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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997.
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from .......... to ..........
Commission file number 0-9300
HARCOR ENERGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0234380
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4400 POST OAK PARKWAY, SUITE 2220
HOUSTON, TX 77027-3413
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (713) 961-1804
. . . . . . . . . . . . . . . .
(Former name, former address and former fiscal year,
if changed since last report)
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 [ ]
The number of shares of Registrant's Common Stock outstanding at August
13, 1997 was 16,196,387.
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HARCOR ENERGY, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
------------------------------------
Part I - Financial Information Page
------------------------------ ----
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1997
(unaudited) and December 31, 1996 1
Consolidated Statements of Operations for the Three
Months Ended June 30, 1997 and 1996 (unaudited) 3
Consolidated Statements of Operations for the Six
Months Ended June 30, 1997 and 1996 (unaudited) 4
Consolidated Statement of Stockholders' Equity
for the Six Months Ended June 30, 1997 (unaudited) 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1997 and 1996 (unaudited) 6
Notes to Unaudited Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Part II - Other Information
---------------------------
Item 6. Exhibits and Reports on Form 8-K 31
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HARCOR ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996
------------------------------------------------------
ASSETS
JUNE 30, DECEMBER 31,
1997 1996
--------------- ---------------
CURRENT ASSETS:
CASH AND CASH INVESTMENTS ........................... $ 1,878,476 $ 1,593,330
ACCOUNTS RECEIVABLE ................................. 3,912,824 8,894,240
PREPAIDS AND OTHER .................................. 1,215,833 185,618
--------------- ---------------
TOTAL CURRENT ASSETS ................................ 7,007,133 10,673,188
--------------- ---------------
PROPERTY AND EQUIPMENT, AT COST,
SUCCESSFUL EFFORTS METHOD:
UNPROVED OIL AND GAS PROPERTIES ..................... 4,366,212 4,079,779
PROVED OIL AND GAS PROPERTIES:
LEASEHOLD COSTS ................................... 57,551,780 56,934,690
PLANT, LEASE AND WELL EQUIPMENT ................... 20,811,663 19,194,951
INTANGIBLE DEVELOPMENT COSTS ...................... 29,830,089 28,918,323
FURNITURE AND EQUIPMENT ............................. 394,424 373,772
--------------- ---------------
112,954,168 109,501,515
LESS - ACCUMULATED DEPLETION,
DEPRECIATION AND AMORTIZATION ..................... (32,100,644) (28,876,525)
--------------- ---------------
NET PROPERTY, PLANT AND EQUIPMENT ................... 80,853,524 80,624,990
--------------- ---------------
OTHER ASSETS .......................................... 3,183,133 3,328,364
--------------- ---------------
$ 91,043,790 $ 94,626,542
=============== ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
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HARCOR ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996
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LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30, DECEMBER 31,
1997 1996
--------------- ---------------
CURRENT LIABILITIES:
CURRENT PORTION OF LONG-TERM
BANK DEBT ........................................ $ -- $ 300,000
OTHER SHORT-TERM DEBT ............................... -- 85,500
ACCOUNTS PAYABLE AND
ACCRUED LIABILITIES ............................... 6,872,553 10,348,318
--------------- ---------------
TOTAL CURRENT LIABILITIES ........................... 6,872,553 10,733,818
--------------- ---------------
LONG-TERM BANK DEBT,
NET OF CURRENT PORTION .............................. 1,800,000 1,700,000
--------------- ---------------
14-7/8% SENIOR SECURED NOTES .......................... 52,518,865 52,400,131
--------------- ---------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $.01 PAR VALUE -
1,500,000 SHARES AUTHORIZED;
30,000 SHARES OUTSTANDING
AT DECEMBER 31, 1996 .............................. -- 300
COMMON STOCK, $.10 PAR VALUE -
25,000,000 SHARES AUTHORIZED;
16,196,387 AND 15,110,836 SHARES
OUTSTANDING AT JUNE 30, 1997 AND
DECEMBER 31, 1996, RESPECTIVELY ................... 1,619,639 1,511,084
ADDITIONAL PAID-IN CAPITAL .......................... 50,923,530 49,891,612
ACCUMULATED DEFICIT ................................. (22,690,797) (21,610,403)
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY .......................... 29,852,372 29,792,593
--------------- ---------------
$ 91,043,790 $ 94,626,542
=============== ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
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HARCOR ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
JUNE 30, 1997 AND 1996
(UNAUDITED)
------------------------------------
THREE MONTHS ENDED
JUNE 30,
------------------------------------
1997 1996
--------------- ---------------
REVENUES:
OIL AND GAS REVENUES ........................... $ 3,890,345 $ 5,500,870
GAS PLANT OPERATING
AND MARKETING REVENUES ....................... 1,256,089 1,791,131
INTEREST INCOME ................................ 8,641 1,410
OTHER .......................................... 37,319 75,901
--------------- ---------------
5,192,394 7,369,312
--------------- ---------------
COSTS AND EXPENSES:
PRODUCTION COSTS ............................... 878,045 1,236,960
GAS PLANT OPERATING
AND MARKETING COSTS .......................... 850,253 1,030,280
ENGINEERING AND GEOLOGICAL COSTS ............... 51,875 64,145
DEPLETION, DEPRECIATION AND
AMORTIZATION ................................. 1,548,315 1,638,148
GENERAL AND ADMINISTRATIVE EXPENSES ............ 717,483 820,929
INTEREST EXPENSE ............................... 2,076,531 2,675,652
--------------- ---------------
6,122,502 7,466,114
--------------- ---------------
LOSS BEFORE PROVISION FOR INCOME TAX ........... (930,108) (96,802)
PROVISION FOR INCOME TAXES ....................... -- --
--------------- ---------------
NET OPERATING LOSS ............................. (930,108) (96,802)
DIVIDENDS ON PREFERRED STOCK ..................... -- (132,500)
--------------- ---------------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS ................................... $ (930,108) $ (229,302)
=============== ===============
NET LOSS PER COMMON SHARE ........................ $ (0.06) $ (0.03)
=============== ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
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HARCOR ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996
(UNAUDITED)
------------------------------------
SIX MONTHS ENDED
JUNE 30,
------------------------------------
1997 1996
--------------- ---------------
REVENUES:
OIL AND GAS REVENUES ................................ $ 8,925,823 $ 11,456,928
GAS PLANT OPERATING
AND MARKETING REVENUES ............................ 2,826,705 3,414,916
INTEREST INCOME ..................................... 18,952 11,720
OTHER ............................................... 47,647 82,314
--------------- ---------------
11,819,127 14,965,878
--------------- ---------------
COSTS AND EXPENSES:
PRODUCTION COSTS .................................... 2,091,940 2,673,689
GAS PLANT OPERATING
AND MARKETING COSTS ............................... 1,747,527 1,986,470
ENGINEERING AND GEOLOGICAL COSTS .................... 201,018 165,152
DEPLETION, DEPRECIATION AND
AMORTIZATION ...................................... 3,224,119 3,344,708
GENERAL AND ADMINISTRATIVE EXPENSES ................. 1,387,844 1,541,724
INTEREST EXPENSE .................................... 4,247,073 5,318,193
OTHER ............................................... -- 260,703
--------------- ---------------
12,899,521 15,290,639
--------------- ---------------
LOSS BEFORE PROVISION FOR INCOME TAX ................ (1,080,394) (324,761)
PROVISION FOR INCOME TAXES ............................ -- --
--------------- ---------------
NET OPERATING LOSS .................................. (1,080,394) (324,761)
DIVIDENDS ON PREFERRED STOCK .......................... (60,000) (265,000)
--------------- ---------------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS ........................................ $ (1,140,394) $ (589,761)
=============== ===============
NET LOSS PER COMMON SHARE ............................. $ (0.07) $ (0.07)
=============== ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
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HARCOR ENERGY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
------------------------------------------------
PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------------- --------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
---------- ---------- ---------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1996 30,000 $ 300 15,110,836 $ 1,511,084 $ 49,891,612 $(21,610,403)
GRANT OF COMMON STOCK -- -- 60,000 6,000 279,000
ISSUANCE OF COMMON STOCK
PURSUANT TO WARRANT EXERCISE -- -- 256,351 25,635 889,538 --
PREFERRED STOCK CONVERSIONS (30,000) (300) 769,200 76,920 (76,620) --
PREFERRED STOCK DIVIDENDS -- -- -- -- (60,000) --
NET LOSS FOR SIX MONTHS
ENDED JUNE 30, 1997 -- -- -- -- -- (1,080,394)
---------- ---------- ---------- ------------ ------------ ------------
BALANCE, JUNE 30, 1997 -- $ -- 16,196,387 $ 1,619,639 $ 50,923,530 $(22,690,797)
========== ========== ========== ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
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HARCOR ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996
(UNAUDITED)
------------------------------------
SIX MONTHS ENDED
JUNE 30,
------------------------------------
1997 1996
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS ................................................. $ (1,080,394) $ (324,761)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
DEPLETION, DEPRECIATION AND
AMORTIZATION ........................................... 3,224,119 3,344,708
AMORTIZATION OF DEFERRED CHARGES ....................... 422,300 481,193
ENGINEERING AND GEOLOGICAL COSTS ......................... 201,018 165,152
OTHER .................................................... 31,665 260,703
--------------- ---------------
2,798,708 3,926,995
CHANGES IN WORKING CAPITAL, NET OF
EFFECTS OF NON-CASH TRANSACTIONS ....................... 4,631,813 203,494
--------------- ---------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES ................................... 7,430,521 4,130,489
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
ENGINEERING AND GEOLOGICAL COSTS ......................... (201,018) (165,152)
ADDITIONS TO PROPERTY AND EQUIPMENT ...................... (7,514,030) (13,797,196)
--------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES .................... (7,715,048) (13,962,348)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
INCREASE IN OTHER ASSETS ................................. -- (342,107)
PROCEEDS FROM BANK DEBT .................................. 300,000 1,900,000
REPAYMENT OF BANK DEBT ................................... (500,000) (2,000,000)
DECREASE IN OTHER DEBT AND LIABILITIES ................... (85,500) (366,840)
DIVIDENDS ON PREFERRED STOCK ............................. (60,000) (265,000)
ISSUANCE OF COMMON STOCK ................................. 915,173 --
--------------- ---------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES .................................. 569,673 (1,073,947)
--------------- ---------------
NET INCREASE (DECREASE) IN CASH .......................... 285,146 (10,905,806)
CASH AT BEGINNING OF PERIOD .............................. 1,593,330 12,204,460
--------------- ---------------
CASH AT END OF PERIOD .................................... $ 1,878,476 $ 1,298,654
=============== ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
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HARCOR ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
--------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (ALL DOLLAR AMOUNTS HAVE
BEEN ROUNDED TO THE NEAREST THOUSAND) -
The Company made interest payments of $4,109,000 and $4,854,000 during the
six months ended June 30, 1997 and 1996, respectively.
The Company received payment of $4,674,000 in January 1997 relating to the
sale of oil and gas properties effective December 1996. The proceeds from this
sale are reflected as a reduction of accounts receivable in the current period
statement of cash flows.
SUPPLEMENTAL INFORMATION REGARDING NON-CASH INVESTING AND FINANCING
ACTIVITIES - SIX MONTHS ENDED JUNE 30, 1997
The Company granted an aggregate of 60,000 restricted shares of common
stock on behalf of certain of its directors which was valued as deferred
compensation of $285,000 and is not reflected in financing activities. (See
Note 5.)
Included in investing activities in the current period are payments of
$4,725,000 relating to drilling costs which were accrued but unpaid at December
31, 1996. At June 30, 1997, the Company had accrued capital costs of $761,000
which are not reflected in investing activities.
SUPPLEMENTAL INFORMATION REGARDING NON-CASH INVESTING AND FINANCING
ACTIVITIES - SIX MONTHS ENDED JUNE 30, 1996
The Company entered into agreements resulting in the issuance of 65,000
unregistered shares of its common stock in exchange for the cancellation of
options and warrants to purchase an aggregate of 376,000 of its common shares.
Additionally, a warrant to purchase 350,000 shares of the Company's common
stock, which was issued in connection with a prior financing, was returned to
the Company and canceled in exchange for the issuance of 99,750 new warrants.
These activities are not reflected in financing activities and did not result
in a gain or loss.
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Included in investing activities in the period were payments of $8,188,000
relating to drilling costs which were accrued but unpaid at December 31, 1996.
At June 30, 1996, the Company had accrued capital costs of $1,925,000 which are
not reflected in investing activities.
The accompanying notes are an integral part of
these consolidated financial statements.
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HARCOR ENERGY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -
The accompanying consolidated financial statements for the current period
include the accounts and results of HarCor Energy, Inc. ("HarCor") and, for the
six months ended June 30, 1996, the results of its wholly-owned subsidiaries,
Warrior, Inc. ("Warrior") and HTAC Investments, Inc. ("HTAC") (collectively,
the "Company" or "HarCor" unless the context specifies otherwise). Warrior and
HTAC had no material operations during 1996 and were merged into HarCor in
March 1996.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
The consolidated financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes, however, that it
has made adequate disclosures so that the information presented herein is not
misleading.
A summary of the Company's significant accounting policies is included in
the consolidated financial statements and notes thereto, contained in its
Annual Report on Form 10-K for the year ended December 31, 1996 (the "10-K").
The unaudited consolidated financial data presented herein should be read in
conjunction with the 10-K.
In the opinion of the Company, the unaudited consolidated financial
statements contained herein include all adjustments (consisting of normal
recurring accruals and the elimination of intercompany transactions) necessary
to present fairly the Company's consolidated results of operations, cash flows
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and changes in stockholders' equity for the six-month periods ended June 30,
1997 and 1996.
The results of operations for an interim period are not necessarily
indicative of the results to be expected for a full year.
GAS BALANCING -
Natural gas revenues are recorded on the entitlement method based on the
Company's percentage ownership of current production. Each working interest
owner in a well generally has the right to a specific percentage of production,
although actual production sold may differ from an owner's ownership
percentage. Under entitlement accounting, a receivable is recorded when
underproduction occurs and a payable is recorded when overproduction occurs.
CAPITALIZED INTEREST COSTS -
Interest costs of $191,000 for the six months ended June 30, 1997 have
been capitalized as part of the historical costs of unproved oil and gas
properties.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES -
Accounts payable and accrued liabilities at June 30, 1997 comprised the
following (amounts in thousands):
Accrued development costs ................... $ 761
Accrued interest payable .................... 3,713
Trade accounts payable and other ............ 2,398
---------
$ 6,872
=========
STOCK COMPENSATION PLANS -
The Company accounts for its Stock Compensation Plans by applying
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees"; accordingly, no compensation expense has been
recognized for awards granted under these plans. The Company has elected not to
apply SFAS No. 123, "Accounting for Stock Based Compensation", which would
result in additional compensation expense in the statement of income for the
current period.
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NET LOSS PER COMMON SHARE -
Net loss per common share was calculated by dividing the appropriate net
loss, after considering preferred stock dividends for applicable periods, by
the weighted average number of common shares outstanding during each period.
Outstanding stock options, warrants and convertible preferred shares were not
included in the calculations, since their effect was antidilutive. The weighted
average number of outstanding common shares utilized in the calculations was
16,092,000 and 8,696,000 for the three months ended June 30, 1997 and 1996,
respectively; and 15,614,000 and 8,690,000 for the six months ended June 30,
1997 and 1996, respectively.
CHANGES IN ACCOUNTING PRINCIPLES -
In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position No. 96-1, "Environmental Remediation Liabilities,"
which establishes new accounting and reporting standards for the recognition
and disclosure of environmental remediation liabilities. The provisions of the
statement are effective for fiscal years beginning after December 15, 1996. The
impact of this new standard is not expected to have a significant effect on the
Company's financial position or results of operations.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 - "Earnings per
Share" effective for interim and annual periods after December 15, 1997. This
statement replaces primary earnings per share ("EPS") with a newly defined
basic EPS and modifies the computation of diluted EPS. The Company's basic and
diluted EPS computed using the requirements of SFAS 128 are the same as the
Company's currently disclosed primary EPS.
In February 1997, the FASB issued SFAS No. 129 - "Disclosures of
Information about Capital Structures" which is applicable to all entities that
issue securities other than ordinary common stock and is effective for all
periods ending after December 15, 1997. There are no additional disclosures
required of the Company at this time relating to the issuance of SFAS No. 129.
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USE OF ESTIMATES -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported periods. Actual results could differ from those estimates. Significant
estimates with regard to these financial statements include the estimate of
proved oil and gas reserve volumes and the related present value of estimated
future net revenues therefrom.
(2) LONG-TERM DEBT
Availability under the Company's current credit facility, entered into in
July 1995 (the "Credit Agreement"), is limited to a "borrowing base" amount
which is determined semi-annually by ING Capital, at its sole discretion, and
may be established at an amount up to $15 million. The borrowing base was $15
million at June 30, 1997. Availability under the Credit Agreement, as amended
in August 1997, will terminate on June 30, 1998, and amounts outstanding will
convert to a term loan on July 31, 1998, with a set amortization schedule of a
percentage of the outstanding principal balance continuing through December 31,
2001. Amounts advanced under this facility bear interest at an adjusted
Eurodollar rate plus 2.50% or Prime Rate (as determined by ING Capital) plus
0.5% at the Company's option. There was $1.8 million outstanding under the
Credit Agreement at June 30, 1997, with an effective interest rate of 8.22% at
that date.
The Credit Agreement contains certain customary and usual covenants and
restrictions which impose limitations on the Company with respect to, among
other things, dividends, financial condition and ratios, use of borrowings and
additional debt incurrence. All indebtedness of the Company under the Credit
Agreement is secured by a first lien upon substantially all of the Company's
oil and gas properties as well as by a pledge of all of the accounts
receivable, inventory, general intangibles, machinery and equipment and other
assets of the Company. All assets not subject to a lien in favor of the lender
are subject to a negative pledge, with certain exceptions.
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(3) SENIOR SECURED NOTES
THE NOTES -
The Company's 14-7/8% Senior Secured Notes, which were issued in July 1995
(the "Notes"), bear interest at the rate of 14-7/8% per annum and are payable
semi-annually on January 15 and July 15 of each year. The Notes are redeemable,
in whole or in part, at the option of the Company at any time on or after July
15, 1999, at the following redemption prices (expressed as percentages of the
principal amount) if redeemed during the twelve-month period commencing on July
15 of the year set forth below plus, in each case, accrued interest thereon to
the date of redemption:
Year Percentage
---- ----------
1999................................................. 110%
2000................................................. 107%
2001 and thereafter.................................. 100%
The Notes were issued pursuant to an indenture, dated July 24, 1995,
between the Company and Texas Commerce Bank National Association, as Trustee
(the "Indenture"). All of the obligations of the Company under the Notes and
the Indenture are secured by a second priority lien on substantially all of the
assets of the Company securing its bank debt.
There were a total of $53.7 million Notes outstanding (face value) at June
30, 1997. The difference between the face value of the Notes and the balance
sheet amount recorded herein is the result of an initial allocation to paid-in
capital of the value ascribed to the warrants at the close of the Note
Offering. This amount is being amortized through interest expense over the life
of the Notes.
EXCESS CASH FLOW OFFER -
In the event that the Company has excess cash flow (as defined) in excess
of $2 million in any fiscal year, beginning with the fiscal year ending
December 31, 1996, the Company will be required to make an offer to purchase
Notes from all Holders in an amount equal to 50% of all such excess cash flow
for such fiscal year (not just the amount in excess of $2 million) at a
purchase price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest thereon ("Excess Cash Flow Offer"). The Company may credit the
principal amount of Notes acquired in the open market and retired prior to the
Excess Cash Flow Offer against
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such required Excess Cash Flow Offer, provided that each Note may only be so
credited once. Excess cash flow for this purpose is generally defined as net
cash flow provided by operations less capital expenditures and payments on
scheduled indebtedness. No Excess Cash Flow Offer has been made in the current
period ended.
(4) COMMITMENTS AND CONTINGENCIES
RISK MANAGEMENT AND HEDGING ACTIVITIES -
The Company utilizes financial instruments as a hedging strategy to
protect against the effects of volatility in crude oil and natural gas
commodity prices. Upon consummation of an acquisition, the Company will usually
enter into commodity derivative contracts (hedges) such as futures, swaps or
collars or forward contracts which cover a substantial portion of the existing
production of the acquired property. Over time, as production increases, the
Company will continue to utilize hedging techniques to ensure that a
substantial portion of its production remains effectively hedged. Gains or
losses under the hedging agreements are recognized in oil and gas production
revenues in periods in which the hedged production occurs with such agreements
settling on a monthly basis.
As of June 30, 1997, the Company was a party to various gas contracts
covering volumes of approximately 1.9 Bcf and 0.3 Bcf for 1997 and 1998,
respectively, at fixed prices ranging from $1.68/MMBtu to $2.07/MMBtu or
indexed prices; and oil hedges covering notional volumes of approximately 124
MBOE and 74 MBOE for 1997 and 1998, respectively, at fixed prices ranging from
$17.25/Bbl to $18.51/Bbl or indexed prices.
EMPLOYEE SEVERANCE OBLIGATION -
Concurrent with the Company's engagement of investment bankers to pursue
its potential sale, the Company's Board of Directors approved in March 1997 a
severance arrangement for all of the Company's employees. The purpose of this
severance arrangement is to maximize shareholder value in any potential sale
process and retain personnel necessary to effect an orderly transition in the
event of sale. The severance arrangement would be effected only in the event
the Company is sold or a change of control occurs. The total financial impact
of this severance arrangement, if effected, would result in a decrement of
approximately $0.10 per common share to any potential sales proceeds on a
fully-diluted basis. (See Note 6.)
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(5) STOCKHOLDERS' EQUITY
COMMON STOCK GRANTS -
In February 1997 the Company granted an aggregate of 60,000 restricted
shares of common stock on behalf of certain of its directors as deferred
compensation. The shares will be issued upon approval by a vote of the
Company's stockholders at the Company's next annual meeting and will vest over
a period of three years from the date of grant. The issuance of shares and
deferral period may be accelerated upon the sale of the Company or a change of
control as defined.
WARRANT EXERCISE -
In May 1997 a warrant to purchase 256,351 shares of the Company's common
stock at $3.57 per share was exercised for total cash proceeds of $915,000.
CONVERSION OF PREFERRED STOCK -
Effective April 1997 the remaining 20,000 shares of the Company's Series B
8% Convertible Preferred Stock were converted into 512,800 shares of the
Company's common stock on an exchange basis equivalent to 25.64 shares of
common to each share of preferred. Effective April 1997 the 10,000 shares of
the Company's Series C 8% Convertible Preferred Stock were converted into
256,400 shares of the Company's common stock on an exchange basis equivalent to
the Series B 8% Convertible Preferred Stock.
PREFERRED STOCK DIVIDENDS -
The Company paid cash dividends on preferred stock for the periods
indicated as follows:
Six Months Ended
June 30,
-------------------------
1997 1996
---------- ----------
8% Convertible (Series A, B, C) .................. $ 60,000 $ 130,000
9% Convertible (Series E) ........................ -- 135,000
---------- ----------
$ 60,000 $ 265,000
========== ==========
The Series A Preferred Stock and the Series E Preferred Stock were
converted into shares of common stock of the Company
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during the fourth quarter of 1996 and paid no dividends during the current
year. No further dividends are currently required to be paid as all of the
preferred stock of the Company has been either redeemed or converted to common
stock as of April 1997.
(6) STRATEGIC ALTERNATIVES
In March 1997 the Company announced that it had engaged a group of
investment bankers to pursue the potential sale of the Company. The Company is
continuing to review proposals for a sale of the Company or its assets;
however, there can be no assurances that this process will result in the sale
of the Company. In the event the Company is sold, there can be no assurances as
to the amount nor form of consideration that the Company's shareholders would
receive in such a transaction. The Company intends to continue conducting its
business without regard to any potential outcome of the proposed sale.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
All dollar amounts and volume information referenced in this Item 2. have
been rounded to the nearest thousand.
COMPARISON OF RESULTS FOR THE THREE MONTHS
ENDED JUNE 30, 1997 AND 1996
REVENUES - The Company's total revenues decreased $2,177,000 (29%) from
$7,369,000 in second quarter 1996 to $5,192,000 in the current period.
Oil and gas revenues decreased $1,611,000 (29%) from $5,501,000 in the
second quarter of 1996 to $3,890,000 in the current period due to decreased
production levels and lower commodity prices. Oil and gas production volumes
were lower in the current period as compared to second quarter 1996 as a result
of the following factors: (i) normal production rate declines on the older
phase development wells on the Bakersfield Properties; (ii) second quarter 1996
included the continued effect of higher initial production rates resulting from
the second phase of the Company's development drilling program on the
Bakersfield Properties conducted during the latter half of 1995; (iii) the
conversion of twelve producing wells to water injection wells beginning in the
latter part of 1996 as part of the Ellis waterflood project on the Bakersfield
Properties; and (iv) lost production from the sale of the majority of the
Company's Permian Basin properties in December 1996.
Oil revenues decreased $919,000 (37%) from $2,453,000 in second quarter
1996 to $1,534,000 in the current period due to lower production volumes and
prices. Oil production decreased 45,000 barrels (34%) from 132,000 barrels in
the second quarter of 1996 to 87,000 barrels in the current period. A decrease
of 22,000 barrels was attributable to the Bakersfield Properties due to the
factors described above while oil production from the Company's other
properties decreased 23,000 barrels in the aggregate due principally to the
sale of its Permian Basin properties. Lower unit prices also negatively
impacted oil revenues in the current quarter. The average unit price received
for oil was $17.72 per barrel during second quarter 1997 as compared to $18.62
per barrel in second quarter 1996. Hedging activities had no material effect on
oil revenues in the current quarter.
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Gas revenues decreased $692,000 (23%) from $3,048,000 in the second
quarter of 1996 to $2,356,000 in the current period also due to decreased
production volumes and lower unit prices. Gas production decreased 263,000 Mcf
(17%) from 1,525,000 Mcf in second quarter 1996 to 1,262,000 Mcf in second
quarter 1997 due to decreased production from the Company's Bakersfield
Properties as discussed previously. Gas production from the Company's other
properties remained flat in the aggregate from period to period. Average prices
received for gas were $1.87 per Mcf in second quarter 1997 as compared to $2.00
per Mcf in the second quarter of 1996.
During the current quarter, the Company realized revenues of $1,256,000
from its natural gas processing plant and gas marketing activities. Gas plant
revenues consisted of $893,000 from the sale of processed natural gas liquids
(51,400 barrels at an average composite price of $17.83 per barrel), $324,000
from the resale of natural gas purchased from third parties, and $39,000 in gas
processing fees. During the second quarter of 1996, the Company realized
revenues of $1,791,000 from its gas plant and marketing activities consisting
of $1,042,000 from the sale of natural gas liquids (59,900 barrels at an
average composite price of $17.40 per barrel), $704,000 from the resale of
natural gas purchased from third parties, and $45,000 in processing fees. The
decrease in gas plant revenues in the current period is primarily due to
reduced gas inlet production volumes from the Company's Bakersfield Properties
as discussed previously.
The Company realized total interest and other income of $46,000 in the
second quarter of 1997 as compared to $77,000 during the second quarter of
1996.
COSTS AND EXPENSES - Total costs and expenses decreased $1,344,000 (18%)
from $7,466,000 in second quarter 1996 to $6,122,000 in the current period.
Oil and gas production costs for the second quarter 1997 were $878,000 as
compared to $1,237,000 in second quarter 1996 representing a decrease of
$359,000 (29%) in the current period. The current quarter reflects reduced
production volumes, and adjustments to lease operating expenses on certain of
the Company's properties for prior periods.
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During the second quarter of 1997, the Company incurred costs of $850,000
from gas plant and gas marketing activities, which consisted of $381,000 from
the purchase of natural gas for processing and resale and $469,000 of direct
operating expenses. During the second quarter of 1996, the Company incurred
costs of $1,030,000 in gas plant and marketing activities which consisted of
$637,000 for the purchase of natural gas for resale and $393,000 of direct
operating expenses.
The Company incurred engineering and geological expenses of $52,000 and
$64,000 for the quarters ended June 30, 1997 and 1996, respectively.
Depletion, depreciation and amortization ("DD&A") expense decreased
$90,000 (5%) from $1,638,000 in second quarter 1996 to $1,548,000 in the second
quarter of 1997 due to decreased levels of oil and gas production in the
current period as discussed in REVENUES.
General and administrative expenses were $717,000 and $821,000 for the
quarters ended June 30, 1997 and 1996, respectively, representing a decrease of
$104,000 (13%) in the current period.
Interest expense decreased $599,000 (22%) from $2,676,000 in second
quarter 1996 to $2,077,000 in second quarter 1997. This was due to the
retirement of $11.3 million of the Company's 14-7/8% Senior Secured Notes in
the third quarter of 1996. There were no dividends on preferred stock in the
second quarter of 1997 due to the conversion of the Company's remaining
preferred stock into common stock. The Company paid $132,000 in Preferred Stock
dividends in second quarter 1996.
NET LOSS - For the three months ended June 30, 1997, the Company had a net
loss of $930,000, or $0.06 per share. The Company had a net operating loss of
$97,000 for the three months ended June 30, 1996 and a net loss attributable to
common stockholders after preferred dividends of $229,000 ($.03 per common
share).
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COMPARISON OF RESULTS FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1996
REVENUES - The Company's total revenues decreased $3,147,000 (21%) from
$14,966,000 during the first six months of 1996 to $11,819,000 in the current
period.
Oil and gas revenues decreased $2,531,000 (22%) from $11,457,000 in the
first six months of 1996 to $8,926,000 in the current period due to decreased
production levels. Oil and gas production volumes were lower in the first six
months of 1997 as compared to the same period in 1996 as a result of the
following factors: (i) normal production rate declines on the older phase
development wells on the Bakersfield Properties; (ii) first half 1996 included
the continued effect of higher initial production rates resulting from the
second phase of the Company's development drilling program on the Bakersfield
Properties conducted in the latter half of 1995; (iii) the conversion of twelve
producing wells to water injection wells beginning in the latter part of 1996
as part of the Ellis waterflood project on the Bakersfield Properties; and (iv)
lost production from the sale of the majority of the Company's Permian Basin
properties in December 1996.
Oil revenues decreased $1,726,000 (33%) from $5,194,000 in first six
months of 1996 to $3,468,000 in the current period due to lower production
volumes. Oil production decreased 107,000 barrels (37%) from 290,000 barrels in
the first six months of 1996 to 183,000 barrels in the current period. A
decrease of 67,000 barrels was attributable to the Bakersfield Properties due
to the factors described above while oil production from the Company's other
properties decreased 40,000 barrels in the aggregate due principally to the
sale of the Permian Basin properties. The average unit price received for oil
rose to $18.91 per barrel during first six months of 1997 as compared to $17.92
per barrel for the same period in 1996. Hedging activities had no material
effect on oil revenues in the current period.
Gas revenues decreased $805,000 (13%) from $6,263,000 in the first six
months of 1996 to $5,458,000 in the current period also due to decreased
production volumes. Gas production decreased 758,000 Mcf (23%) from 3,257,000
Mcf in first six months of 1996 to 2,499,000 Mcf in the current period as a
result of decreased production from the Company's Bakersfield Properties as
described previously. Gas production from the Company's other properties
remained flat in the aggregate from period to period. Average
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prices received for gas rose to $2.18 per Mcf in six months 1997 as compared to
$1.92 per Mcf in the first six months of 1996.
During the first half of 1997, the Company realized revenues of $2,827,000
from its natural gas processing plant and gas marketing activities. Gas plant
revenues consisted of $1,994,000 from the sale of natural gas liquids (99,400
barrels at an average composite price of $20.07 per barrel), $761,000 from the
resale of natural gas purchased from third parties, and $72,000 in gas
processing fees. During the first half of 1996, the Company realized revenues
of $3,415,000 from its gas plant and marketing activities consisting of
$2,173,000 from the sale of natural gas liquids (122,000 barrels at an average
composite price of $17.79 per barrel), $1,172,000 from the resale of natural
gas purchased from third parties, and $70,000 in processing fees. The decrease
in gas plant revenues in the current period is primarily due to reduced gas
inlet production volumes from the Company's Bakersfield Properties as
previously discussed.
The Company realized total interest and other income of approximately
$66,000 in the first half of 1997 as compared to $94,000 during the same period
in 1996.
COSTS AND EXPENSES - Total costs and expenses decreased $2,392,000 (16%)
from $15,291,000 in first half of 1996 to $12,899,000 in the current period.
Oil and gas production costs for the first half of 1997 were $2,092,000 as
compared to $2,674,000 in the first half of 1996 representing a decrease of
$582,000 (22%) in the current period. The Company's total aggregate production
cost per barrel of oil equivalent ("BOE") was $3.49 per BOE year-to-date as
compared to $3.21 per BOE for the first half of 1996. The current period
reflects reduced production volumes and adjustments to lease operating expenses
on certain of the Company's properties for prior periods.
During the first half of 1997, the Company incurred costs of $1,747,000
from gas plant and gas marketing activities, which consisted of $787,000 from
the purchase of natural gas for processing and resale and $960,000 of direct
operating expenses. During the first half of 1996, the Company incurred costs
of $1,986,000 resulting from its gas plant and marketing activities
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which consisted of $995,000 from the purchase of natural gas for processing and
resale and $991,000 of direct operating expenses.
The Company incurred engineering and geological expenses of $201,000 and
$165,000 for the six months ended June 30, 1997 and 1996, respectively.
DD&A expense decreased $121,000 (4%) from $3,345,000 in first half of 1996
to $3,224,000 in the first half of 1997 due to decreased levels of oil and gas
production in the current period as discussed in REVENUES. The DD&A rate per
BOE for oil and gas reserves was estimated at $4.95 for the first half of 1997
as compared to an estimated $3.87 per BOE during the first half of 1996. The
increase in DD&A rate per BOE in the current period is due to incremental
capital costs incurred in the continuing development of the Company's
undeveloped reserves in California.
General and administrative expenses were $1,388,000 and $1,542,000 for the
six months ended June 30, 1997 and 1996, respectively, representing a decrease
of $154,000 (10%) in the current period.
Interest expense decreased $1,071,000 (20%) from $5,318,000 in first half
1996 to $4,247,000 in first half 1997. This was primarily due to the retirement
of $11.3 million of the Company's 14-7/8% Senior Secured Notes in the third
quarter of 1996. The Company paid $60,000 in preferred dividends in the first
half of 1997 as compared to $265,000 during the same period of 1996. The
decrease in dividends in the current period was due to the conversion of the
Company's remaining preferred stock into common stock during the period.
NET LOSS - The Company's net operating loss for the six months ended June
30, 1997 was $1,080,000 and net loss attributable to common stockholders after
preferred dividends was $1,140,000 ($.07 per common share). For the six months
ended June 30, 1996, the Company had a net operating loss of $325,000 and net
loss attributable to common stockholders after preferred dividends of $590,000
($.07 per common share).
LIQUIDITY AND CAPITAL RESOURCES
SUMMARY - The Company's sources of working capital have primarily been
cash flow from operations and a combination of debt and equity financings as
needs for capital have arisen.
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During the six months ended June 30, 1997, the Company generated net cash from
operating activities of $7.4 million as compared to $4.1 million during the
same period in 1996. The Company realized net proceeds of $570,000 from
financing activities during the current period as compared to an expenditure of
$1.1 million in financing activities during the same period in 1996. The
Company utilized a total of $7.7 million in investing activities in the current
period as compared to $13.9 million expended on investing activities for the
six months ended June 30, 1996.
WORKING CAPITAL - The Company had net working capital of $135,000 with a
current ratio of 1.02:1 at June 30, 1997 as compared to a working capital
deficit of $61,000 and a current ratio of 0.99:1 at December 31, 1996.
OPERATING ACTIVITIES
CASH FLOWS - Discretionary cash flow is a measure of performance which is
useful for evaluating exploration and production companies. It is derived by
adjusting net income or loss to eliminate the non-cash effects of exploration
expenses, DD&A and non-recurring charges, if applicable. The effects of
non-cash working capital changes are not taken into account. This measure
reflects an amount that is available for capital expenditures, debt service and
dividend payments.
During the six months ended June 30, 1997, the Company generated
discretionary cash flow of $2.8 million (before an increase resulting from
changes in other working capital of $4.6 million, which consisted principally
of a reduction in accounts receivable). This compares to discretionary cash
flow generated by operations of $3.9 million (before an increase resulting from
changes in other working capital of $203,000) during the same period in 1996.
The decrease in the current period's cash flow as compared to 1996 was
primarily due to decreased oil and gas production volumes and revenues. The
decrease in production volumes in the current period is a result of the
following factors: (i) production declines on the initial Bakersfield
development wells; (ii) first half 1996 included the continued effect of higher
initial production rates resulting from the second phase of the Company's
development drilling program on the Bakersfield Properties conducted in the
latter half of 1995; (iii) the conversion of a number of producing wells to
water injection wells on a waterflood project on the Bakersfield
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Properties initiated in the latter part of 1996; and (iv) lost production from
the sale of the majority of the Company's Permian Basin properties in December
1996. Although these factors have negatively impacted production on a
year-to-year comparison basis, the Company's current quarter production volumes
were relatively flat in the aggregate as compared to the prior two quarters.
Also negatively impacting revenues in the first half of 1997 was a decline in
commodity prices during the second quarter. (See RESULTS OF OPERATIONS -
REVENUES.)
The effect of the current period's decline in production volumes and lower
second quarter commodity prices was partially mitigated by (i) lower operating
costs and expenses; (ii) interest expense savings as a result of the retirement
of a portion of the Company's 14-7/8% Senior Secured Notes; and (iii) reduced
dividend payments resulting from the conversion of the Company's remaining
preferred stock into common stock. (See RESULTS OF OPERATIONS - COSTS AND
EXPENSES.)
Production during the remainder of 1997 will continue to be negatively
impacted by normal production declines and production losses resulting from the
conversion of additional producing wells to water injector wells on the Ellis
lease waterflood project. The Company will also continue to be negatively
impacted in 1997 on a year-to-year comparison basis as a result of the sale of
its Permian Basin properties last year.
The Company is continuing to drill additional wells on the Bakersfield
Properties. (See DEVELOPMENTAL DRILLING AND ACTIVITIES which follows.) During
the first half of 1997 drilling activity included 4 new wells on the Ellis
lease and one new well on the Truman lease. Drilling on the Ellis lease has
been delayed pending progress of repressuring of the Diatomite zone by water
injection. Water injection on the Ellis waterflood project was initiated during
July 1996 and initial effects of water injection have been observed in 22
producing wells to date. There can be no assurances, however, that the Company
will continue to be successful in the development of the Bakersfield
Properties, nor that it will experience a favorable production response from
the Ellis waterflood project.
RESULTS OF HEDGING ACTIVITIES - The Company's hedging activities during
the six months ended June 30, 1997 have not had a material effect on the
Company's liquidity or results of operations. (See Note 4 of "Unaudited Notes
to Consolidated Financial Statements" included herein.)
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FINANCING ACTIVITIES
SUMMARY - The Company realized net proceeds of $570,000 from its financing
activities during the first six months of 1997 which consisted of (i) $915,000
in cash proceeds from the issuance of common stock pursuant to a warrant
exercise; (ii) net repayment of $200,000 in long-term bank debt; (iii) $85,000
repayment of other debt; and (iv) $60,000 for the payment of preferred
dividends. Effective April 1997 all of the Company's preferred stock had been
either redeemed or converted to common stock and no dividends are currently
required to be paid in future periods.
CREDIT AGREEMENT - Availability under the Company's Credit Agreement is
limited to a "borrowing base" amount which is determined semi-annually by ING
Capital, at its sole discretion, and may be established at an amount up to $15
million. The borrowing base was $15 million at June 30, 1997 and there was $1.8
million outstanding under the Credit Agreement at that date. Availability under
the Credit Agreement, as amended in August 1997, will terminate on June 30,
1998, at which time amounts outstanding will convert to a term loan on July 31,
1998, with a set amortization schedule of a percentage of the outstanding
principal balance continuing through December 31, 2001. Amounts advanced under
this facility bear interest at an adjusted Eurodollar rate plus 2.50% or Prime
Rate (as determined by ING Capital) plus .5% at the Company's option.
The Credit Agreement contains restrictive covenants which impose
limitations on the Company and its subsidiaries with respect to, among other
things, certain financial ratios or limitations, incurrence of indebtedness,
the sale of the Company's oil and gas properties and other assets, hedging
transactions, payment of dividends, mergers or consolidations and investments
outside the ordinary course of business. The Credit Agreement also contains
customary default provisions. The Company believes that it was in compliance
with all of the covenant provisions under the Credit Agreement at June 30,
1997.
14-7/8% SENIOR SECURED NOTES - The Company's $53.7 million (face value) of
14-7/8% Senior Secured Notes (the "Notes") bear interest at the rate of 14-7/8%
per annum and is payable semi-annually on January 15 and July 15 of each year.
The Notes are redeemable, in whole or in part, at the option of the Company at
any time on or after July 15, 1999, at the following redemption
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prices (expressed as percentages of the principal amount) if redeemed during
the 12-month period commencing on July 15 of the year set forth below plus, in
each case, accrued interest thereon to the date of redemption:
Year Percentage
---- ----------
1999 . . . . . . . . . . 110%
2000 . . . . . . . . . . 107%
2001 and thereafter. . . 100%
In the event that the Company has excess cash flow (as defined) in excess
of $2 million in any fiscal year, beginning with the fiscal year ending
December 31, 1996, the Company will be required to make an offer to purchase
Notes from all holders thereof in an amount equal to 50% of all such excess
cash flow for such fiscal year (not just the amount in excess of $2 million) at
a purchase price equal to 101% of the principal amount thereof, plus accrued
and unpaid interest thereon. The Company does not anticipate making such an
offer in the current fiscal year.
All of the obligations of the Company under the Notes and related
indenture are secured by a second priority lien on substantially all of the
assets of the Company, which are also collateralized under its Credit
Agreement.
CAPITAL EXPENDITURES AND INVESTING ACTIVITIES
DEVELOPMENTAL DRILLING ACTIVITIES - The Company expended a total of $7.7
million in investing activities in the current period which consisted of $4.7
million for drilling costs accrued at December 31, 1996 and $3 million ($3.7
million accrual basis) relating to current period developmental drilling and
3-D activities. This compares to $13.9 million expenditures for the six months
ended June 30, 1996 which consisted of $8.2 million for drilling costs accrued
at December 31, 1995 and $5.7 million ($7.6 million accrual basis) relating to
developmental drilling and 3-D activities for that period.
Based on current engineering estimates, the Company anticipates that as of
December 31, 1996, total additional drilling necessary to completely develop
the proven reserves of Bakersfield Properties over future years will result in
approximately 176 new wells at an estimated capital cost of $59 million (based
on current drilling costs). These future
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development costs for the Bakersfield Properties also include additional costs
for full development of a waterflood project in the Diatomite Formation on the
Ellis lease. Approximately $14 million was originally planned to be spent
during 1997, and $45 million thereafter. However, a portion of the originally
planned 1997 expenditures for drilling new wells will be delayed until 1998
pending progress of repressuring of the Diatomite zone on the Ellis lease by
water injection. During July, 1996 water injection was initiated in the
waterflood pilot project area with completion of the installation of the entire
project anticipated by January 1, 1999. Expansion of the waterflood project has
continued in 1997 with the number of injection wells being increased to 12 in
the first half of 1997. An additional 12 producing wells are currently being
converted to water injection during the third quarter. Plans are to convert 8
more wells to injection in the fourth quarter which will result in a total of
32 active injection wells by year-end. The effect of water injection has been
observed in a total of 22 wells to date. The Company is currently drilling 4
Diatomite wells on the Ellis lease to evaluate the repressuring progress, with
the timing of additional drilling contingent on the pressure information to be
obtained in these new wells. These estimates may vary as the Company further
evaluates the results of drilling activities, water injection, and results of
future operations.
The Company is also involved in a small waterflood project on its Permian
Basin properties and has approximately $2 million in capital expenditures
planned in this area during the next two years.
EXPLORATION ACTIVITIES - The Company has entered into an agreement with a
3-D seismic interpretation company to jointly explore the Hostetter Field in
South Texas; the Terrebonne Parish area of South Louisiana; and an area of the
Permian Basin in Reeves County, Texas. The Company has working interests of
22.7%, 7.5% and 12.5% in these projects, respectively. The area of mutual
interest covers approximately 217,000 acres and entails shooting 3-D seismic
data over approximately 339 square miles. The Company and its 3-D seismic
partner have also jointly formed a geologic team to assist them in the
evaluation of these 3-D projects. The status of these 3-D projects is as
follows:
HOSTETTER AREA: HarCor's first 3-D test well has been drilled to total
depth and is currently being tested. The well is believed to have encountered
multiple zones with potentially
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productive sands. The company anticipates one rig running in the Hostetter area
through year end.
TERREBONE PARISH: Initial 3-D interpretations have been completed and
final leasing activity is being undertaken. The company expects to spud its
initial test well in the fourth quarter.
PERMIAN BASIN: The company has completed a 1500' horizontal test well at a
depth of 3,300' in the Delaware Formation and is awaiting the installation of
surface equipment. A second well in another prospect has been reentered to a
depth of 13,900' and is presently logging. Drilling is under way on two other
prospects, a 22,000' Siluro-Devonian test and a 14,650' Atoka Wolfcamp test.
The Company anticipates spending approximately $2 million to $4 million
through the end of 1997 on 3-D generated drilling activities, depending upon
initial results.
FINANCIAL COMMITMENTS - The Company expects that its available cash and
expected cash flow from operating activities will be sufficient to meet its
financial obligations and fund its planned developmental drilling on the
Bakersfield Properties for the foreseeable future, provided that (i) there are
no significant decreases in oil and gas prices, (ii) there are no significant
declines in oil and gas production from existing properties other than declines
in production currently anticipated based on engineering estimates of the
decline curves associated with such properties, (iii) drilling costs for
development wells with respect to the Bakersfield Properties do not increase
significantly from the drilling costs recently experienced by the operator in
such areas with respect to similar wells and (iv) the operator continues its
development program with respect to the Bakersfield Properties on the schedule
currently contemplated.
The Company also expects that its improved liquidity as a result of the
July 1996 Equity Offering, availability under its Credit Agreement and improved
cash flow as a result of interest savings due to the redemption of a portion of
the Notes will enable it to fund its 3-D seismic and exploration activities for
the next eighteen months. Further exploration and resulting development
drilling of these projects will depend largely on the measure of success of
these initial activities.
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In the event operating cash flow and available liquidity are not
sufficient to fund debt and development and exploration costs, or results from
developmental drilling and exploration are not as successful as anticipated,
the Company will either (i) curtail its developmental drilling and/or
exploration activities or (ii) seek alternative financing to assist in these
activities.
STRATEGIC ALTERNATIVES -
In March 1997 the Company announced that it had engaged a group of
investment bankers to pursue a possible sale of the Company in order to
maximize shareholder returns. The Company is continuing to review proposals for
a sale of the Company or its assets; however, there can be no assurances that
this process will, in fact, result in the sale of the Company. In the event the
Company is sold, there can be no assurances as to either the amount or form of
consideration that the Company's shareholders would receive in such a
transaction. The Company intends to continue conducting its business as
described in the above CAPITAL EXPENDITURES AND INVESTING ACTIVITIES section,
without regard to any potential outcome of a proposed sale.
UNCERTAINTIES INVOLVING FORWARD-LOOKING DISCLOSURE
Certain of the statements set forth above under LIQUIDITY AND CAPITAL
RESOURCES - CAPITAL EXPENDITURES AND INVESTING ACTIVITIES and STRATEGIC
ALTERNATIVES, such as the statements regarding estimated production amounts,
available cash and expected cash flows from operating activities for 1997 and
1998, estimated development costs and number of anticipated wells to be drilled
in 1997 and thereafter, the planned 3-D seismic program and the potential sale
of the Company are forward-looking and are based upon the Company's current
belief as to the outcome and timing of such future events. There are numerous
uncertainties inherent in estimating quantities of proved oil and gas reserves
and in projecting future rates of production and timing of development
expenditures, including many factors beyond the control of the Company. Reserve
engineering is a subjective process of estimating underground accumulations of
oil and gas that cannot be measured in an exact way, and the accuracy of any
reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment.
As a result, estimates made by different engineers often vary from one
another. In addition, results of drilling, testing
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and production subsequent to the date of an estimate may justify revisions of
such estimate and such revisions, if significant, would change the schedule of
any further production and development drilling. Accordingly, reserve estimates
are generally different from the quantities of oil and gas that are ultimately
recovered. Furthermore, the estimated production amounts and numbers of wells
to be drilled in 1997 and beyond are based upon product prices and costs as of
December 31, 1996 (except for gas sold under contract, in which case the
contract prices were used), which will probably be different from the actual
prices recognized and costs incurred in 1997 and beyond. Additional factors
which could materially affect the Company's oil and gas production and
development drilling program in the future are general economic conditions; the
impact of the activities of OPEC and other competitors; the impact of possible
geopolitical occurrences world-wide; the results of financing efforts, risks
under contract and swap agreements; changes in laws and regulations; capacity,
deliverability and supply constraints or difficulties, unforeseen engineering
and mechanical or technological difficulties in drilling or working over wells;
and other risks described under "Risk Factors" in the Company's Prospectus
dated July 25, 1996, filed with the Securities and Exchange Commission,
relating to the July 1996 Equity Offering. Because of the foregoing matters,
the Company's actual results for 1997 and beyond and strategic alternatives
could differ materially from those expressed in the above-described
forward-looking statements.
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HARCOR ENERGY, INC.
PART II - OTHER INFORMATION
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HARCOR ENERGY, INC.
Registrant
Date: August 13, 1997 /s/ Francis H. Roth
------------------------------------
Francis H. Roth
President and Chief
Operating Officer
Date: August 13, 1997 /s/ Gary S. Peck
------------------------------------
Gary S. Peck
Vice President - Finance &
Administration, Chief Financial
Officer and Corporate Secretary
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 FINANCIAL DATA SCHEDULE