1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
================================================================================
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
[ ] 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)
(318) 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 [ ]
*Petsec Energy Inc. is a wholly owned operating subsidiary of Petsec Energy
Ltd, a listed Australian public company registered with the Commission as a
result of its public offering in July 1996 of American Depositary Receipts
(ADRs) which are traded on the New York Stock Exchange (symbol: PSJ).
Shareholders and holders of American Depositary Shares are advised to refer
to the filings of Petsec Energy Ltd for the consolidated results.
1
2
PETSEC ENERGY INC.
INDEX TO FORM 10-Q
Page
------
PART I. FINANCIAL INFORMATION
IMPORTANT NOTE: The financial information in this Quarterly Report
refers to Petsec Energy Inc., a wholly owned subsidiary of Petsec
Energy Ltd. The publicly listed Petsec Energy Ltd files its annual
consolidated financial statements separately under form 20-F and a
summary of its quarterly consolidated financial statements under
form 6-K.
Item 1. Financial Statements
Balance Sheets............................................... 3
Statements of Operations and Retained Earnings (Deficit)..... 4
Statements of Cash Flows..................................... 5
Notes to Financial Statements................................ 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 8-14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk............................................ 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................... 14
SIGNATURES............................................................... 15
Exhibit Index............................................................ 16
2
3
PETSEC ENERGY INC.
A WHOLLY OWNED SUBSIDIARY OF PETSEC ENERGY LTD
BALANCE SHEETS
(Dollars in thousands, except share amounts)
ASSETS
March 31, December 31,
1999 1998
(unaudited) (audited)
----------- -----------
Current Assets:
Cash $ 9,040 $ 1,024
Accounts receivable 3,124 8,279
Other receivables 1,929 4,626
Inventories of crude oil 45 45
Prepaid expenses 191 274
Assets held for sale -- 68,300
---------- ----------
Total Current Assets 14,329 82,548
---------- ----------
Net property, plant and equipment, at cost, under the
successful efforts method of accounting
for oil and gas properties
Proved oil and gas properties 150,504 156,265
Unproved oil and gas properties 17,418 31,984
Production facilities 43,927 43,321
Other 1,949 1,970
---------- ----------
213,798 233,540
Less accumulated depletion,
depreciation and amortization (120,299) (133,738)
---------- ----------
Net property, plant and equipment 93,499 99,802
---------- ----------
Other Assets 2,603 2,682
---------- ----------
Total Assets $ 110,431 $ 185,032
========== ==========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current Liabilities:
Trade accounts payable 3,465 8,572
Interest payable 3,446 2,214
Other accrued liabilities 3,845 3,381
Bank credit facility 3,375 67,250
---------- ----------
Total Current Liabilities 14,131 81,417
Senior Subordinated Notes 99,662 99,656
Bank credit facility 5,625 6,750
Subordinated shareholder loan 36,979 36,792
Provision for dismantlement 2,611 2,488
---------- ----------
Total Liabilities $ 159,008 $ 227,103
---------- ----------
Shareholder's Deficit:
Common stock, $1 par value; authorized
1,000,000 shares; issued and
outstanding 1 share -- --
Additional paid-in-capital 21,636 21,572
Accumulated deficit (70,213) (63,643)
---------- ----------
Total Shareholder's Deficit (48,577) (42,071)
---------- ----------
$ 110,431 $ 185,032
========== ==========
See accompanying notes to financial statements.
3
4
PETSEC ENERGY INC.
A WHOLLY OWNED SUBSIDIARY OF PETSEC ENERGY LTD
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
(UNAUDITED)
(Dollars in thousands)
Three Months Ended
March 31
------------------
1999 1998
---- ----
Revenue:
Oil and gas sales $ 9,315 $ 27,986
--------- ---------
Operating expenses:
Lease operating expenses 1,676 4,088
Production taxes 64 148
Exploration expenditures 1,645 1,824
Abandonments 888 --
Dry hole costs and impairments -- 16,951
General and administrative 1,287 1,551
Stock compensation 64 175
Depletion, depreciation and amortization 6,475 15,095
--------- ---------
Total operating expenses 12,099 39,832
--------- ---------
Loss from operations (2,784) (11,846)
Other income (expenses):
Interest expense (3,663) (2,212)
Interest income 65 102
Other, principally foreign exchange loss (188) (138)
--------- ---------
(3,786) (2,248)
Loss before income taxes (6,570) (14,094)
Income taxes -- 5,073
--------- ---------
Net loss (6,570) (9,021)
Retained earnings (deficit) at beginning of period (63,643) 27,654
--------- ---------
Retained earnings (deficit) at end of period $ (70,213) $ 18,633
========== =========
See accompanying notes to financial statements.
4
5
PETSEC ENERGY INC.
A WHOLLY OWNED SUBSIDIARY OF PETSEC ENERGY LTD
STATEMENTS OF CASH FLOWS
(unaudited)
(Dollars in thousands)
Three Months Ended
March 31
--------------------------
1999 1998
---- ----
Cash flows from operating activities:
Net loss $ (6,570) $ (9,021)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depletion, depreciation and amortization 6,475 15,095
Deferred income taxes -- (5,073)
Dry hole costs and impairments -- 17,632
Abandonments 888 --
Other 338 399
Changes in operating assets and liabilities:
Decrease in receivables 5,155 3,109
Increase in inventories -- (19)
Decrease in prepayments 83 175
Decrease (increase) in other receivables 2,697 (21)
Decrease in trade accounts payable (2,030) (476)
Increase (decrease) in other accrued liabilities 611 (932)
Increase in interest payable 1,232 1,666
--------- ---------
Net cash provided by operating activities 8,879 22,534
--------- ---------
Cash flows from investing activities:
Proceeds from sale of oil and gas properties 68,300 --
Lease acquisitions (414) (1,680)
Exploration and development expenditures (3,748) (30,269)
Other asset additions (1) (412)
--------- ---------
Net cash provided by (used in) investing activities 64,137 (32,361)
--------- ---------
Cash flows from financing activities:
Proceeds from bank credit facility -- 4,000
Repayment of bank credit facility (65,000) --
-------- ---------
Net cash (used in) provided by financing activities (65,000) 4,000
-------- ---------
Net increase (decrease) in cash 8,016 (5,827)
Cash at beginning of period 1,024 7,431
Cash at end of period $ 9,040 $ 1,604
========== =========
See accompanying notes to financial statements
5
6
PETSEC ENERGY INC.
A WHOLLY-OWNED SUBSIDIARY OF PETSEC ENERGY LTD
NOTES TO FINANCIAL STATEMENTS
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 the Company's Annual
Report on Form 10-K for the year ended December 31, 1998 and the
accompanying notes and Management's Discussion and Analysis of
Financial Condition and Results of Operations.
The financial information for the three months ended March 31,
1999 and 1998 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 February 1, 1999, the Company completed the sale of a 50%
working interest in certain of its oil and gas properties to Apache
Corporation (Apache) for $68.3 million (the Asset Sale). The
transaction was effective January 1, 1999. The proceeds from the
Asset Sale were used to repay $65 million of outstanding borrowings
under the Company's credit facility, reducing outstanding borrowings
under the credit facility to $9 million. The borrowing base on the
credit facility was reduced to $10 million as a result of the Asset
Sale. Revenue for the quarter ended March 31, 1998 attributed to the
50% working interest that was sold was $12.5 million.
NOTE 3 - The Company is involved in certain lawsuits arising in the ordinary
course of business. While the outcome of any of these lawsuits cannot
be predicted with certainty, management expects these matters to
have no material adverse effect on the financial position, results
of operations or liquidity of the Company.
NOTE 4 - In June of 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133,
"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
6
7
Task Force. Statement 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. 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.
7
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion is intended to assist in the understanding
of Petsec Energy Inc.'s (the Company's) historical financial position and
results of operations for the three-month periods ended March 31, 1999 and
1998. The Company's unaudited financial statements and notes thereto should
be referred to in conjunction with the following discussion.
OVERVIEW
The Company is the wholly owned principal operating subsidiary of
Petsec Energy Ltd (the Parent). The Parent is an Australian public company
with ordinary shares listed on the Australian Stock Exchange (symbol: PSA)
and American Depositary Receipts (ADRs) listed on The New York Stock Exchange
(symbol: PSJ). The results discussed in this report refer only to the
Company. The Parent's results are filed with the Securities and Exchange
Commission separately under forms 6-K (quarterly) and 20-F (annual).
Shareholders and ADR holders are advised to refer to these filings.
The Company was incorporated in March 1990 to evaluate oil and gas
exploration opportunities in the United States. In 1990, the Company
participated in an oil discovery in the Paradox Basin in Colorado. In
addition, the Company acquired oil and gas lease interests in northern
California. The Company also established an office in Lafayette, Louisiana,
hired several former employees of Tenneco Oil Company and acquired leases in
the Gulf of Mexico, offshore Louisiana. The Company subsequently made a
strategic decision to focus its efforts entirely in the Gulf of Mexico and
disposed of its interests in the Paradox Basin in January 1995.
The Company has acquired substantially all of its 44 leases in the
Gulf of Mexico at federal or state lease sales. A disappointing drilling
program in 1998 compounded by low oil and gas prices caused the Company's
outstanding debt to reach unacceptable levels. In December 1998, the Company
agreed to sell to Apache a 50% working interest in 17 developed leases and 6
exploration leases. In addition, Apache assumed operatorship of the assets.
The $68.3 million sale was effective January 1, 1999 and completed on
February 1, 1999, reducing bank debt to $9 million and total debt, including
the subordinated shareholder loan, to $145.4 million. The $100 million of
interest-only subordinated notes are due for repayment in 2007.
The Company markets its oil and gas production through contracts
that generally reflect spot market conditions in the central Gulf of Mexico.
The Company has historically entered into crude oil and natural gas price
swaps to reduce its exposure to price fluctuations. The results of operations
described herein reflect any hedging transactions undertaken.
The Company follows the successful efforts method of accounting.
Under this method, the Company capitalizes lease acquisition costs, costs to
drill and complete exploration wells in which proved reserves are discovered
and costs to drill and complete development wells. Costs to drill exploratory
wells that do not find proved reserves are expensed. Seismic, geological and
geophysical, and delay rental expenditures are expensed as incurred.
The Company reimburses the Parent for direct expenses incurred in
connection with its operations. In addition, the Company has received
subordinated loans from the Parent to finance its operations. See
"---Liquidity and Capital Resources."
8
9
The Company's revenues, profitability and future rate of growth 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 financial position, results of
operations and access to capital, as well as the quantities of oil and gas
reserves that may be economically produced.
RESULTS OF OPERATIONS
The following table sets forth certain operating information with
respect to the oil and gas operations of the Company.
Three Months Ended
March 31
------------------------
1999 1998
---- ----
Net production:
Gas (MMcf) 2,621 7,582
Oil (MBbls) 249 683
Total (MMcfe) 4,115 11,680
Net sales data (in thousands):
Gas $6,183 $17,033
Oil $3,132 $10,953
Total $9,315 $27,986
Average sales price (1):
Gas (per Mcf) $2.36 $2.25
Oil (per Bbl) $12.58 $16.04
Total (per Mcfe) $2.26 $2.40
Average costs (per Mcfe):
Lease operating expenses $0.42 $0.36
Depletion, depreciation, and amortization $1.57 $1.29
General, administrative and stock
compensation expense $0.31 $0.13
(1) Includes effects of hedging activities
GENERAL. On February 1, 1999 (effective January 1, 1999), the
Company sold a 50% working interest in 17 production and six exploration
leases for $68.3 million. The proceeds were used to reduce debt. Apache has
assumed operatorship of the leases. No wells were drilled during the quarter.
OIL AND GAS REVENUES. Oil and gas revenues for the three months
ended March 31, 1999 were $9.3 million, a decrease of $18.7 million, or 67%,
from $28.0 million for the comparable period in 1998. A 65% decrease in gas
production (39% related to the Asset Sale, 26% due to natural decline)
partially offset by a 5% increase in gas prices resulted in a $10.9 million
decrease in gas revenues. A 64% decrease in oil production (27% related to
the Asset Sale, 37% due to natural decline) coupled with a 22% decrease in
oil prices resulted in a $7.8 million decrease in oil revenues.
For the three months ended March 31, 1999, the average realized
gas price was $2.36 per Mcf, or 41% above the $1.67 per Mcf average gas price
before hedging. Over the same period, the average realized oil price was
$12.58 per Bbl, or 24% above the $10.19 per Bbl average oil price before
hedging. Hedging activities resulted in a $2.4 million increase in oil and
gas revenues. For the
9
10
comparable period in 1998, the average realized gas price was $2.25 per Mcf,
or 4% above the $2.17 per Mcf average gas price before hedging. Over the same
period, the average realized oil price was $16.04 per Bbl, or 14% above the
$14.13 per Bbl average oil price before hedging. Hedging activities resulted
in a $1.9 million increase in oil and gas revenues for the three-month period
ended March 31, 1998.
LEASE OPERATING EXPENSES (including production taxes). Lease operating
expenses decreased $2.5 million, or 59% (25% due to the Asset Sale, 34% due to
production decline), to $1.7 million for the three months ended March 31, 1999,
from $4.2 million for the three months ended March 31, 1998. Lease operating
expenses per Mcfe increased from $0.36 for the comparable period in 1998 to
$0.42 for the three months ended March 31, 1999 due to costs of well workovers
coupled with lower production volumes.
DEPLETION, DEPRECIATION AND AMORTIZATION (DD&A). DD&A expense
decreased $8.6 million, or 57% (19% related to the Asset Sale, 38% due to
production decline), to $6.5 million for the three months ended March 31,
1999, from $15.1 million for the same period in 1998. The unit rate was $1.57
per Mcfe in the three months ended March 31, 1999 compared to $1.29 per Mcfe
for same period in 1998.
EXPLORATION EXPENDITURES AND ABANDONMENTS. Seismic, geological and
geophysical expenditures of $1.6 million were expensed during the quarter, a
decrease of $0.2 million from the comparable period in 1998. An abandonment
charge of $0.9 million was recorded in the quarter ended March 31, 1999, for
the write-off of the West Cameron 480 and 462 leases.
DRY HOLE COSTS AND IMPAIRMENTS. During the three-month period ended
March 31, 1998, $17.0 million was expensed for the dry hole and impairment
costs incurred on the South Marsh Island 189 #1 and West Cameron 480 #2
wells. No dry hole cost and impairment charges were incurred during the
quarter ended March 31, 1999.
GENERAL AND ADMINISTRATIVE. General and administrative expense
decreased $0.3 million, or 17%, to $1.3 million for the three months ended
March 31, 1999 from $1.6 million for the comparable period in 1998 due to
staff downsizing following the Asset Sale. On a per Mcfe basis, the rate
increased from $0.13 per Mcfe for the three-month period ended March 31, 1998
to $0.31 per Mcfe for the comparable period in 1999.
STOCK COMPENSATION EXPENSE. Stock compensation expense of $64,000
for the three months ended March 31, 1999 was 63% lower than the charge of
$175,000 recorded for the comparable period in 1998 as a result of staff
downsizing following the Asset Sale.
NET LOSS. As a result of the conditions noted above, a net loss of
$6.6 million was recorded for the three months ended March 31, 1999, an
improvement of $2.4 million over the net loss of $9.0 million for the
comparable period in 1998. For the three months ended March 31, 1999, the
valuation allowance on deferred tax assets was increased, resulting in no tax
benefit.
10
11
LIQUIDITY AND CAPITAL RESOURCES
The following table represents cash flow data for the Company for
the periods indicated:
Three Months Ended
March 31,
----------------------------
( in thousands)
1999 1998
-------- --------
Cash flow data
Net cash provided by operating activities $ 8,879 $ 22,534
Net cash provided by (used in) investing activities 64,137 (32,361)
Net cash (used in) provided by financing activities (65,000) 4,000
The decrease in cash provided by operating activities from 1998 to
1999 was due primarily to the sale to Apache of a 50% working interest in
certain oil and gas properties.
The cash provided by investing activities in 1999 was due to the
receipt of proceeds from the sale of a 50% working interest in certain assets
to Apache. The cash used in investing activities in 1998 represented oil and
gas exploration activities.
The cash (used in) provided by financing activities in 1999 and 1998
consisted of repayments and borrowings under the bank credit facility.
Since 1990 the Company has financed its working capital needs,
operations and growth primarily with advances from the Parent, cash flow from
operations, long term debt and bank borrowings under a revolving credit
facility.
Petsec Energy Ltd made an initial cash investment of $11.4 million
in the Company and, subsequently, increased this investment with advances of
$18.5 million from an Australian offering of Ordinary Shares in September
1995 and $31.0 million out of the net proceeds from a U.S. offering of ADRs in
July 1996.
Funds advanced by the Parent historically have been provided in the
form of subordinated loans. These loans are subordinated to the payment of
all senior indebtedness and have been subordinated to the Notes (defined
herein). At March 31, 1999, the US dollar loans bear interest at 6.56% and in
the case of Australian dollar borrowings, 6.25%. The loans from the Parent do
not have mandatory principal payments due until December 31, 2007. No
interest was paid or accrued on these loans prior to June 1, 1997. Any
payments or distributions made by the Company to its Parent have been
principally for reimbursement of direct expenses incurred in connection with
the Company's operations.
In April 1996, the Company entered into a $75 million bank credit
facility, under which the borrowing base at March 31, 1999 was $10 million.
At March 31, 1999, borrowings outstanding under the bank credit facility were
$9 million with a letter of credit outstanding of $0.2 million. The bank
credit facility is a two-year revolving credit facility followed by a
two-year term period with equal quarterly amortization payments. The facility
matures in April 2001. The bank credit facility is secured by the Company's
Gulf of Mexico producing properties and contains financial covenants that
require the Company to maintain a ratio of senior debt to earnings before
interest, taxes, depreciation, amortization and exploration costs (EBITDAX)
of not more than 4.0 to 1.0 and a coverage ratio of EBITDAX to total interest
of not less than 2.0 to 1.0. The Company is currently in compliance with all
financial covenants under the bank credit facility. Outstanding borrowings
accrue interest at the rate of LIBOR plus a margin of 1.25% to 1.75% per
annum, depending upon the total amount borrowed. The
11
12
Company is obligated to pay a fee equal to .30% to .375% per annum based on
the unused portion of the borrowing base under the facility.
The Company's ability to borrow under the bank credit facility is
dependent upon the reserve value of its oil and gas properties, as determined
by The Chase Manhattan Bank (Chase). If the reserve value of the Company's
borrowing base declines, the amount available to the Company under the bank
credit facility will be reduced and, to the extent that the borrowing base is
less than the amount then outstanding (including letters of credit) under the
bank credit facility, the Company will be obligated to repay such excess
amount upon ninety days' notice from Chase or to provide additional
collateral. Borrowing base repayments, if required, are expected to be met
from estimated future net operating cash flow.
In June 1997, the Company issued $100 million of 9 1/2% Senior
Subordinated Notes due 2007 (the Notes). The Notes were issued at a discount
with a yield to maturity of 9.56% per annum. The net proceeds from the
offering of the Notes were approximately $96.4 million. The Company used a
portion of the net proceeds to repay borrowings under the bank credit
facility. The remainder of the net proceeds was used to provide working
capital for the Company to fund further exploration and development of its
oil and gas properties, the acquisition of lease blocks and other general
corporate purposes.
In response to changing market conditions and restricted capital
availability, the Company will take a more risk diverse approach to its
exploration and development program. This will result in a much lower capital
budget than previous years. The Company was recently the high bidder on two
leases at the March 18, 1999 lease sale. If awarded by the MMS the cost to
the Company is $1.9 million, which currently can be met from net operating
cash flows. The Company intends to finance its 1999 drilling program with
cash on hand, cash flow from operations and proceeds from farm-outs of
certain oil and gas properties. The success of the drilling program will
determine the amount of funds required for development expenditures and,
accordingly, additional capital may have to be raised at that time. The
capital expenditure budget is continually re-evaluated based on drilling
results, commodity prices, cash flow from operations and opportunities for
property acquisitions.
HEDGING TRANSACTIONS
From time to time, the Company has utilized hedging transactions
with respect to a portion of its oil and gas production to achieve a more
predictable cash flow and to reduce its exposure to oil and gas price
fluctuations. While these hedging arrangements limit the downside risk of
adverse price movements, they also limit future revenues from favorable price
movements. The use of hedging transactions also involves the risk that the
counterparties will be unable to meet the financial terms of such
transactions. The credit worthiness of counterparties is subject to
continuing review and full performance is anticipated. The Company limits the
duration of the transactions and the percentage of the Company's expected
aggregate oil and gas production that may be hedged. The Company accounts for
these transactions as hedging activities and, accordingly, gains or losses
are included in oil and gas revenues when the hedged production is delivered.
The Company enters 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.
12
13
As of March 31, 1999, for the remainder of 1999, the Company had
entered into commodity swaps effectively fixing the price of 7.3 million
MMbtu of gas at a volume-weighted average New York Mercantile Exchange
(NYMEX) price of $2.32 per MMbtu. The Company had also entered into commodity
swap contracts for 4.6 million MMbtu at a volume-weighted average NYMEX price
of $2.29 per MMbtu for calendar year 2000.
As of March 31, 1999, for the remainder of 1999, the Company had
entered into commodity swap contracts for 458,000 barrels of oil at a
volume-weighted average NYMEX price of $17.72 per barrel. The Company had
also entered into commodity swap contracts for 152,000 Bbls at a
volume-weighted average NYMEX price of $19.70 per Bbl for calendar year 2000.
The fair value at March 31, 1999, represented by the estimated
amount that would be required to terminate these contracts, was a net gain of
$1.6 million for the gas contracts and a net gain of $1.1 million for the oil
contracts.
YEAR 2000
The Company has a plan in place to address Year 2000 (Y2K) issues.
The plan requires the Company to assess its information technology (IT)
systems and non-information technology (non-IT) systems (primarily embedded
technology in process control equipment containing microprocessors or other
similar circuitry) and those of its principal suppliers, customers and
business associates whose Y2K readiness could reasonably be expected to have
a material effect on the Company's business, results of operations or
financial condition.
On February 1, 1999, the Company completed the sale of a 50% working
interest in most of the Company's producing oil and gas properties to Apache
including the responsibilities associated with the operation of these assets.
As a result, Apache is primarily responsible for Y2K compliance issues
concerning these oil and gas operating assets. The Company has made available
to Apache all data and testing accumulated to date that is relevant to the
oil and gas assets that are now jointly owned.
Prior to the Apache transaction, the Company had identified all
material IT and non-IT systems it uses directly in its operations that could
be affected by Y2K issues. The Company has assessed the Y2K readiness of
these systems and has found no material instances of Y2K compliance problems.
In addition, the licensor of the Company's primary financial software has
certified that this software is Y2K compliant. Surveys have been received
from a substantial number of the Company's principal suppliers, customers and
business associates. With Apache now among the Company's principal business
partners, the Company is in the process of assessing Apache's Y2K readiness.
The Company will continue to seek Y2K compliance assurances from its
principal suppliers, customers and business associates who have not already
done so. There can be no guarantee, however, that the systems of other
companies on which the Company's operations rely will be timely converted, or
that a failure to convert by another company, or a conversion that is
incompatible with the Company's systems would not have a material adverse
effect on the Company.
The Company has formulated contingency plans to address Y2K risks.
These contingency plans presently consist of identifying suppliers,
hydrocarbon purchasers and other business associates that have developed
systems that are Y2K compliant. In addition, the Company has plans to conduct
its operations manually in the event an unexpected Y2K problem would shut
down significant systems. There can be no assurance that the Company's
contingency plans will be effective to mitigate an anticipated Y2K compliance
problem or that the Company has anticipated all Y2K compliance problems that
could arise.
13
14
The Company has and will utilize both internal and external
resources to complete tasks and perform testing necessary to address the Y2K
issue. The Company expects to continue to assess its Y2K risks and develop
contingency plans to minimize those risks during the year. To date, the
Company has not incurred any significant costs on its Y2K project and
estimates a total cost of less than $80,000 related to the assessment and
remediation of Year 2000 issues.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
There has been no material change to the information disclosed in
the Company's most recent Annual Report on Form 10-K.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Reports on Form 8-K
Date of Report Item Reported Financial Statements Filed
January 11, 1999 Item 5, 7 None
January 21, 1999 Item 5, 7 None
February 12, 1999 Item 2, 7 Unaudited Pro Forma Balance
Sheet at September 30, 1998
and Unaudited Pro Forma
Statements of Operations for
Year Ended December 31, 1997
and Nine Months Ended
September 30,1998.
(b). 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
4.1 Articles of Incorporation of the Company (filed as Exhibit 4.1
to the Registration Statement on Form S-4 filed on July 18,
1997 and is included herein by reference (File No. 333-31625))
4.2 By-Laws of the Company (filed as Exhibit 4.2- to the
Registration Statement on Form S-4 filed on July 18, 1997 and
is included herein by reference (File No. 333-31625))
4.3 Indenture dated as of June 13, 1997 among the Company, as
issuer, and the Bank of New York, as trustee (filed as Exhibit
4.3- to the Registration Statement on Form S-4 filed on July
18, 1997 and is included herein by reference (File No.
333-31625))
4.4 Registration Rights Agreement dated June 13, 1997 by and among
the Company and Merrill, Lynch, Pierce, Fenner & Smith
Incorporated, Donaldson, Lufkin & Jenrette Securities
Corporation and Salomon Brothers Inc (filed as Exhibit 4.4
to the Registration Statement on Form S-4 filed on July 18,
1997 and is included herein by reference (File No. 333-31625))
10.1 Credit Agreement by and among Petsec Energy Inc. and Chase
Manhattan Bank and certain financial institutions named therein
as Lenders (filed as Exhibit 10.1 to the Registration Statement
on Form S-4 filed on July 18, 1997 and is included herein by
reference (File No. 333-31625))
27 Financial Data Schedule
14
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Petsec Energy Inc.
May 14, 1999 By: /s/ Ross A. Keogh
---------------------------
Ross A. Keogh
Director and Vice President
(Principal Financial
and Accounting officer)
May 14, 1999 By: /s/ James E. Slatten, III
------------------------
James E. Slatten, III
Director and Vice President
(Duly Authorized Officer)
15
16
INDEX TO EXHIBITS
Exhibit No. Exhibit
4.1 Articles of Incorporation of the Company (filed as Exhibit 4.1
to the Registration Statement on Form S-4 filed on July 18,
1997 and is included herein by reference (File No. 333-31625))
4.2 By-Laws of the Company (filed as Exhibit 4.2- to the
Registration Statement on Form S-4 filed on July 18, 1997 and
is included herein by reference (File No. 333-31625))
4.3 Indenture dated as of June 13, 1997 among the Company, as
issuer, and the Bank of New York, as trustee (filed as Exhibit
4.3- to the Registration Statement on Form S-4 filed on July
18, 1997 and is included herein by reference (File No.
333-31625))
4.4 Registration Rights Agreement dated June 13, 1997 by and among
the Company and Merrill, Lynch, Pierce, Fenner & Smith
Incorporated, Donaldson, Lufkin & Jenrette Securities
Corporation and Salomon Brothers Inc (filed as Exhibit 4.4
to the Registration Statement on Form S-4 filed on July 18,
1997 and is included herein by reference (File No. 333-31625))
10.1 Credit Agreement by and among Petsec Energy Inc. and Chase
Manhattan Bank and certain financial institutions named therein
as Lenders (filed as Exhibit 10.1 to the Registration Statement
on Form S-4 filed on July 18, 1997 and is included herein by
reference (File No. 333-31625))
27 Financial Data Schedule
16