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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 September 30, 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)
(337) 989-1942
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [ X ] NO [ ]
*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.
CERTAIN INFORMATION HAS BEEN OMITTED IN ACCORDANCE WITH GENERAL INSTRUCTION H
(1) OF FORM 10-Q.
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PETSEC ENERGY INC.
INDEX TO FORM 10-Q
Page
----
PART I. FINANCIAL INFORMATION
IMPORTANT NOTE: The financial information in this Quarterly Report
refers to Petsec Energy Inc., a wholly owned subsidiary of Petsec
Energy Ltd. The publicly listed Petsec Energy Ltd files its annual
consolidated financial statements separately under Form 20-F and a
summary of its quarterly consolidated financial statements under
Form 6-K.
Item 1. Financial Statements
Balance Sheets................................................ 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........................................... 8-18
Item 3. Quantitative and Qualitative Disclosures
About Market Risk............................................... 19
PART II. OTHER INFORMATION
Item 4. Other Information................................................. 19
Item 5. Exhibits and Reports on Form 8-K.................................. 20
SIGNATURES................................................................. 21
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PETSEC ENERGY INC.
a wholly owned subsidiary of Petsec Energy Ltd
BALANCE SHEETS
(Dollars in thousands, except share amounts)
ASSETS
September 30, December 31,
1999 1998
(unaudited)
------------- ------------
Current Assets
Cash $ 5,694 $ 1,024
Accounts receivable 4,925 8,279
Other receivables 203 4,626
Inventories of crude oil 45 45
Prepaid expenses 1,228 274
Assets held for sale - 68,300
----------- ------------
Total Current Assets 12,095 82,548
----------- ------------
Property, plant and equipment - at cost under the successful
efforts method of accounting for oil and gas properties
Proved oil and gas properties 161,098 156,265
Unproved oil and gas properties 11,926 31,984
Production facilities 44,467 43,321
Other 1,933 1,970
----------- ------------
219,424 233,540
Less accumulated depletion, depreciation and amortization (129,790) (133,738)
----------- ------------
Net property, plant and equipment 89,634 99,802
----------- ------------
Other Assets 2,445 2,682
----------- ------------
Total Assets $ 104,174 $ 185,032
=========== ============
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current Liabilities:
Trade accounts payable 3,931 8,572
Interest payable 3,507 2,214
Other accrued liabilities 5,488 3,381
Bank credit facility (including $1.3 million reclassified
as a result of default) 7,875 67,250
Senior Subordinated notes (due 2007, in technical default) 99,676 -
----------- ------------
Total Current Liabilities 120,477 81,417
Senior Subordinated notes - 99,656
Bank credit facility - 6,750
Subordinated shareholder loan 37,319 36,792
Provision for dismantlement 2,788 2,488
----------- ------------
Total Liabilities $ 160,584 $ 227,103
----------- ------------
Shareholder's Deficit:
Common stock, $1 par value; authorized 1,000,000 shares;
issued and outstanding 1 share - -
Additional paid-in-capital 21,769 21,572
Accumulated deficit (78,179) (63,643)
----------- ------------
Total Shareholder's Deficit (56,410) (42,071)
----------- ------------
$ 104,174 $ 185,032
=========== ============
See accompanying notes to financial statements.
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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 Nine Months Ended
September 30, September 30,
-------------------------- ------------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenue:
Oil and gas sales $ 6,914 $ 20,589 $ 24,260 $ 72,171
Operating expenses:
Lease operating expenses 1,607 2,997 5,022 10,477
Production taxes 44 145 170 479
Exploration expenditures 522 1,645 2,435 6,515
Abandonments 71 - 959 -
Dry hole costs and impairments - 2,169 - 36,225
General and administrative 902 1,492 3,529 4,785
Stock compensation 49 106 196 508
Depletion, depreciation and amortization 4,398 12,702 16,162 41,634
----------- ---------- ----------- ---------
Total operating expenses 7,593 21,256 28,473 100,623
----------- ---------- ----------- ---------
Loss from operations (679) (667) (4,213) (28,452)
Other income (expenses):
Interest expense (3,288) (3,355) (10,235) (8,045)
Interest income 58 69 218 238
Other, principally foreign exchange gain (loss) 63 110 (306) 686
----------- ---------- ----------- ---------
(3,167) (3,176) (10,323) (7,121)
----------- ---------- ----------- ---------
Loss before income taxes (3,846) (3,843) (14,536) (35,573)
Income taxes - 1,384 - 13,079
----------- ---------- ----------- ---------
Net loss (3,846) (2,459) (14,536) (22,494)
Retained earnings (deficit) at beginning of period (74,333) 7,619 (63,643) 27,654
----------- ---------- ----------- ---------
Retained earnings (deficit) at end of period $ (78,179) $ 5,160 $ (78,179) $ 5,160
=========== ========== =========== =========
See accompanying notes to financial statements.
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PETSEC ENERGY INC.
a wholly owned subsidiary of Petsec Energy Ltd
STATEMENTS OF CASH FLOWS
(unaudited)
(Dollars in thousands)
Nine Months Ended
September 30,
--------------------------
1999 1998
---- ----
Cash flows from operating activities:
Net loss $ (14,536) $ (22,494)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depletion, depreciation and amortization 16,162 41,634
Deferred income taxes - (13,079)
Dry hole costs and impairments - 36,225
Abandonments 959 -
Other 685 774
Changes in operating assets and liabilities:
Decrease in receivables 3,354 8,681
Decrease in inventories - 22
Increase in prepayments (1,621) (222)
Decrease (increase) in other receivables 4,423 (181)
Decrease in trade accounts payable (1,943) (2,156)
Decrease in other accrued liabilities (41) (873)
Increase in interest payable 1,293 2,181
---------- ----------
Net cash provided by operating activities 8,735 50,512
---------- ----------
Cash flows from investing activities:
Proceeds from sale of oil and gas properties 71,727 -
Lease acquisitions (2,144) (8,147)
Exploration and development expenditures (7,523) (114,428)
Other asset additions - (452)
---------- ----------
Net cash provided by (used in) investing activities 62,060 (123,027)
---------- ----------
Cash flows from financing activities:
Proceeds from bank credit facility - 66,000
Repayment of bank credit facility (66,125) -
---------- ----------
Net cash (used in) provided by financing activities (66,125) 66,000
---------- ----------
Net increase (decrease) in cash 4,670 (6,515)
Cash at beginning of period 1,024 7,431
---------- ----------
Cash at end of period $ 5,694 $ 916
========== ==========
See accompanying notes to financial statements.
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NOTE 1 - The accompanying financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. The financial statements and footnotes should
be read in conjunction with the financial statements and notes
thereto included in Petsec Energy Inc.'s (the "Company's") Annual
Report on Form 10-K for the year ended December 31, 1998 and
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The financial information for the three and nine-month periods ended
September 30, 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 - The Company is experiencing a liquidity problem. This problem is
exacerbated by the strong performance of its 1999 drilling program.
The Company does not currently have the financial resources to fund
both anticipated capital and non-capital obligations through the end
of the fourth quarter of 1999 and beyond. In addition, the expected
capital expenditure commitments could increase with continued success
on wells currently drilling and as more wells are drilled by the
Company. The Company would incur material non-recourse financial
penalties under its joint venture agreements if because of liquidity
problems it were unable to participate in operations proposed by its
joint venture partners.
On October 29, 1999, in order to preserve available cash, the Company
elected not to pay $3.2 million due under its revolving credit
facility (the "Credit Facility") in which The Chase Manhattan Bank,
N.A., Bank of America, N.A. (formerly NationsBank, N.A.) and Credit
Lyonnais (collectively, the "Banks") are participants. This caused a
default under the Credit Facility and a cross default under the
Company's indenture (the "Indenture") governing its $100 million 9
1/2% senior subordinated notes (the "9 1/2% Notes"). The Banks have
agreed to forbear in collecting indebtedness due under the Credit
Facility through December 14, 1999 as to existing known defaults to
allow the Company the opportunity to obtain alternate financing.
In April 1996, the Company entered into the Credit Facility. Under
the Credit Facility, $3.2 million in principal was due on October 29,
1999. Of this amount, $2.075 million resulted from the required
repayment of principal with respect to a borrowing base
redetermination on July 30, 1999, and $1.125 million was a regularly
scheduled quarterly installment payment. In addition to the $3.2
million now due, the Company has outstanding principal borrowings in
the amount of $4.7 million under the Credit Facility. The
indebtedness owed to the Banks under the Credit Facility is secured
by a mortgage over a substantial portion of the Company's producing
properties.
The Company is also in technical default of certain negative
covenants in the Credit Facility. These technical covenant defaults,
together with the payment default, are subject to the forbearance
agreement between the Company and the Banks. Under the Credit
Facility, the Banks would have the right to accelerate the entire
$7.9 million in debt that is due to them and to commence collection
proceedings if the defaults are not cured prior to December 14, 1999.
Accordingly, the amounts outstanding under the Credit Facility and
the 9 1/2% Notes have been reclassified as current liabilities at
September 30, 1999.
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As a consequence of the default on the Credit Facility, under the
Indenture the Indenture trustee or the holders of $25 million or more
of the 9 1/2% Notes can elect to accelerate the entire debt that is
due to them, which is $100 million, and to commence collection
proceedings. The next semi-annual interest payment under the
Indenture in the amount of $4.75 million is due on December 15, 1999,
and given the Company's present liquidity position, it is unlikely
the Company will make this payment. The Company is in the process of
extending an invitation to the holders of the 9 1/2% Notes to
organize as the first step toward the commencement of discussions
between the Company and the holders of the 9 1/2% Notes on the
restructure of this indebtedness. There can be no assurance that
discussions with these holders will result in the successful
restructuring of the 9 1/2% Notes.
The Company is exploring the possibility of supplemental or
replacement financing with several different entities and has
received non-binding written proposals that would allow the Company
to repay the Credit Facility debt in full and provide the Company
with additional capital. There is no assurance that supplemental or
replacement financing will be available, and if available, will be
available on terms and at a cost that is comparable to the Credit
Facility or acceptable to the Company. The Company is also
considering the restructure of its public debt. The Company believes
that no additional funding will be made available to it from its
indirect parent, Petsec Energy Ltd, if at all, until after a
restructuring proposal acceptable to the Parent is achieved. The
Company has engaged a financial advisor to assist it in restructuring
its debt. There can be no assurance, however, that the Company will
be able to obtain funding on a timely basis, that the Banks or the
holders or trustee of the 9 1/2% Notes will not commence collection
proceedings against the Company, or that the Company will be able to
avoid seeking protection under Chapter 11 of the United States
Bankruptcy Code in an effort to reorganize.
NOTE 3 - 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 Credit Facility, reducing outstanding borrowings under the
Credit Facility to $9 million. Revenue for the three-month and
nine-month periods ended September 30, 1998 attributed to the 50%
working interest that was sold was $9.0 million and $31.9 million,
respectively.
NOTE 4 - 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 5 - In June of 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 (Statement 133),
"Accounting for Derivative Instruments and Hedging Activities".
Statement 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. Statement
133 requires that all derivatives be recognized as either assets or
liabilities in the balance sheet and measured at fair value. The
accounting for changes in the fair value of a derivative (that is,
gains and losses) depends on the intended use of the derivative and
resulting designation. If certain conditions are met, a derivative
may be specifically designated as a "fair value hedge," "cash flow
hedge," or a hedge of the foreign currency exposure of a net
investment in a foreign operation. Statement 133 amends and
supersedes a number of existing Statements of Financial Accounting
Standards, and nullifies or modifies the consensus reached in a
number of issues addressed by the Emerging Issues Task Force.
Statement 133, as amended, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company is assessing
the impact of adoption of Statement 133, and at the present time, has
not quantified the effect of adoption or continuing impact of such
adoption.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion is intended to assist in the understanding of
Petsec Energy Inc.'s (the "Company's") historical financial position and results
of operations for the three-month and nine-month periods ended September 30,
1999 and 1998. The Company's unaudited financial statements and notes thereto
should be referred to in conjunction with the following discussion.
The Company has a liquidity problem. This problem is exacerbated by the
success of the Company's 1999 drilling program, and particularly the success
experienced in the third quarter of this year. Capital requirements may increase
with continued success on wells currently drilling and as more wells are drilled
by the Company. The Company would incur material non-recourse financial
penalties under its joint venture agreements if because of liquidity problems
it were unable to participate in operations proposed by its joint venture
partners.
The Company does not currently have the financial resources to fund
both anticipated capital and non-capital obligations through the end of the
fourth quarter of 1999 and beyond. In order to preserve available cash, the
Company did not make principal payments due on October 29, 1999 in the amount of
$3.2 million under its revolving credit facility (the "Credit Facility") in
which The Chase Manhattan Bank, N.A., Bank of America, N.A. (formerly
NationsBank, N.A.) and Credit Lyonnais (collectively, the "Banks") are
participants. The Company is in default under the Credit Facility, and this
default caused a cross default under the Company's indenture (the "Indenture")
governing its $100 million 9 1/2% senior subordinated notes (the "9 1/2%
Notes"). Accordingly, the amounts outstanding under the Credit Facility and the
9 1/2% Notes have been reclassified as current liabilities at September 30,
1999. See discussion, "Liquidity and Capital Resources."
The Company is seeking additional capital to meet its financial
commitments. The Company is also considering the restructure of its public debt.
The Company believes that no additional funding will be made available to it
from its Parent, if at all, until a restructuring proposal acceptable to the
Parent is achieved. The Company has engaged a financial advisor to assist it to
obtain additional capital and restructure its existing debt.
The Banks have agreed to forbear and not take any action to collect on
the Indebtedness due under the Credit Facility as a result of existing known
defaults until after December 14, 1999 to allow the Company to obtain alternate
financing. The Company has received non-binding written proposals from financing
sources that would allow the Company to repay the aggregate $7.9 million
indebtedness under the Credit Facility and provide the Company with additional
capital. There can be no assurance, however, that the Company will be able to
reach agreement on these proposals or obtain required funding on a timely basis
or that the Company will be able to avoid seeking protection under the United
States Bankruptcy Code in an effort to reorganize.
The Company is in the process of inviting the holders of the 9 1/2%
Notes to organize as the first step toward the commencement of discussions
between the Company and the holders of the 9 1/2% Notes on the restructure of
this indebtedness.
The liquidity issues faced by the Company are discussed in detail in
the "Liquidity and Capital Resources section of this 10-Q.
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OVERVIEW
The Company is the wholly owned principal operating subsidiary of 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 (annually). 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 47 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 these assets. The $68.3
million sale was effective January 1, 1999 and completed on February 1, 1999,
reducing debt under the Credit Facility to $9 million and total debt, including
the 9 1/2 % Notes and the subordinated shareholder loan, to $145.4 million.
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 discussion,
"Liquidity and Capital Resources."
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.
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RESULTS OF OPERATIONS
The following table sets forth certain operating information with
respect to the oil and gas operations of the Company.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- --------------------
1999 1998 1999 1998
------ ------- ------- -------
NET PRODUCTION:
Gas (MMcf) 1,749 5,802 6,510 20,056
Oil (MBbls) 186 549 637 1,769
Total (Mmcfe) 2,865 9,096 10,332 30,670
NET SALES DATA (IN THOUSANDS):
Gas $3,717 $11,998 $14,680 $43,663
Oil $3,197 $ 8,591 $ 9,580 $28,508
Total $6,914 $20,589 $24,260 $72,171
AVERAGE SALES PRICE (1):
Gas (per Mcf) $ 2.13 $ 2.07 $ 2.25 $ 2.18
Oil (per Bbl) $17.19 $ 15.65 $ 15.04 $ 16.12
Total (per Mcfe) $ 2.41 $ 2.26 $ 2.35 $ 2.35
AVERAGE COSTS (PER MCFE):
Lease operating expenses $ 0.58 $ 0.35 $ 0.50 $ 0.36
Depletion, depreciation, and amortization $ 1.54 $ 1.40 $ 1.56 $ 1.36
General, administrative and other expenses $ 0.31 $ 0.16 $ 0.34 $ 0.16
(1) Includes effects of hedging activities
GENERAL. During the three months ended September 30, 1999, six wells
were drilled. The Main Pass 105#1 ST was completed as a gas producer and began
production on August 26, 1999. The Main Pass 90 #1 and Main Pass 93 #1 wells
were both completed as future gas producers and are expected to be in production
in the first quarter of 2000. The West Cameron 515 #1 and 516 #1 wells both
encountered hydrocarbon bearing sands and are currently suspended awaiting
installation of surface facilities. The Mustang Island 883 #1 well also
encountered hydrocarbons which the Company believes are commercial, but after
logging operations were completed, the well experienced mechanical difficulties
and operations are currently underway to free stuck drill pipe. Of the ten wells
spud in 1999, eight were either committed to or spud in the third quarter. Of
the seven wells that have reached total depth and have
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been evaluated by electric logging, all seven have encountered hydrocarbons that
the Company believes will be commercial. Of the seven discoveries, two are
currently producing, four are temporarily suspended pending installation of
development facilities, and one is undergoing operations to free stuck pipe. The
Vermilion 47 #1, West Cameron 653 # 1 and West Delta 112 #1 wells are currently
being drilled.
OIL AND GAS REVENUES. Oil and gas revenues for the three months ended
September 30, 1999 were $6.9 million, a decrease of $13.7 million, or 66%, from
$20.6 million for the comparable period in 1998. A 70% decrease in gas
production (25% related to the Asset Sale, 45% due to natural decline) partially
offset by a 3% increase in gas prices, resulted in an $8.3 million decrease in
gas revenues. A 66% decrease in oil production (34% related to the Asset Sale,
32% due to natural decline) partially offset by a 10% increase in oil prices
resulted in a $5.4 million decrease in oil revenues.
Oil and gas revenues for the nine-month period ended September 30, 1999
were $24.3 million, a decrease of $47.9 million, or 66% below $72.2 million for
the comparable period in 1998. Oil production in the nine months to September
30, 1999 decreased 64% (36% related to the Asset Sale, 28% due to natural
decline) and gas production decreased 68% (26% related to the Asset Sale, 42%
due to natural decline) over the comparable 1998 period. The average realized
price of oil decreased by 7% and gas increased by 4%.
For the three months ended September 30, 1999, the average realized gas
price was $2.13 per Mcf, or 13% below the $2.44 per Mcf average gas price before
hedging. Over the same period, the average realized oil price was $17.19 per
Bbl, or 13% below the $19.82 per Bbl average oil price before hedging. Hedging
activities resulted in a $1.0 million decrease in oil and gas revenues. For the
comparable period in 1998 the average realized gas price was $2.07 per Mcf, or
6% above the $1.96 per Mcf average gas price before hedging. In the same period
the average realized oil price was $15.65, or 24% above the $12.65 per Bbl
average oil price before hedging. Hedging activities resulted in a $2.3 million
increase in oil and gas revenues for the three-month period ended September 30,
1998.
For the nine months ended September 30, 1999, the average realized gas
price was $2.25 per Mcf, or 13% above the $1.99 per Mcf average gas price before
hedging. Over the same period, the average realized oil price was $15.04 per Bbl
or $0.01 below the $15.05 per Bbl average oil price before hedging. Hedging
activities resulted in a $1.7 million increase in oil and gas revenues. For the
comparable period in 1998, the average realized gas price was $2.18 per Mcf, or
2% above the $2.13 per Mcf average gas price before hedging. Over the same
period, the average realized oil price was $16.12 per Bbl, or 18% above the
$13.62 per Bbl average oil price before hedging. Hedging activities resulted in
a $5.3 million increase in oil and gas revenues for the nine-month period ended
September 30, 1998.
LEASE OPERATING EXPENSES (including production taxes). Lease operating
expenses decreased $1.4 million, or 45% to $1.7 million for the three months
ended September 30, 1999, from $3.1 million for the three months ended September
30, 1998. Lease operating expenses per Mcfe increased from $0.35 for the
comparable period in 1998 to $0.58 for the three months ended September 30, 1999
as a result of the production decline.
Lease operating expenses for the nine-month period ended September 30,
1999 were $5.2 million, a decrease of 53% over the corresponding period in 1998.
Lease operating expenses per Mcfe increased from $0.36 for the comparable period
in 1998 to $0.50 for the nine-month period to September 30, 1999 due to
production decline.
DEPLETION, DEPRECIATION AND AMORTIZATION (DD&A). DD&A expense decreased
$8.3 million, or 65% to $4.4 million for the three months ended September 30,
1999, from $12.7 million
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for the same period in 1998. Due to downward reserve revisions by the Company's
independent reserve engineers at December 31, 1998, the unit rate increased to
$1.54 per Mcfe for the three months ended September 30, 1999 from $1.40 per Mcfe
for the same period in 1998.
DD&A expense for the nine-month period ended September 30, 1999
decreased 61% to $16.2 million from $41.6 million for the corresponding period
in 1998. The depletion rate per unit of $1.56 per Mcfe for the nine-month period
ended September 30, 1999 increased from $1.36 per Mcfe for the corresponding
period in 1998 due to the downward reserve revisions as noted above.
EXPLORATION EXPENDITURES AND ABANDONMENTS. Seismic, geological and
geophysical expenditures of $0.5 million were expensed during the quarter, a
decrease of $1.1 million from the comparable period in 1998. A charge of $0.1
million was recorded in the quarter ended September 30, 1999 for the plugging
and abandonment of the West Cameron 542 B-1 well.
Exploration expenditures for the nine months ended September 30, 1999
were $3.4 million, a decrease of $3.1 million over the comparable period in
1998. An abandonment charge of $0.9 million was recorded in the first quarter of
1999 for the write-off of the West Cameron 480 and 462 leases.
DRY HOLE COSTS AND IMPAIRMENTS. No dry hole cost and impairment charges
were incurred during the quarter ended September 30, 1999. During the quarter
ended September 30, 1998, $2.2 million was expensed for the dry hole costs
incurred on the Main Pass 91 East #1 well.
No dry hole and impairment costs were incurred in the nine months ended
September 30, 1999. For the nine months ended September 30, 1998, $36.2 million
was expensed for dry hole and impairment costs incurred primarily on the South
Marsh Island 189 #1, High Island 308 #1, West Cameron 480 #2 wells and Main Pass
91 East #1 wells.
INTEREST EXPENSE. Interest expense for the three months ended September
30, 1999 was $3.3 million, a decrease of $0.1 million over the comparable period
in 1998. No interest was capitalized in the third quarter of 1999 while $0.8
million was capitalized in the same quarter in 1998.
For the nine months ended September 30, 1999, interest expense was
$10.2 million with no capitalized interest. For the same period in 1998,
interest expense was $8.0 million with $2.6 million in capitalized interest.
Interest incurred was comparable due to the timing of borrowings and repayments
on the bank credit facility.
GENERAL, ADMINISTRATIVE AND STOCK COMPENSATION EXPENSE. General,
administrative and stock compensation expense decreased $0.6 million, or 38%, to
$1.0 million for the three months ended September 30, 1999 from $1.6 million for
the comparable period in 1998. On a per Mcfe basis, the rate increased from
$0.16 per Mcfe for the three-month period ended September 30, 1998 to $0.31 per
Mcfe for the comparable period in 1999 due to production decline.
For the nine-month period ended September 30, 1999, the general,
administrative and stock compensation expense decreased $1.6 million to $3.7
million from $5.3 million for the comparable period in 1998. On a per Mcfe
basis, the rate increased from $0.16 per Mcfe for the nine-month period ended
September 30, 1998 to $0.34 per Mcfe for the comparable period in 1999 due to
production decline.
NET LOSS. As a result of the conditions noted above, a net loss of $3.8
million was recorded for the three months ended September 30, 1999, an increase
of $1.3 million over the net loss of $2.5 million for the comparable period in
1998. The net loss for the nine months ended September 30, 1999 was $14.5
million, an improvement of $8.0 million over the comparable 1998 period.
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LIQUIDITY AND CAPITAL RESOURCES
Liquidity Position
The Company is experiencing a liquidity problem. This problem is
exacerbated by the strong performance of its 1999 drilling program. Ten wells
have been spud in 1999, eight of which were spud or committed to in the third
quarter of this year. Of the seven wells that have been evaluated by electric
logging in 1999, seven have encountered hydrocarbons that the Company believes
will be commercial. The Company has committed to additional capital expenditures
on six of the seven wells that have encountered hydrocarbons and expects to have
additional capital expenditure commitments with respect to the remaining well.
The Company does not currently have the financial resources to fund both
anticipated capital and non-capital obligations through the end of the fourth
quarter of 1999 and beyond. In addition, the expected capital expenditure
commitments could increase with continued success on wells currently drilling
and as more wells are drilled by the Company. The Company would incur material
non-recourse financial penalties under its joint venture agreements if because
of liquidity problems it were unable to participate in operations proposed by
its joint venture partners.
On October 29, 1999, in order to preserve available cash, the Company
elected not to pay $3.2 million due to the Banks under the Credit Facility. This
caused a default under the Credit Facility and a cross default under the
Indenture. Accordingly, the amounts outstanding under the Credit Facility and
the 9 1/2% Notes have been reclassified as current liabilities at September 30,
1999. The Banks have agreed to forbear in collecting indebtedness due under
the Credit Facility through December 14, 1999 as to existing known defaults to
allow the Company the opportunity to obtain alternate financing. Under the
Credit Facility, the Banks would have the right to accelerate the entire $7.9
million in debt that is due to them and to commence collection proceedings if
the payment default and certain other non-payment defaults are not cured prior
to December 14, 1999.
As a consequence of the default on the Credit Facility, under the
Indenture the Indenture trustee or the holders of $25 million or more of the 9
1/2% Notes can elect to accelerate the entire debt that is due to them, which is
$100 million, and to commence collection proceedings. The next semi-annual
interest payment under the Indenture in the amount of $4.75 million is due on
December 15, 1999, and given the Company's present liquidity position, it is
unlikely the Company will make this payment. The Company is in the
process of extending an invitation to the holders of the 9 1/2% Notes to
organize as the first step toward the commencement of discussions between the
Company and the holders of the 9 1/2% Notes on the restructure of this
indebtedness. There can be no assurance that discussions with these holders will
result in the successful restructuring of the 9 1/2% Notes.
The Company is exploring the possibility of supplemental or
replacement financing with several different entities and has received
non-binding written proposals that would allow the Company to repay the Credit
Facility debt in full and provide the Company with additional capital. There is
no assurance that supplemental or replacement financing will be available, and
if available, will be available on terms and at a cost that is comparable to the
Credit Facility or acceptable to the Company. The Company is also considering
the restructure of its public debt. The Company believes that no additional
funding will be made available to it from its Parent, if at all, until a
restructuring proposal acceptable to the Parent is achieved. The Company has
engaged Gordian Group, L.P., to assist it in restructuring its debt. There can
be no assurance, however, that the Company will be able to obtain funding on a
timely basis, that the Banks or the holders or trustee of the 9 1/2% Notes will
not commence collection proceedings against the Company, or that the Company
will be able to avoid seeking protection under Chapter 11 of the United States
Bankruptcy Code in an effort to reorganize.
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Cash Flow
The following table represents cash flow data for the Company for the
periods indicated:
Nine Months Ended
September 30,
------------------------
(in thousands)
1999 1998
Cash flow data
Net cash provided by operating activities $ 8,735 $ 50,512
Net cash provided by (used in) investing activities 62,060 (123,027)
Net cash (used in) provided by financing activities (66,125) 66,000
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 coupled with natural decline in production.
The cash provided by investing activities in 1999 was due primarily to
the receipt of proceeds from the sale of a 50% working interest in certain
assets to Apache. The cash used in investing activities in 1998 represented oil
and gas exploration and development activities.
The cash movements in financing activities in 1999 and 1998 consisted
of repayments and borrowings under the bank credit facility.
Capital Expenditures and Commitments.
In response to changing market conditions and restricted capital
availability, in 1999 the Company has taken a more risk averse approach to its
exploration and development program resulting in a much lower capital budget
than previous years. In the quarter ended September 30, 1999, the Company signed
a participation agreement over West Delta 112 with Coastal Oil & Gas USA., L.P.
("Coastal"). Under the terms of the participation agreement the Company
recovered $1.7 million in leasehold costs from Coastal. In addition, Coastal is
required to pay 66 2/3% of the drilling and casing cost of the first two test
wells on the lease to earn a 50% working interest.
During the three-month period ended September 30, 1999, the Company
spent $1.8 million in capital and exploration expenditures, and in the nine
months ended September 30, 1999 spent $9.7 million. In the comparable periods in
1998 the Company spent $47.2 million and $123.0 million, respectively. During
the September 1999 quarter, the Company was awarded a federal lease covering
part of High Island Block 33 as successful bidder at the Western Gulf of Mexico
federal lease sale. The Company paid $142,874 and has a 100% working interest in
the lease block. In addition, on October 5, 1999, the Company was awarded a
Texas State lease for $126,875 covering a portion of Mustang Island Block 795L
as successful bidder at the State of Texas lease sale.
For a discussion of liquidity issues relating to capital expenditures,
see the subsection entitled "Liquidity Position" of this "Liquidity and Capital
Resources" section of the 10-Q.
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Senior Secured Bank Loans
In April 1996, the Company entered into the Credit Facility. Under the
Credit Facility, $3.2 million in principal was due on October 29, 1999. Of this
amount, $2.075 million resulted from the required repayment of principal with
respect to a borrowing base redetermination on July 30, 1999, and $1.125 million
was a regularly scheduled quarterly installment payment. The Company did not
make this payment. In addition to the $3.2 million now due, the Company has
outstanding principal borrowings in the amount of $4.7 million under the Credit
Facility. The indebtedness owed to the Banks under the Credit Facility is
secured by a mortgage over a substantial portion of the Company's producing
properties.
The Company is also in technical default of certain negative covenants
in the Credit Facility. These technical covenant defaults, together with the
payment default, are subject to a forbearance agreement between the Company and
the Banks which provides that the Banks will not take any legal action to
enforce its rights under the Credit Facility as a result of the known existing
defaults until after December 14, 1999.
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 past due principal amount accrues interest at the rate of 2% per annun above
LIBOR plus the applicable margin. The Company has paid all interest that is
presently due.
For a discussion of liquidity issues relating to indebtedness owed to
the Banks under the Credit Facility, see the subsection entitled "Liquidity
Position" of this "Liquidity and Capital Resources" section of the 10-Q.
Public Senior Subordinated Indebtedness
In June 1997 the Company issued $100 million of 9 1/2% Senior
Subordinated Notes. The principal is due in a lump sum in June 2007. The 9 1/2%
Notes were issued at a discount with a yield to maturity of 9.56% per annum.
Interest at the rate of 9.5% per annum is payable semiannually on June 15 and
December 15 of each year.
The Company's default under the Credit Facility caused a cross default
under the Indenture. The Indenture trustee has been notified of the default. For
a discussion of liquidity issues relating to indebtedness owed to the Banks
under the Indenture, see the subsection entitled "Liquidity Position" of this
"Liquidity and Capital Resources" section of the 10-Q.
Subordinate Loans from Parent
Petsec Energy Ltd made an initial cash investment of $11.4 million in
the Company and subsequently increased this investment with advances of $18.5
million from an Australian offering of Ordinary Shares in September 1995 and
$31.0 million out of the net proceeds from a U.S. offering of ADRs in July 1996.
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Funds advanced by the Parent historically have been provided
substantially in the form of subordinated loans denominated in Australian and US
dollars. These loans are subordinated to the payment of both senior bank
indebtedness and the public debt Notes. At September 30, 1999, the US dollar
loans bear interest at 7.08% and in the case of Australian dollar borrowings,
6.48%. The loans from the Parent do not have mandatory principal payments due
until December 31, 2007. Any payments or distributions made by the Company to
its Parent have been for reimbursement of direct expenses incurred in connection
with the Company's operations and interest under the subordinated loans. The
Parent has no commitments to make any further advances to the Company.
HEDGING TRANSACTIONS
The Company has utilized hedging transactions with respect to a portion
of its oil and gas production to achieve a more predictable cash flow and to
reduce its exposure to oil and gas price fluctuations. While these hedging
arrangements limit the downside risk of adverse price movements, they also limit
future revenues from favorable price movements. The use of hedging transactions
also involves the risk that the counterparties will be unable to meet the
financial terms of such transactions. 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.
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As of September 30, 1999, the following commodity swap contracts are in
place:
Oil Gas
Volume Price Volume Price
Bbls/day $/bbl Mmbtu/d $/mmbtu
-------- ----- ------- -------
1999 4th Quarter 1,500 $18.15 20,000 $2.30
2000 1st Quarter 1,000 $19.70 15,000 $2.28
2nd Quarter 670 $19.70 15,000 $2.28
3rd Quarter 0 0 10,000 $2.30
4th Quarter 0 0 10,000 $2.30
The fair value at September 30, 1999, represented by the estimated
amount that would be required to terminate these contracts, was a net cost of
$2.4 million for the gas contracts and a net cost of $1.3 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. Apache has informed the Company that it
believes that all material systems relating specifically to the operation of the
co-owned properties are Y2K compliant.
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. 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.
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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 has substantially completed the Y2K project. To date, the Company has
not incurred any significant costs on its Y2K project and estimates a total cost
of less than $50,000 related to the assessment and remediation of Year 2000
issues.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Except as described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Hedging Transactions," the only
other material change to the information disclosed in the Company's most recent
Annual Report on Form 10-K is that the Company believes the fair market value of
the 9 1/2% Notes was $52 million at September 30, 1999. This fair market value
is based upon a quotation on the trading price received from a market maker in
the 9 1/2% Notes.
PART II. OTHER INFORMATION.
ITEM 4. OTHER INFORMATION.
The New York Stock Exchange ("NYSE") recently introduced continued
listing policies which include the requirement that both market capitalization
and total stockholders' equity be greater than $50 million. The Parent does not
meet these new listing standards.
In compliance with the rules of the NYSE, the Parent submitted a plan
to the NYSE incorporating a strategy to enable the Parent to comply with the new
standards by February 2001, a date established by the NYSE.
If approved, the Parent compliance will be monitored quarterly by the NYSE.
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ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the quarter covered by this
report.
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
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Petsec Energy Inc.
November 15, 1999 By: /s/ ROSS A. KEOGH
---------------------------
Ross A. Keogh
Director and Vice President
Chief Financial Officer
(Principal Financial
and Accounting officer)
November 15, 1999 By: /s/ JAMES E. SLATTEN, III
---------------------------
James E. Slatten, III
Director and Vice President
(Duly Authorized Officer)
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INDEX TO EXHIBITS
-----------------
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule