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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
or
[ ] 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: 019020
PETROQUEST ENERGY, INC.
(Exact name of registrant as specified in its charter)
State of incorporation: I.R.S. Employer Identification No.
Delaware 98-0115468
400 E. Kaliste Saloom Road, Suite 3000
Lafayette, Louisiana 70508
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (337) 232-7028
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, Par Value $.001 Per Share
(Title of Class)
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.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant was approximately $32,845,382 as of March 17, 2000 (based on
the last reported sale price of such stock on the Nasdaq National Market
System).
As of March 17, 2000, the registrant had outstanding 24,089,222 shares
of Common Stock, par value $.001 per share.
Document incorporated by reference: Proxy Statement of PetroQuest
Energy, Inc. relating to the Annual Meeting of Stockholders to be held on May
23, 2000 which is incorporated into Part III of this Form 10-K.
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TABLE OF CONTENTS
Page No.
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PART I
Item 1. Business ............................................................................. 1
Item 2. Properties ........................................................................... 8
Item 3. Legal Proceedings .................................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders .................................. 11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ................ 12
Item 6. Selected Financial Data .............................................................. 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations .............................................................. 13
Item 7A. Disclosure About Market Risks ........................................................ 18
Item 8. Financial Statements and Supplementary Data .......................................... 18
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ............................................................... 18
PART III
Item 10. Directors and Executive Officers of the Registrant ................................... 18
Item 11. Executive Compensation ............................................................... 18
Item 12. Security Ownership of Certain Beneficial Owners and Management ....................... 18
Item 13. Certain Relationships and Related Transactions ....................................... 18
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ...................... 18
Index to Financial Statements ........................................................ F-1
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This Form 10-K contains "forward looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All statements other than statements of historical facts
included in and incorporated by reference into this Form 10K are forward-looking
statements. These forward-looking statements include, without limitation,
statements regarding our estimate of the sufficiency of our existing capital
resources and its ability to raise additional capital to fund cash requirements
for future operations, and regarding the uncertainties involved in estimating
quantities of proved oil and natural gas reserves and in projecting future rates
or production and timing of development expenditures. Although we believe that
the expectations reflected in these forward looking statements are reasonable,
we cannot give any assurance that such expectation reflected in these forward
looking statements will prove to have been correct.
When used in this Form 10-K, the words, "expect," "anticipate,"
"intend," "plan," "believe," "seek," "estimate" and similar expressions are
intended to identify forward-looking statements, although not all
forward-looking statements contain these identifying words. Because these
forward-looking statements involve risks and uncertainties, actual results could
differ materially from those expressed or implied by these forward-looking
statements for a number of important reasons, including those discussed under
"Management's Discussions and Analysis of Financial Condition and Results of
Operations", "Risk Factors" and elsewhere in this Form 10-K.
You should read these statements carefully because they discuss our
expectations about our future performance, contain projections of our future
operating results or our future financial condition, or state other
"forward-looking" information. Before you invest in our common stock, you should
be aware that the occurrence of any of the events described in these risk
factors and elsewhere in this Form 10-K could substantially harm our business,
results of operations and financial condition and that upon the occurrence of
any of these events, the trading price of our common stock could decline, and
you could lose all or part of your investment.
We cannot guarantee any future results, levels of activity,
performance or achievements. Excepts as required by law, we undertake no
obligation to update any of the forward-looking statements in this Form 10-K
after the date of this Form 10-K
PART I
ITEM 1. BUSINESS
OVERVIEW
PetroQuest Energy, Inc. ("PetroQuest" or the "Company") is an
independent oil and gas company engaged in the generation, exploration,
development, acquisition and operation of oil and gas properties onshore and
offshore in the Gulf Coast Region. The Company and its predecessors have been
active in this area since 1986. The Company's business strategy is to increase
production, cash flow and reserves through generation, exploration, development
and acquisition of properties located in the Gulf Coast Region.
The Company was incorporated under the name "Lathwell Resources Ltd.",
by registration of Articles and Memorandum pursuant to the laws of the province
of British Columbia, Canada on April 11, 1983. On February 5, 1988,
consolidating its common stock on a 1 for 5 basis, the Company changed its name
to "Optima Energy Corporation". On July 9, 1992, the Company changed its name to
"Optima Petroleum Corporation" ("Optima") concurrently with a 1 for 2.5
consolidation of its common stock. It was continued under the Canada Business
Corporation Act on May 23, 1995.
On September 1, 1998, the Company, formerly Optima Petroleum
Corporation, consummated a merger (the "Merger") by and among the Company,
Optima Energy (U.S.) Corporation, a wholly owned subsidiary of the Company,
Goodson Exploration Company ("Goodson"), NAB Financial, L.L.C. ("NAB") and Dexco
Energy, Inc. ("Dexco"), pursuant to which the Company acquired 100% of the
ownership interests of American Explorer L.L.C. ("American") all which were
owned by Goodson, NAB and Dexco. Following the Merger, the Company was continued
and domesticated from a Canadian corporation to a Delaware corporation (the
"Continuation"), changing its name to "PetroQuest Energy, Inc." and adopting a
new certificate of incorporation. In addition, Optima Energy (U.S.) Corporation
changed its name to PetroQuest Energy, Inc. and became a Louisiana corporation
and American Explorer, L.L.C. changed its name to PetroQuest Energy One, L.L.C.
In connection with the Merger, the Company issued to the owners of
Goodson, NAB and Dexco 7,335,001 shares of Company common stock, par value $.001
per share (the Common Stock), and 1,667,001 Contingent Stock Issue Rights (the
"CSIR"). The CSIRs entitle the holders to receive an additional 1,667,001 shares
of Common Stock at such time as the trading price for the Common Stock is $5.00
or higher for 20 consecutive trading days. Shares of the Common Stock and CSIRs
issued in the Merger were issued to the following persons, each of whom became
an officer and director of the Company upon completion of the Merger:
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SHARES OF COMMON STOCK CSIRS
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Charles T. Goodson 2,567,250 583,450
Alfred J. Thomas, II (1) 1,309,298 297,560
Ralph J. Daigle 2,200,500 500,000
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(1) Does not include 487,778 shares and 110,856 CSIRs issued to Mr.
Thomas' spouse and an aggregate of 770,175 shares and 175,035 CSIRs
issued to Mr. Thomas' adult children.
In addition, Robert R. Brooksher, who became a director and Chief
Financial Officer and Secretary of the Company upon completion of the Merger,
holds a three year option to acquire from Charles T. Goodson, Alfred J. Thomas,
II, Janell B. Thomas, Alfred J. Thomas, III, Blaine A. Thomas, Natalie A. Thomas
and Ralph J. Daigle 5% of the shares of Common Stock and CSIRs issued in
connection with the Merger.
As part of the Merger, the following individuals were elected by the
shareholders as additional directors of the Company and also serve as the
executive officers of the Company as set forth below. William C. Leuschner and
Robert L. Hodgkinson continued to serve as directors of the Company after the
Merger.
Charles T. Goodson -- President, Chief Executive Officer and Director
Alfred J. Thomas, II -- Chief Operating Officer and Director
Ralph J. Daigle -- Senior Vice President-Exploration and Director
Robert R. Brooksher -- Chief Financial Officer, Secretary and Director
Daniel G. Fournerat -- Director
In addition, management of the Company was changed to the management of
American. The Canadian offices were closed and the Company's headquarters were
moved to Lafayette, Louisiana. PetroQuest maintains an offshore exploration
office in Houston, Texas.
MARKETS
PetroQuest's ability to market oil and gas from the Company's wells
depends upon numerous factors beyond the Company's control, including the extent
of domestic production and imports of oil and gas, the proximity of the gas
production to gas pipelines, the availability of capacity in such pipelines, the
demand for oil and gas by utilities and other end users, the availability of
alternative fuel sources, the effects of inclement weather, and state and
federal regulation of oil and gas production and federal regulation of gas sold
or transported in interstate commerce. No assurance can be given that PetroQuest
will be able to market all of the oil or gas produced by the Company or that
favorable prices can be obtained for the oil and gas PetroQuest produces.
In view of the many uncertainties affecting the supply and demand for
oil, gas and refined petroleum products, the Company is unable to predict future
oil and gas prices and demand or the overall effect such prices and demand will
have on the Company. For the year ended December 31, 1999, Creole Gas Co., The
Meridian Resource Exploration Co., and El Paso Energy Marketing Co. purchased
22%, 12% and 10%, respectively of the Company's oil and gas production.
PetroQuest does not believe that the loss of any of the Company's oil purchasers
would have a material adverse effect on the Company's operations. Additionally,
since all of the Company's gas sales are on the spot market, the loss of one or
more gas purchasers should not materially and adversely affect the Company's
financial condition. The marketing of oil and gas by PetroQuest can be affected
by a number of factors which are beyond the Company's control, the exact effects
of which cannot be accurately predicted.
EMPLOYEES
The Company had 24 employees as of December 31, 1999. PetroQuest
believes that its relationships with its employees are satisfactory. None of the
Company's employees are covered by a collective bargaining agreement. From time
to time, the Company utilizes the services of independent contractors to perform
certain services.
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FEDERAL REGULATIONS
SALES OF NATURAL GAS. Effective January 1, 1993, the Natural Gas Wellhead
Decontrol Act deregulated prices for all "first sales" of natural gas. Thus, all
sales of gas by the Company may be made at market prices, subject to applicable
contract provisions.
TRANSPORTATION OF NATURAL GAS. The rates, terms and conditions applicable to the
interstate transportation of natural gas by pipelines are regulated by the
Federal Energy Regulatory Commission ("FERC") under the Natural Gas Act ("NGA"),
as well as under section 311 of the Natural Gas Policy Act ("NGPA"). Since 1985,
the FERC has implemented regulations intended to make natural gas transportation
more accessible to gas buyers and sellers on an open-access, non-discriminatory
basis.
Most recently, in Order No. 636, et seq., the FERC promulgated an
extensive set of new regulations requiring all interstate pipelines to
"restructure" their services. The most significant provisions of Order No. 636
(i) require that interstate pipelines provide firm and interruptible
transportation solely on an "unbundled" basis, separate from their sales
service, and convert each pipeline's bundled firm city-gate sales service into
unbundled firm transportation service; (ii) issue blanket certificates to
pipelines to provide unbundled sales service; (iii) require that pipelines
provide firm and interruptible transportation service on a basis that is equal
in quality for all natural gas supplies, whether purchased from the pipeline or
elsewhere; (iv) require that pipelines provide a new non-discriminatory
"no-notice" transportation service; (v) establish two new, generic programs for
the reallocation of firm pipeline capacity; (vi) require that all pipelines
offer access to their storage facilities on a firm and interruptible, open
access, contract basis; (vii) provide pregranted abandonment of unbundled sales
and interruptible and short-term firm transportation service and conditional
pregranted abandonment of long-term transportation service; (viii) modify
transportation rate design by requiring all fixed costs related to
transportation to be recovered through the reservation charge under the straight
fixed variable ("SFV") method. The order also recognized that the elimination of
city-gate sales service and the implementation of unbundled transportation
service would result in considerable costs being incurred by the pipelines.
Therefore, Order No. 636 provided mechanisms for the recovery by pipelines from
present, former and future customers of certain types of "transition" costs
likely to occur due to these new regulations.
In subsequent orders, the FERC substantially upheld the requirements
imposed by Order No. 636. Pursuant to Order No. 636, pipelines and their
customers engaged in extensive negotiations in order to develop and implement
new service relationships under Order No. 636. Tariffs instituting these new
restructured services were placed into effect on all pipelines on or before
November 1, 1993. Numerous petitions for judicial review of Order No. 636 have
been filed and consolidated for review in the United States Court of Appeals for
the D.C. Circuit. In addition, numerous parties have sought review of separate
FERC orders implementing Order No. 636 on individual pipeline systems. Since the
restructuring requirements that emerge from this lengthy administrative and
judicial review process may be materially different from those of Order No. 636
as originally adopted, it is not possible to predict what effect, if any, the
final rule resulting from Order No. 636 will have on the Company.
SALES AND TRANSPORTATION OF CRUDE OIL. Sales of crude oil and condensate can be
made by the Company at market prices not subject at this time to price controls.
The price that the Company receives from the sale of these products will be
affected by the cost of transporting the products to market. As required by the
Energy Policy Act of 1992, the FERC has revised its regulations governing the
rates that may be charged by oil pipelines. The new rules, which were effective
January 1, 1995, provide a simplified, generally applicable method of regulating
such rates by use of an index for setting rate ceilings. In certain
circumstances, the new rules permit oil pipelines to establish rates using
traditional cost of service and other methods of ratemaking. The effect that
these new rules may have on moving the Company's products to market cannot yet
be determined. In addition, at the same time as it issued the new rules, the
FERC also issued notices of inquiry regarding market-based pricing for oil
pipeline rates and the information required to be filed for ratemaking and
reporting purposes. It is not possible to predict what rules, if any, the FERC
will ultimately adopt as a result of these inquiry proceedings or the effect
that any rules that are adopted might have on the cost of moving the Company's
products to market.
LEGISLATIVE PROPOSALS. In the past, Congress has been very active in the area of
natural gas regulation. There are legislative proposals pending in various state
legislatures which, if enacted, could significantly affect the petroleum
industry. At the present time it is impossible to predict what proposals, if
any, might actually be enacted by Congress or the various state legislatures and
what effect, if any, such proposals might have on the Company's operations.
FEDERAL, STATE OR AMERICAN INDIAN LEASES. In the event the Company conducts
operations on federal, state or American Indian oil and gas leases, such
operations must comply with numerous regulatory restrictions, including various
nondiscrimination statutes, and certain of such operations must be conducted
pursuant to certain on-site security regulations and
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other appropriate permits issued by the Bureau of Land Management ("BLM") or
Minerals Management Service or other appropriate federal or state agencies.
The Mineral Leasing Act of 1920 ("Mineral Act") prohibits direct or
indirect ownership of any interest in federal onshore oil and gas leases by a
foreign citizen of a country that denies "similar or like privileges" to
citizens of the United States. Such restrictions on citizens of a
"non-reciprocal" country include ownership or holding or controlling stock in a
corporation that holds a federal onshore oil and gas lease. If this restriction
is violated, the corporation's lease can be cancelled in a proceeding instituted
by the United States Attorney General. Although the regulations of the BLM
(which administers the Mineral Act) provide for agency designations of
non-reciprocal countries, there are presently no such designations in effect.
The Company owns interests in numerous federal onshore oil and gas leases. It is
possible that holders of equity interests in the Company may be citizens of
foreign countries, which at some time in the future might be determined to be
non-reciprocal under the Mineral Act.
STATE REGULATIONS
Most states regulate the production and sale of oil and natural gas,
including requirements for obtaining drilling permits, the method of developing
new fields, the spacing and operation of wells and the prevention of waste of
oil and gas resources. The rate of production may be regulated and the maximum
daily production allowable from both oil and gas wells may be established on a
market demand or conservation basis or both.
PetroQuest may enter into agreements relating to the construction or
operation of a pipeline system for the transportation of natural gas. To the
extent that such gas is produced, transported and consumed wholly within one
state, such operations may, in certain instances, be subject to the jurisdiction
of such state's administrative authority charged with the responsibility of
regulating intrastate pipelines. In such event, the rates which the Company
could charge for gas, the transportation of gas, and the construction and
operation of such pipeline would be subject to the rules and regulations
governing such matters, if any, of such administrative authority.
ENVIRONMENTAL REGULATIONS
GENERAL. The Company's activities are subject to existing federal, state and
local laws and regulations governing environmental quality and pollution
control. Although no assurances can be made, the Company believes that, absent
the occurrence of an extraordinary event, compliance with existing federal,
state and local laws, regulations and rules regulating the release of materials
in the environment or otherwise relating to the protection of the environment
will not have a material effect upon the capital expenditures, earnings or the
competitive position of the Company with respect to its existing assets and
operations. The Company cannot predict what effect additional regulation or
legislation, enforcement policies thereunder, and claims for damages to
property, employees, other persons and the environment resulting from the
Company's operations could have on its activities.
Activities of PetroQuest with respect to natural gas facilities,
including the operation and construction of pipelines, plants and other
facilities for transporting, processing, treating or storing natural gas and
other products, are subject to stringent environmental regulation by state and
federal authorities including the United States Environmental Protection Agency
("EPA"). Such regulation can increase the cost of planning, designing,
installation and operation of such facilities. In most instances, the regulatory
requirements relate to water and air pollution control measures. Although the
Company believes that compliance with environmental regulations will not have a
material adverse effect on it, risks of substantial costs and liabilities are
inherent in oil and gas production operations, and there can be no assurance
that significant costs and liabilities will not be incurred. Moreover, it is
possible that other developments, such as stricter environmental laws and
regulations, and claims for damages to property or persons resulting from oil
and gas production, would result in substantial costs and liabilities to the
Company.
SOLID AND HAZARDOUS WASTE. The Company owns or leases numerous properties that
have been used for production of oil and gas for many years. Although the
Company has utilized operating and disposal practices standard in the industry
at the time, hydrocarbons or other solid wastes may have been disposed or
released on or under these properties. In addition, many of these properties
have been operated by third parties. The Company had no control over such
entities' treatment of hydrocarbons or other solid wastes and the manner in
which such substances may have been disposed or released. State and federal laws
applicable to oil and gas wastes and properties have gradually become stricter
over time. Under these new laws, the Company could be required to remove or
remediate previously disposed wastes (including wastes disposed or released by
prior owners or
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operators) or property contamination (including groundwater contamination by
prior owners or operators) or to perform remedial plugging operations to prevent
future contamination.
The Company generates wastes, including hazardous wastes, that are
subject to the Federal Resource Conservation and Recovery Act ("RCRA") and
comparable state statutes. The EPA has limited the disposal options for certain
hazardous wastes and is considering the adoption of stricter disposal standards
for nonhazardous wastes. Furthermore, it is possible that certain wastes
currently exempt from treatment as "hazardous wastes" generated by the Company's
oil and gas operations may in the future be designated as "hazardous wastes"
under RCRA or other applicable statutes, and therefore be subject to more
rigorous and costly disposal requirements.
SUPERFUND. The Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on certain classes of
persons with respect to the release of a "hazardous substance" into the
environment. These persons include the owner and operator of a site and persons
that disposed or arranged for the disposal of the hazardous substances found at
a site. CERCLA also authorizes the EPA and, in some cases, third parties to take
actions in response to threats to the public health or the environment and to
seek to recover from the responsible classes of persons the costs of such
action. Neither the Company nor its predecessors have been designated as a
potentially responsible party by the EPA under CERCLA with respect to any such
site.
OIL POLLUTION ACT. The Oil Pollution Act of 1990 (the "OPA") and regulations
thereunder impose a variety of regulations on "responsible parties" related to
the prevention of oil spills and liability for damages resulting from such
spills in United States waters. A "responsible party" includes the owner or
operator of a facility or vessel, or the lessee or permittee of the area in
which an offshore facility is located. The OPA assigns liability to each
responsible party for oil removal costs and a variety of public and private
damages. While liability limits apply in some circumstances, a party cannot take
advantage of liability limits if the spill was caused by gross negligence or
willful misconduct or resulted from violation of a federal safety, construction
or operating regulation. If the party fails to report a spill or to cooperate
fully in the cleanup, liability limits likewise do not apply. Few defenses exist
to the liability imposed by the OPA.
The OPA also imposes ongoing requirements on a responsible party,
including proof of financial responsibility to cover at least some costs in a
potential spill. On August 25, 1993, an advance notice of intention to adopt a
rule under the OPA was published that would require owners and operators of
offshore oil and gas facilities to establish $150 million in financial
responsibility. Under the proposed rule, financial responsibility could be
established through insurance, guaranty, indemnity, surety bond, letter of
credit, qualification as a self-insurer or a combination thereof. It is unlikely
that insurance companies or underwriters will be willing to provide coverage
under the OPA because the statute provides for direct lawsuits against insurers
who provide financial responsibility coverage, and most insurers have strongly
protested this requirement. The financial tests or other criteria that will be
used to judge self-insurance are also uncertain. A number of bills are pending
in the United States Congress to amend or modify the financial responsibility
requirements under OPA. The Company cannot predict the final form of the
financial responsibility rule that will be adopted. If the original requirements
under OPA are not amended, regulations promulgated thereunder may have the
potential to result in the imposition of substantial additional annual costs on
the Company or otherwise materially adversely affect the Company. The impact of
the rule should not be any more adverse to the Company than it will be to other
similarly or less capitalized owners or operators in the Gulf of Mexico. Pending
adoption of final regulations the Company has not taken any steps to establish
financial responsibility under the OPA.
AIR EMISSIONS. The operations of the Company are subject to local, state and
federal regulations for the control of emissions from sources of air pollution.
Administrative enforcement actions for failure to comply strictly with air
regulations or permits are generally resolved by payment of monetary fines and
correction of any identified deficiencies. Alternatively, regulatory agencies
could require the Company to forego construction or operation of certain air
emission sources, although the Company believes that in such case it would have
enough permitted or permittable capacity to continue its operations without a
material adverse effect on any particular producing field.
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OSHA. The Company is subject to the requirements of the Federal Occupational
Safety and Health Act ("OSHA") and comparable state statutes. The OSHA hazard
communication standard, the EPA community right-to-know regulations under Title
III of the Federal Superfund Amendment and Reauthorization Act and similar state
statutes require the Company to organize and/or disclose information about
hazardous materials used or produced in its operations. Certain of this
information must be provided to employees, state and local governmental
authorities and local citizens.
Management believes that the Company is in substantial compliance with
current applicable environmental laws and regulations and that continued
compliance with existing requirements will not have a material adverse impact on
the Company.
RISK FACTORS
VOLATILITY OF OIL AND GAS PRICES; MARKETABILITY OF PRODUCTION. The Company's
revenues, profitability and future growth and the carrying value of its oil and
gas properties are substantially dependent on prevailing prices of oil and gas.
The Company's ability to maintain or increase its borrowing capacity and to
obtain additional capital on attractive terms is also substantially dependent
upon oil and gas prices. Prices for oil and gas are subject to large
fluctuations in response to relatively minor changes in the supply of and demand
for oil and gas, market uncertainty and a variety of additional factors beyond
the control of the Company. These factors include weather conditions in the
United States, the condition of the United States economy, the action of the
Organization of Petroleum Exporting Countries, governmental regulation,
political stability in the Middle East and elsewhere, the foreign supply of oil
and gas, the price of foreign imports and the availability of alternate fuel
sources. Any substantial short-term or extended decline in the price of oil or
gas would have an adverse effect on the Company's carrying value of its proved
reserves, borrowing capacity, revenues, profitability and cash flows from
operations.
In addition, the marketability of the Company's production depends upon
the availability and capacity of gas gathering systems, pipelines and processing
facilities. Federal and state regulation of oil and gas production and
transportation, general economic conditions and changes in supply and demand all
could adversely affect the Company's ability to produce and market its oil and
natural gas. If market factors were to change dramatically, the financial impact
on the Company could be substantial. The availability of markets and the
volatility of product prices are beyond the control of the Company and represent
a significant risk.
OPERATING HAZARDS, OFFSHORE OPERATIONS AND UNINSURED RISKS. PetroQuest's
operations are subject to risks inherent in the oil and gas industry, such as
blowouts, cratering, explosions, uncontrollable flows of oil, gas or well
fluids, fires, pollution and other environmental risks. These risks could result
in substantial losses to the Company due to injury and loss of life, severe
damage to and destruction of property and equipment, pollution and other
environmental damage and suspension of operations. Moreover, a portion of the
Company's operations are offshore and therefore are subject to a variety of
operating risks peculiar to the marine environment, such as hurricanes or other
adverse weather conditions, to more extensive governmental regulation, including
regulations that may, in certain circumstances, impose strict liability for
pollution damage, and to interruption or termination of operations by
governmental authorities based on environmental or other considerations.
The Company maintains insurance of various types to cover its
operations, including maritime employer's liability and comprehensive general
liability. Amounts in excess of base coverages are provided by primary and
excess umbrella liability policies with maximum limits of $35 million. In
addition, the Company maintains operator's extra expense coverage, which
provides coverage for the control of wells drilled and/or producing and
redrilling expenses and pollution coverage for wells out of control.
No assurances can be given that PetroQuest will be able to maintain
adequate insurance in the future at rates the Company considers reasonable. The
occurrence of a significant event not fully insured or indemnified against could
materially and adversely affect the Company's financial condition and results of
operations.
ESTIMATES OF OIL AND GAS RESERVES. This Form 10-K contains estimates of oil and
gas reserves, and the future net cash flows attributable to those reserves,
prepared by the Ryder Scott Company, independent petroleum and geological
engineers ("Ryder Scott"). There are numerous uncertainties inherent in
estimating quantities of proved reserves and cash flows attributable to such
reserves, including factors beyond the control of the Company and Ryder Scott.
Reserve engineering is a subjective process of estimating underground
accumulations of oil and gas that cannot be measured in an exact manner. The
accuracy of an estimate of quantities of reserves, or of cash flows attributable
to such reserves, is a function of the available data, assumptions regarding
future oil and gas prices and expenditures for future development and
exploitation activities, and of engineering and geological interpretation and
judgment. Additionally, reserves and future cash flows may be subject to
material downward or upward revisions, based upon production history,
development and exploitation activities and prices of oil and
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gas. Actual future production, revenue, taxes, development expenditures,
operating expenses, quantities of recoverable reserves and the value of cash
flows from such reserves may vary significantly from the assumptions and
estimates set forth herein. In addition, reserve engineers may make different
estimates of reserves and cash flows based on the same available data. In
calculating reserves on a Mcfe basis, oil was converted to gas equivalent at the
ratio of six Mcf of gas to one Bbl of oil. While this ratio approximates the
energy equivalency of gas to oil on a Btu basis, it may not represent the
relative prices received by the Company on the sale of its oil and gas
production.
The estimated quantities of proved reserves and the discounted present
value of future net cash flows attributable to estimated proved reserves set
forth in this Form 10-K were prepared by Ryder Scott in accordance with the
rules of the Securities and Exchange Commission (the "Commission"), and are not
intended to represent the fair market value of such reserves.
ABILITY TO REPLACE RESERVES. The Company's future success depends upon its
ability to find, develop and acquire additional oil and gas reserves that are
economically recoverable. As is generally the case in the Gulf Coast region,
many of the Company's producing properties are characterized by a high initial
production rate, followed by a steep decline in production. As a result, the
Company must locate and develop or acquire new oil and gas reserves to replace
those being depleted by production. Without successful exploration or
acquisition activities, the Company's reserves and revenues will decline
rapidly. No assurances can be given that the Company will be able to find and
develop or acquire additional reserves at an acceptable cost.
SUBSTANTIAL CAPITAL REQUIREMENTS. PetroQuest makes, and will continue to make,
substantial capital expenditures for the exploitation, exploration, acquisition
and production of oil and gas reserves. Historically, the Company has financed
these expenditures primarily with cash generated by operations and proceeds from
bank borrowings. If revenues or the Company's borrowing base decrease as a
result of lower oil and gas prices, operating difficulties or declines in
reserves, the Company may have limited ability to expend the capital necessary
to undertake or complete future drilling programs. There can be no assurance
that additional debt or equity financing or cash generated by operations will be
available to meet these requirements.
CONTROL BY MANAGEMENT. Executive officers and directors of the Company
beneficially own approximately 40% of the outstanding Common Stock. This
percentage ownership is based on the number of shares of Common Stock
outstanding at March 17, 2000 and the beneficial ownership of such persons at
such date. As a result, these persons may be in a position to control the
Company through their ability to determine the outcome of elections of the
Company's directors and certain other matters requiring the vote or consent of
the Company's stockholders.
COMPETITION. The Company operates in the highly competitive areas of oil and gas
exploration, development and production. The availability of funds and
information relating to a property, the standards established by the Company for
the minimum projected return on investment, the availability of alternate fuel
sources and the intermediate transportation of gas are factors which affect the
Company's ability to compete in the marketplace. The Company's competitors
include major integrated oil companies, substantial independent energy
companies, affiliates of major interstate and intrastate pipelines and national
and local gas gatherers, many of which possess greater financial and other
resources than the Company.
ENVIRONMENTAL AND OTHER REGULATIONS. PetroQuest's operations are subject to
numerous laws and regulations governing the discharge of materials into the
environment or otherwise relating to environmental protection. These laws and
regulations may require the acquisition of a permit before drilling commences,
restrict the types, quantities and concentration of various substances that can
be released into the environment in connection with drilling and production
activities, limit or prohibit drilling activities on certain lands lying within
wilderness, wetlands and other protected areas, require remedial measures to
mitigate pollution from former operations, such as plugging abandoned wells, and
impose substantial liabilities for pollution resulting from the Company's
operations. Moreover, the recent trend toward stricter standards in
environmental legislation and regulation is likely to continue. The enactment of
stricter legislation or the adoption of stricter regulation could have a
significant impact on the operating costs of the Company, as well as on the oil
and gas industry in general.
The Company's operations could result in liability for personal
injuries, property damage, oil spills, discharge of hazardous materials,
remediation and clean-up costs and other environmental damages. Moreover, the
Company could be liable for environmental damages caused by previous property
owners. As a result, substantial liabilities to third parties or governmental
entities may be incurred; the payment of which could have a material adverse
effect on the Company's financial condition and results of operations. The
Company maintains insurance coverage for its operations, including limited
coverage for sudden and accidental environmental damages, but does not believe
that insurance coverage for environmental damages that occur over time is
available at a reasonable cost. Moreover, the Company does not believe that
insurance coverage for the full
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potential liability that could be caused by sudden and accidental environmental
damages is available at a reasonable cost. Accordingly, the Company may be
subject to liability or may lose the privilege to continue exploration or
production activities upon substantial portions of its properties in the event
of certain environmental damages.
The Oil Pollution Act of 1990 imposes a variety of regulations on
"responsible parties" related to the prevention of oil spills. The
implementation of new, or the modification of existing, environmental laws or
regulations, including regulations promulgated pursuant to the Oil Pollution Act
of 1990, could have a material adverse impact on the Company.
ITEM 2. PROPERTIES
The Company is engaged in the development, exploration, acquisition and
operation of oil and gas properties onshore and offshore in the Gulf Coast
Region. As of December 31, 1999, the Company's estimated proved reserves totaled
2,194 thousand barrels of oil and 15,128 billion cubic feet of natural gas, with
pre-tax present value discounted at 10%, of the estimated future net revenues
based on constant prices in effect at year-end ("Discounted Cash Flow") of $43
million. Approximately 40% of the Company's reserves are proved developed
reserves. The Company operates 10 fields representing approximately 83% of the
total Discounted Cash Flow attributable to estimated proved reserves.
SIGNIFICANT PROPERTIES
VALENTINE FIELD, LAFOURCHE PARISH, LA. The Valentine Field has to date
produced in excess of one trillion cubic feet of gas equivalent. This project
began in 1993. For the month of December 1999, production averaged 60 Bbls of
oil per day and 1,260 Mcf of natural gas per day from 8 wells. Due to various
landowner and partner problems, only three 2-D seismic lines were shot over this
south Louisiana salt dome structure, and thus virtually no deep exploration ever
occurred. PetroQuest and a major oil and gas company acquired an 86 square mile
3-D survey in November 1998. The Company bought the oil and gas company's
interest in this field in August 1999 and sold it to another oil and gas company
in October 1999. The Company continues to evaluate the data and has a 35% to 50%
working interest in these prospects. At December 31, 1999 the first well to be
drilled as a result of the new 3-D survey was in progress.
TURTLE BAYOU FIELD, TERREBONNE PARISH, LA. The Company participated in
the drilling of thirteen wells in the Turtle Bayou Field. As of December 31,
1999, there are 7 producing wells in the field in which PetroQuest holds a
working interest. Collectively, the 7 producing wells averaged 17,200 Mcf of
natural gas and 310 barrels of condensate per day for the month of December
1999. Our working interest varies between 46.19% and 16.98% with a weighted
average working interest of 38.34%. PetroQuest acquired a 3-D regional seismic
survey shot in 1998 which incorporates the Turtle Bayou Field. As a result six
prospects with multiple objectives have been identified. The first three wells
have been drilled and completed and a fourth well is expected to begin drilling
in the second quarter of 2000.
BULLY CAMP FIELD, LAFOURCHE PARISH, LA. The Company acquired a 100%
working interest in this property in 1993. In December 1999, fourteen wells in
this field were producing at a combined rate of 1,270 Mcf of gas per day and 135
barrels of oil per day.
MERIDIAN RESOURCES JOINT VENTURE, LA. Under the master participation
agreement with Meridian Resource Corporation dated October 1, 1993, PetroQuest
has evaluated ten prospect areas, of which five have been drilled, four rejected
after geological and geophysical review and one prospect at Stella to be drilled
at a later date not yet determined. At December 31, 1999, drilling resulted in
five currently producing wells at a combined rate of 2,300 barrels of oil per
day and 5,200 Mcf of gas per day. Our working interest averages 8% in these
wells.
BRAZOS BLOCK 446, TEXAS OFFSHORE STATE WATERS. The Company acquired a
44% working interest in this property in early 1997. At December 31, 1999,
production was approximately 3,000 Mcf of gas per day from one well.
GALVESTON BLOCK 303, FEDERAL OUTER CONTINENTAL SHELF WATERS. PetroQuest
generated and drilled the discovery well on this property in 1996. It has a
21.875% working interest in this field. In addition to drilling and completing
three wells, one well and a production platform were acquired. The initial phase
of exploration and development of this field has been completed. At December
1999, production was 2,800 Mcf of gas per day from three wells.
HIGH ISLAND BLOCK 494, FEDERAL OUTER CONTINENTAL SHELF WATERS.
PetroQuest and its partners acquired a 1/3 interest in this property (Snapper)
in 1996 and the remaining 2/3 interest in late 1998. It sold approximately 58%
of this prospect and drilled the C-1 well in December 1998 and January 1999. The
well encountered 207 feet of gross hydrocarbon
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column with 80 feet of net natural gas pay. The well began producing in July and
at December 31, 1999 was producing at a rate of approximately 12 MMcf of gas per
day.
VERMILION BLOCK 375, FEDERAL OUTER CONTINENTAL SHELF WATERS. PetroQuest
acquired this property (Hawk) in March, 1999 and sold it to industry partners
retaining a 5% working interest and a 5% net revenue interest. It was drilled in
June and July 1999 and encountered 590 feet of gross hydrocarbon pay (425 feet
net). At December 31, 1999 development was in progress with first production
expected in the third quarter of 2000.
VERMILION BLOCK 376, FEDERAL OUTER CONTINENTAL SHELF WATERS. The
Company and its partners drilled a well on this property (Falcon) in the fourth
quarter of 1999 and logged 285 feet of gross hydrocarbon column (136 feet net).
Development is in progress with first production expected in the fourth quarter
of 2000. PetroQuest is the operator of the project and owns a 43% working
interest.
OIL AND GAS RESERVES
The following table sets forth certain information about the estimated
proved reserves of the Company as of December 31, 1999 (See Item 1. Business -
Estimates of Oil and Gas Reserves).
Oil (MBbls) Gas (MMcfs)
Proved developed: 402 8,810
Proved undeveloped: 1,792 6,318
Total proved: 2,194 15,128
Estimated pre-tax future net cash flows (000's) $59,056
Discounted pre-tax future net cash flows (000's) $43,069
The Company's independent reserve engineers (Ryder Scott Company)
prepared the estimates of proved reserves and future net cash flows (and present
value thereof) attributable to such proved reserves at December 31, 1999.
Reserves were estimated using oil and gas prices and production and development
costs in effect at December 31, 1999 without escalation, and were otherwise
prepared in accordance with Securities and Exchange Commission regulations
regarding disclosure of oil and gas reserve information. The product prices used
in developing the above estimates averaged $24.92 per Bbl of oil and $2.33 per
MMBtu of gas. Because of the high Btu content of the Company's Gulf Coast gas,
this equates to an average price realized of approximately $2.57 per Mcf.
The Company has not filed any reports with other federal agencies which
contain an estimate of total proved net oil and gas reserves.
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OIL AND GAS DRILLING ACTIVITY
The following table sets forth the wells drilled and completed by the
Company during the periods indicated. All such wells were drilled in the
continental United States.
Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
Exploration:
Productive 4 1.33 2 .74 4 .72
Non-Productive 1 .05 -- -- 2 .33
---- ---- ---- ---- ---- ----
Total 5 1.38 2 .74 6 1.05
==== ==== ==== ==== ==== ====
Development:
Productive 1 .41 -- -- 2 33
Non-Productive -- -- -- -- -- --
---- ---- ---- ---- ---- ----
Total 1 .41 -- -- 2 .33
==== ==== ==== ==== ==== ====
The Company owned working interests in 44 gross (22.5 net) producing
oil and gas wells at December 31, 1999. At December 31, 1999, the Company had
one exploratory well in progress.
LEASEHOLD ACREAGE
The following table shows the approximate developed and undeveloped
(gross and net) leasehold acreage of the Company as of December 31, 1999.
Leasehold Acreage
-----------------
Developed Undeveloped
--------- -----------
Gross Net Gross Net
------ ------ ------ ------
Mississippi (onshore) -- -- 10,757 7,172
Louisiana (onshore) 8,069 2,336 18,521 8,204
Texas (offshore) 1,440 660 -- --
Federal Waters 21,520 6,429 18,521 13,377
------ ------ ------ ------
Total 31,029 9,425 47,799 28,753
====== ====== ====== ======
In addition, PetroQuest has 4,042 gross acres and 1,616 net acres under
option in Louisiana.
TITLE TO PROPERTIES
The Company believes that the title to its oil and gas properties is
good and defensible in accordance with standards generally accepted in the oil
and gas industry, subject to such exceptions which, in the opinion of the
Company, are not so material as to detract substantially from the use or value
of such properties. The Company's properties are typically subject, in one
degree or another, to one or more of the following: royalties and other burdens
and obligations, express or implied, under oil and gas leases; overriding
royalties and other burdens created by the Company or its predecessors in title;
a variety of contractual obligations (including, in some cases, development
obligations) arising under operating agreements, farmout agreements, production
sales contracts and other agreements that may affect the properties or their
titles; back-ins and reversionary interests existing under purchase agreements
and leasehold assignments; liens that arise in the normal course of operations,
such as those for unpaid taxes, statutory liens securing obligations to unpaid
suppliers and contractors and contractual liens under operating agreements;
pooling, unitization and communitization agreements, declarations and orders;
and easements, restrictions, rights-of-way and other matters that commonly
affect property. To the extent that such burdens and obligations affect the
Company's rights to production revenues, they have been taken into account in
calculating the Company's net revenue interests and in estimating the size and
value of the Company's reserves. The Company believes that the burdens and
obligations affecting its properties are conventional in the industry for
properties of the kind owned by the Company.
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ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings to which the Company or its subsidiaries
is a party or by which any of its property is subject, other than ordinary and
routine litigation due to the business of producing and exploring for oil and
natural gas, except as follows:
S.W. HOLMWOOD
PetroQuest Energy, Inc. f/k/a Optima Energy (U.S.) Corp. v The Meridian
Resource & Exploration Company f/k/a Texas Meridian Resources Exploration, Inc.
bearing Civil Action No. 99-2394 of the United States District Court for the
Western District of Louisiana. The Company asserts a claim for damages against
Meridian resulting from defendant's activities as operator of the Southwest
Holmwood property, Calcasieu Parish, Louisiana which resulted in a final
judgment of the United States District Court for the Western district of
Louisiana ordering cancellation of the parties' productive oil and gas lease and
joint exploration agreement with Amoco Production Company, forfeiture of two
producing wells on the lease and substantial damages against the defendant
causing the Company the loss of its investment and profits.
The Meridian Resource & Exploration Company v. PetroQuest Energy, Inc.,
bearing Docket No. 996192A of the 15th Judicial District court in and for the
Parish of Lafayette, Louisiana. Meridian asserts that the Company is responsible
as an investor under its participation agreement with Meridian for $530,004.45
of the losses, costs, expense and liability of Meridian resulting from the final
judgment that was rendered in favor of Amoco and against Meridian in legal
proceedings relative to the Southwest Holmwood Field, Calcasieu Parish,
Louisiana in the matter "Amoco Production Company v. Texas Meridian Resource &
Exploration Company," bearing Civil Action No. 96-1639 in the United States
District Court for the Western District of Louisiana (Civil Action No. 98-30724
in the United States Court of Appeals for the Fifth Circuit). Although the
Company accrued $70,000 when the district court decision was rendered against
Meridian in December 1997, the Company denies liability to Meridian for losses
sustained by Meridian as operator as a result of the Amoco litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE OF AND DIVIDENDS ON COMMON STOCK
The Company's Common Stock trades on the Nasdaq Stock Market under the
symbol "PQUE" and on the Toronto Stock Exchange under the symbol "PQU". The
following table lists high and low sales prices per share for the periods
indicated.
The Nasdaq Stock Market Toronto Stock Exchange
----------------------- ----------------------
Quarter Ended High Low High Low
- ------------- ---- --- ---- ---
(U.S.$) (U.S.$) (Cdn.$) (Cdn.$)
1998
1st Quarter 1.69 1.00 2.50 1.41
2nd Quarter 1.69 .88 2.25 1.35
3rd Quarter 1.25 .63 1.50 1.50
4th Quarter 1.13 .56 1.55 1.00
1999
1st Quarter 1.06 .63 1.25 .75
2nd Quarter 1.19 .38 1.65 .75
3rd Quarter 1.75 .78 2.50 1.20
4th Quarter 1.97 1.28 3.00 2.00
As of March 17, 2000, there were approximately 626 common stockholders
of record.
The Company has not paid dividends on the Common Stock and intends to
retain its cash flow from operations for the future operation and development of
its business. In addition, the Company's credit facility restricts payments of
dividends on its common stock.
On May 5, 1999, the Company's Common Stock ceased trading on the
Nasdaq Stock Market as a result of the Company's failure to satisfy the revised
listing and maintenance standards as contained in SEC Release No. 34-38961
(August 22, 1997), which included a minimum bid price of $1.00 for the Common
Stock. The Common Stock was immediately eligible to trade on the OTC Bulletin
Board, while the Company's listing on the Toronto Stock Exchange was not
affected. On December 23, 1999, the Common Stock was again approved for listing
on The Nasdaq Stock Market. The listing was the result of the Nasdaq Listing and
Hearing Review Council's decision, as approved by the NASD Board, to reverse the
Nasdaq Listing Qualifications Panel's determination to delist the Common Stock.
The Company maintains a reducing revolving line of credit to provide
for borrowings of up to $25 million, subject to a cap calculated on the
Company's borrowing base, as defined. At December 31, 1999, the borrowing base
was $2.1 million and was fully funded. Each month the borrowing base is reduced
by $115,000. The borrowing base amount and the amount by which it will be
reduced, is established by the lender and is based on their evaluation of the
Company's oil and gas properties. The borrowing base is redetermined
semi-annually on February 1 and August 1 of each year. The result of the
February 1, 2000 borrowing base review has not yet been determined. Interest
under the loan is payable monthly at prime plus 1/2% (9% at December 31, 1999).
It is secured by substantially all of the Company's oil and gas properties. A
commitment fee of .5% per annum on the unused available borrowing base is
payable quarterly.
RECENT SALES OF UNREGISTERED SECURITIES
In November and December 1999, the Company issued an aggregate of
238,500 shares of Common Stock in exchange for interests in certain oil and gas
properties. The shares were issued directly by the Company, without the payment
of any commissions, to accredited investors in a private placement transaction
exempt from the registration requirements of the Securities Act of 1933, as
amended, pursuant to Section 4(2) thereof and Regulation D promulgated
thereunder.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, as of the dates and for the periods
indicated, selected financial information for the Company. The financial
information for each of the five years in the period ended December 31, 1999
have been derived from the audited Consolidated Financial Statements of the
Company for such periods. The information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and notes thereto. The
following information is not necessarily indicative of future results of the
Company. All amounts are stated in U.S. dollars unless otherwise indicated.
Years Ended December 31,
------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(000's omitted except per share data)
Revenues $ 8,607 $ 3,377 $ 4,145 $ 7,982 $ 3,888
Net Income (Loss) (310) (16,240) (2,914) 169 (2,002)
Earnings (Loss) per share (0.01) (1.20) (0.26) 0.01 (0.22)
Oil and Gas Properties, net 21,490 17,423 12,862 24,909 23,396
Total Assets 29,901 20,066 20,163 29,641 27,558
Long-term Debt 2,927 1,300 100 4,488 5,418
Stockholders' Equity 18,105 13,336 18,740 22,314 20,360
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
PetroQuest Energy, Inc. is an independent oil and gas company engaged
in the development, exploration, acquisition and operation of oil and gas
properties onshore and offshore in the Gulf Coast Region. The Company and its
predecessors have been active in this area since 1986, which gives the Company
extensive geophysical, technical and operational expertise in this area. The
Company's business strategy is to increase production, cash flow and reserves
through exploration, development and acquisition of properties located in the
Gulf Coast Region.
MERGER OF OPTIMA ENERGY (U.S.) CORPORATION
On September 1, 1998, the Company completed its transaction to merge
its wholly owned subsidiary, Optima Energy (U.S.) Corporation, with American
Explorer, L.L.C. (American). Concurrent with the transaction, the Company became
a Delaware corporation and converted each share of no par value common stock
into one share of the Company's $.001 par value common stock and changed its
name from Optima Petroleum Corporation to PetroQuest Energy, Inc. American
conducted oil and natural gas exploration activities in the Gulf Coast Region.
Under the terms of the transaction, American merged with the Company in
exchange for 7,335,001 shares of the Company's common stock, issued primarily to
the three former members of American, representing about 40% of the post
acquisition shares outstanding. Additionally, the Company issued to members of
American and certain current officers of the Company 1,667,001 contingent stock
rights exchangeable for common shares should the market share price of the
Company's common stock exceed $5.00 per share for 20 consecutive trading days
during the three year term of the rights. The rights terminate on September 1,
2001. Should these rights become exchangeable, the Company would be required to
issue 1,667,001 shares, representing 6.50% of undiluted shares outstanding
(after conversion of the rights) at December 31, 1999, for no net proceeds.
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The transaction was treated as a purchase for accounting purposes. No
value was assigned to the contingent stock rights. The purchase price of
approximately $10.6 million was allocated to the assets and liabilities based on
estimated fair value. Net assets acquired in the transaction were as follows:
Oil and gas properties $16,178
Working capital (1,890)
Due to Optima (2,150)
Note payable (2,440)
Escrow funds and other 903
-------
$10,601
=======
The purchase price in excess of the net book value of the net assets
acquired of $7.9 million was allocated to the Company's oil and gas properties.
The operating results of American have been consolidated in the Company's
consolidated statement of operations since September 1, 1998.
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards that require every derivative instrument (including certain
derivative instruments embedded in other contracts) to be recorded in the
balance sheet as either an asset or liability measured at its fair value and
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met.
SFAS No. 133 is effective for fiscal years beginning after June 15,
2001. Because the Company does not currently use derivative instruments, the
adoption of SFAS No. 133 will not impact the Company's financial statements.
RESULTS OF OPERATIONS
The following table sets forth certain operating information with
respect to the oil and gas operations of the Company for the years ended
December 31, 1999, 1998 and 1997.
Years Ended December 31,
------------------------
1999 1998 1997
--------- --------- ---------
Production:
Oil (Bbls) 104,761 83,637 105,562
Gas (Mcf) 2,830,803 1,049,247 677,300
Total Production (Mcfe) 3,459,369 1,551,063 1,310,672
Sales:
Total oil sales $1,933,192 $1,069,570 $2,116,193
Total gas sales $6,583,026 $2,173,620 $1,848,069
Average sales prices:
Oil (per Bbl) $ 18.45 $ 12.79 $ 20.04
Gas (per Mcf) $ 2.33 $ 2.07 $ 2.73
Per Mcfe $ 2.46 $ 2.09 $ 3.02
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COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND
1998
Oil and Gas Revenues
Oil and gas revenues increased from $3,263,000 to $8,516,000 in 1999 or
an increase of 161%. This increase is the result of both increases in production
volumes and higher product prices for both oil and gas. Production volumes
increased primarily due to three new discoveries beginning production. Also, the
American properties were added in September, 1998. Product prices increased 18%
on an Mcfe basis from 1998 to 1999, reflecting higher product prices for both
oil and gas.
Lease Operating Expenses
Lease operating expenses increased 96% from $1,349,000 to $2,638,000.
This resulted from the additional wells discussed above. On an Mcfe basis,
operating expenses for the year decreased from $.87 in 1998 to $.76 in 1999.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization (DD&A) increased 58% from
$2,801,000 to $4,472,000. This is due to the increased production for the year
and additions to property cost for the American properties and new discoveries.
On an Mcfe basis, which reflects changes in production, the DD&A rate for 1999
was $1.29 per Mcfe compared to $1.81 for 1998.
Full Cost Ceiling Write-Down
The full cost ceiling write-down in 1998 of $13,431,000 was primarily
attributable to cost in excess of net book value recorded in the 1998 merger
with American and significant declines in oil and gas prices in 1998.
General and Administrative Expenses
Expensed general and administrative costs decreased from $1,779,000 in
1998 to $1,625,000 in 1999. In 1999 and 1998, $1,361,000 and $438,000 of general
and administrative costs were capitalized as related directly to the
acquisition, exploration and development effort. Total general and
administrative costs increased in 1999 due to additional staffing levels related
to the generation of prospects, exploration for oil and gas reserves and
operation of properties.
Interest Expense
Interest expense decreased because the Company capitalized interest of
$434,000 in 1999. No interest was capitalized in 1998.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1997
Oil and Gas Revenues
Oil and gas revenue decreased from $3,964,000 in 1997 to $3,263,000 in
1998 or a decrease of 18%. This decrease was the result of both a decrease in
oil production volumes and product prices for both oil and gas. Oil production
volumes decreased as a result of normal depletion of the Company's oil
properties partially offset by the additions of the American properties. Gas
production increased due to the addition of American. Product prices declined
30% on an Mcfe basis from 1997 to 1998, reflecting decreased product prices for
both oil and gas.
Lease Operating Expenses
Lease operating expenses increased from $735,000 in 1997 to $1,349,000
in 1998. This is due to the addition of the American properties at September 1,
1998 and several large workovers performed during 1998. This was partially
offset by a decrease in the number of producing properties in 1998.
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Depreciation, Depletion and Amortization
Depreciation, depletion and amortization (DD&A), before the full cost
ceiling write-downs in each year, did not change significantly from $3,133,000
in 1997 to $2,801,000 in 1998. On a Mcfe basis, the DD&A rate for 1998 was $1.81
per Mcfe compared to $2.39 per Mcfe for 1997.
Full Cost Ceiling Write-Down
The full cost ceiling write-down in 1998 of $13,431,000 was primarily
attributable to cost in excess of net book value recorded in the Merger with
American and significant declines in oil and gas prices in 1998.
General and Administrative Expenses
General and administrative expenses increased from $1,222,000 in 1997
to $1,779,000 in 1998. The increase is primarily related to non-recurring costs
of $450,000 associated with closing the Company's Vancouver office and
termination of Canadian consultants and employees.
Interest Expense
Interest expense decreased due to a lower outstanding debt during 1998
compared to 1997.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital and Cash Flow
Working capital (before considering debt) increased from a $0.1 million
deficit in 1998 to positive working capital of $1.4 million in 1999. This was
caused primarily by funds obtained from the Company's private placement
(discussed below) and improved operating results partially offset by
expenditures for exploration and development.
The Company maintains a reducing revolving line of credit to provide
for borrowings of up to $25 million, subject to a cap calculated on the
Company's borrowing base, as defined. At December 31, 1999, the borrowing base
was $2.1 million and was fully funded. Each month the borrowing base is
reduced by $115,000. The borrowing base amount and the amount by which it will
be reduced, is established by the lender and is based on their evaluation of
the Company's oil and gas properties. The borrowing base is redetermined
semi-annually on February 1 and August 1 of each year. The result of the
February 1, 2000 borrowing base review has not yet been determined. Interest
under the loan is payable monthly at prime plus 1/2% (9% at December 31, 1999).
It is secured by substantially all of the Company's oil and gas properties. A
commitment fee of .5% per annum on the unused available borrowing base is
payable quarterly.
On April 21, 1999, the Company entered into a loan agreement for
non-recourse financing to fund completion, flow line and facility costs of its
High Island Block 494 property. Interest is payable at 12% and the lender
received a 2-1/2% overriding royalty interest in the property as security for
the loan. For the first three months of production, all of the cash flow from
production from the property was dedicated to debt service. Subsequently, 85% of
the net cash flow from the property (assuming certain production levels) is
dedicated to debt service. The well began producing during the first part of
July 1999.
Net cash flow from operations before working capital changes increased
from negative $8,000 in 1998 to positive $4,280,000 in 1999. Included in the
1998 amounts are approximately $450,000 of non-recurring costs associated with
closing the Company's Vancouver office and termination of Canadian consultants
and employees. In addition, 1999 operations improved because of better product
prices and increased production as the result of successful exploration
activities.
In August 1999, the Company completed a private placement of 5 million
units at a purchase price of $1.00 per unit for a total consideration of
$5,000,000 before fees and expenses. Net proceeds of $4,508,000 from the private
placement were used for drilling and exploration costs, delay rentals on oil and
gas leases, working capital and general corporate purposes. Each unit sold in
the private placement consists of one share of the Company's common stock and
one warrant. Each warrant is exercisable at any time through the fourth year
after issuance to purchase one-half of a share of the Company's common stock at
a price per share of $1.25. In addition, the Company issued to the placement
agents of the units, warrants to purchase 500,000 shares of the Company's common
stock. The warrants received by the placement agents are exercisable at any time
for a period of five years to purchase one share of the Company's common stock
at a per share purchase price of $1.25 per share. The Company has filed a
registration statement covering the resale of its common stock underlying the
units and the shares of its common stock issuable on the exercise of the
warrants.
16
19
Although the Company has no commitments for capital expenditures for
2000, it does have an exploration and development program for the year 2000
which will require significant capital. In order to fund its cash requirements
for continued oil and gas exploration and development activities, the Company
plans to obtain additional financing which could include sale of additional
equity and debt securities and additional bank financing. Management intends for
a substantial portion of anticipated capital expenditures to be funded through
drilling ventures with industry partners; however, there is no assurance that
such plans will be successful. If the Company is unable to obtain additional
financing, it could be forced to delay or even abandon some of its exploration
and development opportunities.
YEAR 2000 COMPLIANCE
The year 2000 ("Y2K") issue was the result of concern that computerized
systems would not be able to store and process the year portion of dates from
and after January 1, 2000 without critical systems failure. During 1998 and
1999, we implemented and completed a plan to evaluate the potential Y2K risks of
our critical Information Technology ("IT") and Non-IT Systems and replaced or
made modifications to computer hardware and software that were deemed necessary
for Y2K compliance. Costs incurred during the year related to Y2K compliance
totaled $40,000. The Company does not separately account for the internal costs
incurred for Y2K compliance efforts.
As of March 17, 2000, we have not experienced any noticeable Y2K
related systems failures or disruptions in the supply of materials or services
provided by third parties.
FULL COST CEILING WRITE-DOWN
The Company uses the full cost method of accounting for its investment
in oil and natural gas properties. Under the full cost method of accounting, all
costs of acquisition, exploration and development of oil and natural gas
reserves are capitalized into a "full cost pool" (the pool) as incurred, and
properties in the pool are depleted and charged to operations using the units of
production method based on the ratio of current production to total proved
future production. Additionally, the cost in excess of the net book value of
assets and liabilities acquired in the merger with American of $7.9 million,
discussed above, is recorded in the pool at December 31, 1999, and is subject to
depletion or write-down. To the extent that costs capitalized in the pool (net
of accumulated depreciation, depletion and amortization) exceed the present
value (using a 10% discount rate) of estimated future net cash flow from proved
oil and natural gas reserves, and the lower of cost and fair value of unproved
properties, excess costs are charged to operations. Once incurred, a write-down
of oil and natural gas properties is not reversible at a later date even if oil
or natural gas prices increase. The Company was required to write-down its asset
base in 1998 due primarily to the cost in excess of net book value recorded in
the merger with American and significant declines in oil prices during 1998.
17
20
ITEM 7A. DISCLOSURE ABOUT MARKET RISKS
The Company's indebtedness under its line of credit is variable rate
financing. The Company believes that its exposure to market risk relating to
interest rate risk is not material. The Company believes that its business
operations are not exposed to market risks relating to foreign currency exchange
risk or equity price risk.
The Company's revenues are derived from the sale of its crude oil and
natural gas production. Based on projected annual sales volumes for 2000, a 10%
decline in the prices the Company receives for its crude oil and natural gas
production would have an approximate $1,500,000 impact on the Company's
revenues.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information concerning this Item begins on F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 16, 1998, the board of directors of the Company replaced
KPMG LLP ("KPMG") as its principal accountant with Arthur Andersen LLP ("Arthur
Andersen"). Arthur Andersen was the principal accountant for American Explorer,
L.L.C., which was acquired by the Company on September 1, 1998.
KPMG's report on the Company's financial statements for 1997, the
fiscal year, did not contain an adverse opinion or a disclaimer of opinion, nor
was it qualified or modified to uncertainty, audit scope, or accounting
principles. During the Company's two most recent fiscal years and subsequent
interim periods preceding the replacement of KPMG, there were no disagreements
with KPMG on any matters of accounting principles or practices, financial
statement disclosure or auditing scope or procedure. The Company has authorized
KPMG to respond fully to any inquiries by Arthur Andersen.
PART III
ITEMS 10, 11, 12 & 13
For information concerning Item 10. Directors and Executive Officers of
the Registrant, Item 11. Executive Compensation, Item 12. Security Ownership of
Certain Beneficial Owners and Management and Item 13. Certain Relationships and
Related Transactions, see the definitive Proxy Statement of PetroQuest Energy,
Inc. relating to the Annual Meeting of Stockholders to be held May 23, 2000,
which will be filed with the Securities and Exchange Commission and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following financial statements of the Company and the Reports of
the Company's Independent Public Accountants thereon are included on pages F-1
through F-18 of this Form 10-K.
Reports of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for the three years ended
December 31, 1999
Consolidated Statements of Stockholder's Equity for the three
years ended December 31, 1999
Consolidated Statement of Cash Flows for the three years ended
December 31, 1999
Notes to Consolidated Financial Statements
18
21
2. FINANCIAL STATEMENT SCHEDULES:
All schedules are omitted because the required information is
inapplicable or the information is presented in the Financial Statements or the
notes thereto.
3. EXHIBITS:
2.1 Plan and Agreement of Merger by and among Optima Petroleum
Corporation, Optima Energy (U.S.) Corporation, its
wholly-owned subsidiary, and Goodson Exploration Company, NAB
Financial L.L.C., Dexco Energy, Inc., American Explorer,
L.L.C. (incorporated herein by reference to Appendix G of the
Proxy Statement on Schedule 14A filed July 22, 1998).
3.1 Certificate of Incorporation of the Company (incorporated
herein by reference to Exhibit 4.1 to Form 8-K dated September
16, 1998).
3.2 Bylaws of the Company (incorporated herein by reference to
Exhibit 4.2 to Form 8-K dated September 16, 1998).
3.3 Certificate of Domestication of Optima Petroleum Corporation
(incorporated herein by reference to Exhibit 4.4 to Form 8-K
dated September 16, 1998).
4.1 Registration Rights Agreement dated as of September 1, 1998
among Optima Petroleum Corporation, Charles T. Goodson, Alfred
J. Thomas, II, Ralph J. Daigle, Janell B. Thomas, Alfred J.
Thomas, III, Blaine A. Thomas, and Natalie A. Thomas
(incorporated herein by reference to Exhibit 99.1 to Form 8-K
dated September 16, 1998).
4.2 Form of Certificate of Contingent Stock Issue Right
(incorporated herein by reference to Exhibit 4.3 to Form 8-K
dated September 16, 1998).
4.3 Form of Warrant to Purchase Shares of Common Stock of
PetroQuest Energy, Inc. (incorporated herein by reference to
Exhibit 4.1 to Form 8-K dated August 9, 1999)
4.4 Form of Placement Agent Warrant to Purchase Shares of Common
Stock of PetroQuest Energy, Inc. (incorporated herein by
reference to Exhibit 4.2 to Form 8-K dated August 9, 1999)
10.1 1998 Stock Option Plan (incorporated herein by reference to
Exhibit 10.2 to Form 8-K dated September 16, 1998).
10.2 Employment Agreement dated September 1, 1998, between
PetroQuest Energy, Inc. and Alfred J. Thomas, II (incorporated
herein by reference to Exhibit 10.3 to Form 8-K dated
September 16, 1998).
10.3 Employment Agreement dated September 1, 1998, between
PetroQuest Energy, Inc. and Charles T. Goodson (incorporated
herein by reference to Exhibit 10.2 to Form 8-K dated
September 16, 1998).
10.4 Employment Agreement dated September 1, 1998, between
PetroQuest Energy, Inc. and Ralph J. Daigle (incorporated
herein by reference to Exhibit 10.4 to Form 8-K dated
September 16, 1998).
10.5 Employment Agreement dated September 1, 1998, between
PetroQuest Energy, Inc. and Robert R. Brooksher (incorporated
herein by reference to Exhibit 10.5 to Form 8-K dated
September 16, 1998).
10.6 First Amendment to Employment agreement dated September 1,
1998 between PetroQuest Energy, Inc. and Charles T. Goodson
dated July 30, 1999 (incorporated herein by reference to
Exhibit 10.1 to For 8-K dated August 9, 1999)
10.7 First Amendment to Employment Agreement dated September 1,
1998 between PetroQuest Energy, Inc. and Alfred J. Thomas, II
dated July 30, 1999 (incorporated herein by reference to
Exhibit 10.2 to Form 8-K dated August 9, 1999).
10.8 First Amendment to Employment Agreement dated September 1,
1998 between PetroQuest Energy, Inc. and Ralph J. Daigle dated
July 30, 1999 (incorporated herein by reference to Exhibit
10.3 to Form 8-K dated August 9, 1999).
10.9 First amendment to Employment Agreement dated September 1,
1998 between PetroQuest Energy, Inc. and Robert R. Brooksher
dated July 30, 1999 (incorporated herein by reference to
Exhibit 10.4 to Form 8-K dated August 9, 1999)
19
22
10.10 Credit Agreement dated September 24, 1998, among PetroQuest
Energy, Inc. (a Louisiana corporation), PetroQuest Energy One,
L.L.C. (a Louisiana limited liability company), PetroQuest
Energy, Inc. (a Delaware corporation) and Compass Bank
(Incorporated herein by reference to Exhibit 10.6 to the Form
10-K filed March 31, 1999).
10.11 Termination Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Charles T. Goodson
(Incorporated herein by reference to Exhibit 10.7 to the Form
10-K filed March 31, 1999).
10.12 Termination Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Alfred J. Thomas, II
(Incorporated herein by reference to Exhibit 10.8 to the Form
10-K filed March 31, 1999).
10.13 Termination Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Ralph J. Daigle
(Incorporated herein by reference to Exhibit 10.9 to the Form
10-K filed March 31, 1999).
10.14 Termination Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Robert R. Brooksher
(Incorporated herein by reference to Exhibit 10.10 to the Form
10-K filed March 31, 1999).
10.15 First Amendment to Termination Agreement dated December 16,
1998, between PetroQuest Energy Inc. and Charles T. Goodson
dated July 30, 1999 (incorporated herein by reference to
Exhibit 10.5 to Form 8-K dated August 9, 1999).
10.16 First Amendment to Termination Agreement dated December 16,
1998, between PetroQuest Energy, Inc. and Alfred J. Thomas, II
dated July 30, 1999 (incorporated herein by reference to
Exhibit 10.6 to Form 8-K dated August 9, 1999).
10.17 First Amendment to Termination Agreement dated December 16,
1998, between PetroQuest Energy, Inc. and Ralph J. Daigle
dated July 30, 1999 (incorporated herein by reference to
Exhibit 10.7 to Form 8-K dated August 9, 1999).
10.18 First Amendment to Termination Agreement dated December 16,
1998, between PetroQuest Energy, Inc. and Robert R. Brooksher
dated July 30, 1999 (incorporated herein by reference to
Exhibit 10.8 to Form 8-K dated August 9, 1999).
10.19 Indemnification Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Charles T. Goodson
(Incorporated herein by reference to Exhibit 10.11 to the Form
10-K filed March 31, 1999).
10.20 Indemnification Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Alfred J. Thomas, II
(Incorporated herein by reference to Exhibit 10.12 to the Form
10-K filed March 31, 1999).
10.21 Indemnification Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Ralph J. Daigle
(Incorporated herein by reference to Exhibit 10.13 to the Form
10-K filed March 31, 1999).
10.22 Indemnification Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Robert R. Brooksher
(Incorporated herein by reference to Exhibit 10.14 to the Form
10-K filed March 31, 1999).
10.23 Indemnification Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Daniel G. Fournerat
(Incorporated herein by reference to Exhibit 10.15 to the Form
10-K filed March 31, 1999).
10.24 Indemnification Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and William C. Leuschner
(Incorporated herein by reference to Exhibit 10.16 to the Form
10-K filed March 31, 1999).
10.25 Indemnification Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Robert L. Hodgkinson
(Incorporated herein by reference to Exhibit 10.17 to the Form
10-K filed March 31, 1999).
16.1 Letter from KPMG dated December 18, 1998 (incorporated herein
by reference to Exhibit 16.1 to Form 8-K dated December 21,
1998)
21.1 Subsidiaries of the Company (incorporated herein by reference
to Exhibit 21.1 to the Registration Statement No. 333-55745
filed June 2, 1998)
23.1 Consent of KPMG
23.2 Consent of Arthur Andersen L.L.P.
27.1 Financial data schedule
20
23
REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on December 28, 1999 announcing
that the Company's common stock was again approved for listing on the Nasdaq
Stock Market effective the beginning of business, Thursday, December 23, 1999.
The Company filed a report on Form 8-K on December 17, 1999 announcing
that the Company moved its headquarters to 400 E. Kaliste Saloom Road, Suite
3000, Lafayette, Louisiana 70508 on December 6, 1999.
The company filed a report on Form 8-K on December 10, 1999, amending
its report on Form 8-K filed on September 1, 1998 relating to matters acted on
at a special meeting of its shareholders on August 21, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on March 30, 2000.
PETROQUEST ENERGY, INC.
By:/s/ Charles T. Goodson
-------------------------------------
CHARLES T. GOODSON
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 30, 2000.
By:/s/ Charles T. Goodson President, Chief Executive Officer and
-------------------------------- Director (Principal Executive Officer)
CHARLES T. GOODSON
By:/s/ Alfred J. Thomas, II Chief Operating Officer and Director
--------------------------------
ALFRED J. THOMAS, II
By:/s/ Ralph J. Daigle Senior Vice President - Exploration
-------------------------------- and Director
RALPH J. DAIGLE
By:/s/ Robert R. Brooksher Chief Financial Officer, Secretary and
-------------------------------- Director (Principal Financial and Accounting
ROBERT R. BROOKSHER Officer)
By:/s/ William C. Leuschner Chairman of the Board
--------------------------------
WILLIAM C. LEUSCHNER
By:/s/ Robert L. Hodgkinson Director
--------------------------------
ROBERT L. HODGKINSON
By:/s/ Daniel G. Fournerat Director
--------------------------------
DANIEL G. FOURNERAT
By:/s/Francisco A. Garcia Director
--------------------------------
FRANCISCO A. GARCIA
By:/s/ William W. Rucks IV Director
--------------------------------
WILLIAM W. RUCKS IV
21
24
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants ...................................................... F-2
Auditors' Report to the Shareholders .......................................................... F-3
Consolidated Balance Sheets of PetroQuest Energy, Inc. as of
December 31, 1999 and 1998 .................................................................. F-4
Consolidated Statements of Operations of PetroQuest Energy, Inc.
for the years ended December 31, 1999, 1998 and 1997 ........................................ F-5
Consolidated Statements of Stockholders' Equity of PetroQuest Energy, Inc.
for the years ended December 31, 1999, 1998 and 1997 ........................................ F-6
Consolidated Statements of Cash Flows of PetroQuest Energy, Inc.
for the years ended December 31, 1999, 1998 and 1997 ........................................ F-7
Notes to Consolidated Financial Statements .................................................... F-8
F-1
25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
PetroQuest Energy, Inc.:
We have audited the accompanying consolidated balance sheets of PetroQuest
Energy, Inc. (a Delaware corporation, formerly Optima Petroleum Corporation) and
subsidiaries as of December 31, 1999 and December 31, 1998, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PetroQuest Energy, Inc. and
subsidiaries as of December 31, 1999 and December 31, 1998, and the results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles in the United States.
ARTHUR ANDERSEN LLP
New Orleans, Louisiana
March 10, 2000
F-2
26
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated statements of operations, stockholders' equity
and cash flows of PetroQuest Energy, Inc. (formerly Optima Petroleum
Corporation) for the year ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit includes
accessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects the results of the Company's operations and their cash flows
for the year ended December 31, 1997 in accordance with accounting principles
generally accepted in the United States.
KPMG llp
Chartered Accounts
Vancouver, Canada
March 13, 1998 (except for Note 1,
for which the date is March 12, 1999)
F-3
27
PETROQUEST ENERGY, INC.
Consolidated Balance Sheets
(amounts in thousands)
December 31, December 31,
ASSETS 1999 1998
---------- ----------
Current Assets:
Cash $ 3,006 $ 1,081
Oil and Gas Revenues Receivable 2,337 1,016
Joint Interest Billing Receivable 2,190 -
Other Current Assets 235 177
---------- ----------
Total Current Assets 7,768 2,274
---------- ----------
Oil and Gas Properties
Oil and Gas Properties, Full Cost Method 51,149 42,755
Unevaluated Oil and Gas Properties 5,753 5,747
Accumulated Depreciation,
Depletion and Amortization (35,412) (31,079)
---------- ----------
Oil and Gas Properties, Net 21,490 17,423
Plugging and Abandonment Escrow 255 221
Other Assets 388 148
---------- ----------
$ 29,901 $ 20,066
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable and Accrued Liabilities $ 3,215 $ 2,330
Advances from Co-Owners 3,157 --
Current Portion of Long-term Debt 1,942 2,400
---------- ----------
Total Current Liabilities 8,314 4,730
---------- ----------
Commitments and Contingencies (Note 9) -- --
Long-term Debt 2,927 1,300
Other Liabilities 555 700
Stockholders' Equity
Common Stock 24 19
Paid-in capital 48,869 43,795
Accumulated Deficit (30,788) (30,478)
---------- ----------
Total Stockholders' Equity 18,105 13,336
---------- ----------
$ 29,901 $ 20,066
========== ==========
The accompanying notes are an integral part of these statements.
F-4
28
PETROQUEST ENERGY, INC.
Consolidated Statements of Operations
(amounts in thousands, except per share amounts)
Twelve Months Ended
December 31,
1999 1998 1997
---------- ---------- ----------
Revenues:
Oil and Gas Sales $ 8,516 $ 3,263 $ 3,964
Interest Income 91 114 181
---------- ---------- ----------
8,607 3,377 4,145
---------- ---------- ----------
Expenses:
Lease Operating Expenses 2,638 1,349 735
Production Taxes 406 219 303
Depreciation, Depletion and Amortization 4,472 2,801 3,133
Full Cost Ceiling Write-Down - 13,431 1,820
General and Administrative Expenses 1,625 1,779 1,222
Revenue in Dispute (145) - 740
Interest Expense - 116 136
Gain on Sale of Canadian Properties - - (952)
Other Income (79) (151) (187)
---------- ---------- ----------
Net Income (Loss) Before Income Taxes (310) (16,167) (2,805)
Income Tax Expense -- 73 109
Net Income (Loss) $ (310) $ (16,240) $ (2,914)
========== ========== ==========
Earnings (Loss) Per Common Share
Basic $ (0.01) $ (1.20) $ (0.26)
========== ========== ==========
Diluted $ (0.01) $ (1.20) $ (0.26)
========== ========== ==========
Average shares outstanding 21,528 13,528 11,160
========== ========== ==========
Average shares outstanding assuming dilution 21,528 13,528 11,160
========== ========== ==========
The accompanying notes are an integral part of these statements.
F-5
29
PETROQUEST ENERGY, INC.
Consolidated Statements of Stockholders' Equity
(amounts in thousands)
Total
Common Paid-In Retained Stockholders'
Stock Capital Deficit Equity
---------- ---------- ---------- ----------
December 31, 1996 $ 33,109 $ 529 $ (11,324) $ 22,314
Issued to directors and consultants 17 -- -- 17
Net Loss --- -- (2,914) (2,914)
Treasury stock repurchases (676) (1) -- --
---------- ---------- ---------- ----------
December 31, 1997 $ 32,450 $ 528 $ (14,238) $ 18,740
Conversion of Common Shares (Note 3):
Optima no par Shares Surrendered (32,450) (528) -- (32,978)
PetroQuest Energy, Inc. $.001 par value
Shares Issued 11 32,967 -- 32,978
American Merger Issuance of Shares (Note 3) 8 10,828 -- 10,836
Net Loss -- -- (16,240) (16,240)
---------- ---------- ---------- ----------
December 31, 1998 $ 19 $ 43,795 $ (30,478) $ 13,336
Options Exercised -- 76 -- 76
Stock Based Employee Compensation (78,375 shares) -- 118 -- 118
Stock Issued for Oil and Gas Properties -- 413 -- 413
Sale of Common Stock and Warrants 5 4,467 -- 4,472
Net Loss -- -- (310) (310)
---------- ---------- ---------- ----------
December 31, 1999 $ 24 $ 48,869 $ (30,788) $ 18,105
========== ========== ========== ==========
The accompanying notes are an integral part of these statements.
F-6
30
PETROQUEST ENERGY, INC.
Consolidated Statements of Cash Flows
(amounts in thousands)
Twelve Months Ended
-------------------
December 31
-----------
1999 1998 1997
---------- ---------- ----------
Cash flows from operating activities:
Net income (loss) $ (310) $ (16,240) $ (2,914)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization and full
cost ceiling write-down 4,472 16,232 4,953
Gain on sale of Canadian oil and gas properties -- (952)
Stock based compensation 118 -- --
Changes in working capital accounts:
Accounts receivable (1,321) 1,174 159
Joint interest billing receivable (2,190) -- --
Other current assets (58) (6) --
Accounts payable and accrued liabilities 885 (229) (1,288)
Advances from co-owners 3,157 -- --
Provision for revenue dispute (145) -- 740
Plugging and abandonment escrow 34 (284) (132)
Net working capital of Canadian oil and gas
properties sold -- -- (318)
Other (241) 231 71
---------- ---------- ----------
Net provided by operating activities 4,401 878 319
---------- ---------- ----------
Cash flows from investing activities:
Investment in oil and gas properties (10,062) (3,612) (3,746)
Sale of Canadian properties 1,868 -- 11,865
Cash cost of American merger transaction,
net of cash received (Note 3) -- (1,800) --
---------- ---------- ----------
Net cash provided by (used in) investing activities (8,194) (5,412) 8,119
---------- ---------- ----------
Cash flows from financing activities:
Sale of common stock and warrants 4,472 -- --
Proceeds from borrowings 8,220 1,600 --
Repayment of debt (7,050) (440) (4,845)
Issue (Repurchase) of common stock 76 -- (645)
---------- ---------- ----------
Net cash provided by (used in) financing activities 5,718 1,160 (5,490)
---------- ---------- ----------
Net increase (decrease) in cash 1,925 (3,374) 2,948
Cash balance beginning of period 1,081 4,455 1,507
---------- ---------- ----------
Cash balance end of period $ 3,006 $ 1,081 $ 4,455
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 233 $ 83 $ 109
========== ========== ==========
Income taxes $ -- $ 120 $ 136
========== ========== ==========
The accompanying notes are an integral part of these statements.
F-7
31
PETROQUEST ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
PetroQuest Energy, Inc. ("PetroQuest" or the "Company") is an
independent oil and gas company headquartered in Lafayette, Louisiana with an
exploration office in Houston, Texas. It is engaged in the exploration,
development, acquisition and operation of oil and gas properties onshore and
offshore in the Gulf Coast Region. PetroQuest and its predecessors have been
active in this area since 1986. The financial statements reflect the results of
the Company and its predecessor entity, Optima Petroleum Corporation ("Optima"),
for all periods presented.
The financial statements of Optima for the year ended December 31, 1997
and previously issued to shareholders were prepared in Canadian dollars and in
accordance with Canadian generally accepted accounting principles with a
reconciliation to United States generally accepted accounting principles
included in the notes to the financial statements. In conjunction with the
relocation of the Company to the United States, the Company changed its
reporting currency to the U.S. dollar and changed its generally accepted
accounting principles from Canada to the United States. Consequently, the
comparative financial statements presented for the year ended December 31, 1997
have been prepared in the U.S. dollars and in accordance with United States
generally accepted accounting principles.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principals of Consolidation
The Consolidated Financial Statements include the accounts of the
Company and its subsidiary, PetroQuest Energy, Inc., a Louisiana corporation
(PetroQuest (LA)). Additionally, PetroQuest (LA) owns 100% of the membership
interests of PetroQuest Energy One, L.L.C. All intercompany accounts and
transactions have been eliminated.
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
reporting period. Actual results could differ from those estimates.
Oil and Gas Properties
The Company utilizes the full cost method of accounting, which involves
capitalizing all acquisition, exploration and development costs incurred for the
purpose of finding oil and gas reserves including the costs of drilling and
equipping productive wells, dry hole costs, lease acquisition costs and delay
rentals. The Company also capitalizes the portion of general and administrative
costs which can be directly identified with acquisition, exploration or
development of oil and gas properties. Costs associated with unevaluated
properties are excluded from amortization. Unevaluated property costs are
transferred to evaluated property costs at such time as wells are completed on
the properties, the properties are sold, or management determines these costs to
have been impaired. Cost of properties, including future development, site
restoration, dismantlement and abandonment costs, which have proved reserves and
those which have been determined to be worthless, are depleted on the units of
production method based on proved reserves. Additionally, the capitalized costs
of proved oil and gas properties cannot exceed the present value of the
estimated net cash flow from its proved reserves (the full cost ceiling).
Transactions involving sales of reserves in place, unless extraordinarily large
portions of reserves are involved, are recorded as adjustments to accumulated
depreciation, depletion and amortization.
Upon the acquisition or discovery of oil and gas properties, management
estimates the future net costs to be incurred to dismantle, abandon and restore
the property using geological, engineering and regulatory data available. Such
cost estimates are periodically updated for changes in conditions and
requirements. Such estimated amounts are considered as part of the full cost
pool for purposes of amortization upon acquisition or discovery. Such costs are
capitalized as oil and gas properties as the actual restoration, dismantlement
and abandonment activities take place.
F-8
32
Other Assets
Other Assets consist primarily of furniture and fixtures (net of
accumulated depreciation) which are depreciated over their useful lives ranging
from 3-7 years and loan costs which are amortized over the life of the related
loan.
Cash and Cash Equivalents
The Company considers all highly liquid investments in overnight
securities made through its commercial bank accounts, which result in available
funds the next business day, to be cash and cash equivalents. The Company holds
a minimal amount of cash denominated in Canadian dollars for settlement of
Canadian obligations incurred prior to the Merger (Note 3). The impact of
exchange rate changes on these amounts is insignificant and is included in
results of operations for all periods shown.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109.
Provisions for income taxes include deferred taxes resulting primarily from
temporary differences due to different reporting methods for oil and gas
properties for financial reporting purposes and income tax purposes. For
financial reporting purposes, all exploratory and development expenditures are
capitalized and depreciated, depleted and amortized on the future gross revenue
method. For income tax purposes, only the equipment and leasehold costs relative
to successful wells are capitalized and recovered through depreciation or
depletion. Generally, most other exploratory and development costs are charged
to expense as incurred; however, the Company may use certain provisions of the
Internal Revenue Code which allow capitalization of intangible drilling costs
where management deems appropriate. Other financial and income tax reporting
differences occur as a result of statutory depletion.
Natural Gas Imbalances
The Company follows an entitlement method of accounting for its
proportionate share of gas production on a well by well basis, recording a
receivable to the extent that a well is in an "undertake" position and
conversely recording a liability to the extent that a well is in an "overtake"
position.
At December 31, 1998, the Company had a net overtake position
representing 8,341 Mcf. There were no gas imbalances at December 31, 1997.
Certain Concentrations
During 1999 and 1998, 44% and 51% respectively, of the Company's oil
and gas production was sold to three customers. Based on the current demand for
oil and gas, the Company does not believe the loss of any of these customers
would have a significant financially disruptive effect on its business or
financial condition.
Foreign Currency Accounting
The Company's functional currency is the U.S. dollar. During 1999 and
1998, substantially all of the Company's operations were domestic and recorded
in the Company's primary accounting records in U.S. dollars. The operations of
Canadian oil and gas properties prior to 1997 were translated into U.S. dollars
at the exchange rates in effect at the time of the related transactions. The
translation of Canadian dollar denominated monetary assets and liabilities as of
December 31, 1999 and 1998, are adjusted to reflect the exchange rates at the
balance sheet date. Exchange gains and losses arising from the translation of
Canadian dollar denominated assets and liabilities are included in the results
of operations for each period shown. The net Canadian dollar denominated
monetary assets included in the balance sheet at December 31, 1999, are
insignificant. Prior to the Merger (Note 3), Optima's reporting and functional
currency was the Canadian dollar.
Fair Value of Financial Instruments
The fair value of accounts receivable and accounts payable approximate
book value at December 31, 1999 and 1998 due to the short-term nature of these
accounts. The fair value of the note payable and non-recourse financing
approximates book value due to the variable rate of interest charged.
F-9
33
New Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards that require every derivative instrument (including certain
derivative instruments embedded in other contracts) to be recorded in the
balance sheet as either an asset or liability measured at its fair value and
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met.
SFAS No. 133 is effective for fiscal years beginning after June 15,
2001. Because the Company does not currently use derivative instruments, the
adoption of SFAS No. 133 will not impact the Company's financial statements.
Earnings per Common Share Amounts
Basic earnings or loss per common share was computed by dividing net
income or loss by the weighted average number of shares of common stock
outstanding during the year. Diluted earnings or loss per common share is
determined on a weighted average basis using common shares issued and
outstanding adjusted for the effect of stock options considered common stock
equivalents computed using the treasury stock method. For 1999, 1998, and 1997,
all of the Company's options and warrants were excluded from the computation
because of the net loss for all periods. The contingent stock rights assigned in
connection with the Merger are also excluded from the calculation of diluted
earnings per share.
NOTE 3 - MERGER OF OPTIMA ENERGY (U.S.) CORPORATION
On September 1, 1998, the Company merged its wholly owned subsidiary
Optima Energy (U.S.) Corporation with American Explorer, L.L.C. (American).
Concurrent with the transaction, the Company became a Delaware corporation and
converted each share of Optima no par value common stock into one share of the
Company's $.001 par value common stock and changed its name from Optima
Petroleum Corporation to PetroQuest Energy, Inc. American conducted oil and
natural gas exploration activities in the Gulf Coast Region.
Under the terms of the transaction, American merged with the Company in
exchange for 7,335,001 shares of the Company's common stock, issued primarily to
the three former members of American, representing about 40% of the post
acquisition shares outstanding. Additionally, the Company issued to the members
of American and certain current officers of the Company 1,667,001 contingent
stock rights exchangeable for common shares should the market share price of the
Company's common stock exceed $5 per share for 20 consecutive trading days
during the three year term of the rights. The rights terminate on September 1,
2001. Should these rights become exchangeable, the Company would be required to
issue 1,667,001 shares, representing 6.5% of undiluted shares outstanding (after
conversion of the rights) at December 31, 1999, for no net proceeds.
The transaction was treated as a purchase for accounting purposes. No
value was assigned to the contingent stock rights. The purchase price of
approximately $10.6 million was allocated to the assets and liabilities based on
estimated fair value. Net assets acquired in the transaction were as follows:
Oil and gas properties $16,178
Working capital (1,890)
Due to Optima (2,150)
Note payable (2,440)
Escrow funds and other 903
-------
$10,601
The purchase price in excess of the net book value of the net assets
acquired of $7.9 million was allocated to the Company's oil and gas properties.
The operating results of American have been consolidated in the
Company's statement of operations since September 1, 1998. The following
summarized unaudited proforma income statement data reflects the impact the
transaction would have had on the Company's results of operations for the years
ended December 31, 1998 and 1997 had the transaction occurred January 1, 1997.
These unaudited proforma results have been prepared for comparative purposes
only and do not purport to be indicative of the amounts which actually would
have resulted had the transaction occurred on January 1, 1997, or which may
result in the future.
F-10
34
Proforma Results for the
Years Ended December 31,
------------------------
1998 1997
---------- ----------
Revenues $ 7,469 $ 10,872
========== ==========
Net Loss 8,357 $ (2,554)
========== ==========
Earnings per common share:
Basic $ (0.45) $ (0.13)
========== ==========
Diluted $ (0.45) $ (0.13)
========== ==========
Subsequent to the Merger, Optima Energy (U.S.) Corporation changed its
name to PetroQuest Energy, Inc. (a Louisiana corporation) and American Explorer,
L.L.C. changed its name to PetroQuest Energy One, L.L.C.
NOTE 4 - LONG-TERM DEBT
In connection with the Merger described in Note 3, the Company and its
lender amended American's reducing revolving line of credit to provide for
borrowings of up to $25 million, subject to a cap calculated on the Company's
borrowing base, as defined. At December 31, 1999, the borrowing base was $2.1
million and was fully funded. Each month the borrowing base is reduced by
$115,000. The borrowing base amount and the amount by which it will be reduced,
is established by the lender and is based on their evaluation of the Company's
oil and gas properties. The borrowing base is redetermined semi-annually on
February 1 and August 1 of each year. The result of the February 1, 2000
borrowing base review has not yet been determined. Interest under the loan is
payable monthly at prime plus 1/2% (9% at December 31, 1999). It is secured by
substantially all of the Company's oil and gas properties. A commitment fee of
.5% per annum on the unused available borrowing base is payable quarterly. The
line of credit agreement contains various covenants including restrictions on
additional indebtedness and dividends as well as maintenance of certain
financial ratios. The Company was in compliance with both of these covenant
tests for the quarter ended December 31, 1999.
On April 21, 1999, the company entered into a loan agreement for
non-recourse financing to fund completion, flow line and facility costs of its
High Island Block 494 property which is security for the loan. Interest is
payable at 12% and the lender received a 2-1/2% overriding royalty interest in
the property. For the first three production months, all of the net cash flow
from the property will be dedicated to payment of principal and interest on the
loan. Subsequently, 85% of the net cash flow from the property (assuming certain
production levels) will be dedicated to debt service. The well began producing
during the first part of July 1999.
Maturity of the credit facility over the next five years and thereafter
is as follows (in thousands):
2000 $1,380
2001 690
2002 --
2003 --
2004 and thereafter --
------
$2,070
======
Maturity of the non-recourse financing is dependent on production and
operating costs as discussed above. Amounts due to the lender under this
agreement through December 31, 1999, of $562,000 are included in current
maturity of long-term debt in the accompanying balance sheet. Remaining amounts
due are entirely dependent on the performance of the related property. The
company estimates that these remaining payments during 2000, 2001, 2002 and 2003
will be $283,000, $1,498,000, $456,000 and $-, respectively. These amounts are
included in long-term debt at December 31, 1999. Changes in estimated production
rates and estimated operating costs could cause these estimated payments to
change.
F-11
35
AEI representing primarily accrued production revenue. Beginning January 1, 1999
the Company assumed the operating and management functions of AEI, whose
employees became employees of the Company.
In 1998, three of the officers of the Company contributed their
interests in a lease at the Turtle Bayou Field to the Company in return for a
30% interest after payout of 100% of the related well cost. The Company promoted
this interest to industry partners thereby reducing its cost in the well. A
producing well was drilled and completed on the lease. No cost was recorded for
the contribution of this lease in the accompanying financial statements because
it was treated as an ordinary farmout agreement.
Certain officers and directors and their affiliates are working
interest owners in properties operated by the Company and are billed for and pay
their proportionate share of drilling and operating costs in the normal course
of business.
During 1999 and 1998, the Company was charged consulting expenses of
$143,462 and $124,500, respectively, by companies owned by former directors.
Office expense includes $18,500 and $51,500 for 1999 and 1998, respectively,
paid to a company owned by a former director.
NOTE 6 - COMMON STOCK AND WARRANTS
Prior to the September 1, 1998, Merger of Optima Energy (U.S.)
Corporation, the Company had authorized 100,000,000 no par common shares. There
were 11,002,346 common shares issued and outstanding at December 31, 1997. In
connection with the Merger, all no par common shares of the Company were
surrendered, and replaced by newly authorized and issued shares of $.001 par
value common shares of the Company. There were 75,000,000 shares authorized and
23,943,222 shares issued and outstanding at December 31, 1999.
In August 1999, the Company received the funding of a private placement
of 5 million units at a purchase price of $1.00 per unit for a total
consideration of $5,000,000 before fees and expenses. Net proceeds of $4,508,000
from sale of the units were allocated between the stock and warrants based on
their relative fair market value on the date of the transaction. The proceeds
from the private placement were used for drilling and exploration costs, delay
rentals on oil land gas leases, working capital and general corporate purposes.
Each unit sold in the private placement consists of one share of the
Company's common stock and one warrant exercisable to purchase one-half a share
of the Company's common stock. Each warrant is exercisable at any time through
the fourth year after issuance to purchase one-half of a share of the Company's
common stock at a per share purchase price of $1.25. In addition, the Company
issued to the placement agents of the units, warrants to purchase 500,000 shares
of the Company's common stock. The warrants received by the placement agents are
exercisable at any time for a period of five years to purchase one share of the
Company's common stock at a per share purchase price of $1.25 per share. The
Company has agreed to file a registration statement covering the resale of its
common stock underlying the units and the shares of its common stock issuable on
the exercise of the warrants.
In a private placement during the fourth quarter of 1999, the Company
issued 238,500 shares of common stock (with a fair market value $413,000) in
exchange for additional working interests in producing properties. The effective
date of these acquisitions was June 1, 1999. The net operating income of $89,000
attributable to these interests during the period from the effective date to the
closing date was recorded as an adjustment to the purchase price of the
properties.
F-12
36
NOTE 7 - INVESTMENT IN OIL AND GAS PROPERTIES
The following table discloses certain financial data relative to the
Company's evaluated oil and gas producing activities, which are located onshore
and offshore the continental United States: (amounts in thousands)
Years Ended December 31,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
Costs incurred during year:
Capitalized
Purchases of producing properties $ 546 $ 12,302 $
Exploration costs 7,466 104
Development costs 1,170 2,832
Plugging and abandonment costs -- 1,357
Capitalized G & A cost 1,361 438
---------- ---------- ----------
$ 10,543 $ 17,033 $ 2,739
========== ========== ==========
Oil and gas properties
Balance, beginning of period $ 42,755 $ 25,722 $ 34,692
Additions 10,262 17,033 2,739
Sales (1,868) -- (11,709)
---------- ---------- ----------
Balance, end of year $ 51,149 $ 42,755 $ 25,722
---------- ---------- ----------
Accumulated depreciation, depletion and
Amortization
Balance beginning of period $ 31,079 $ 15,049 $ 12,166
Provision for depreciation, depletion and
amortization 4,333 2,599 3,133
Provision for ceiling write-down -- 13,431 1,820
Sales -- -- (2,070)
---------- ---------- ----------
Balance, end of year $ 35,412 31,079 15,049
---------- ---------- ----------
Net capitalized costs $ 15,737 $ 11,676 $ 10,673
========== ========== ==========
DD&A per Mcfe (including provision for ceiling write-down) $ 1.25 $ 10.33 $ 2.68
Unevaluated oil and gas properties
Balance, beginning of period $ 5,747 $ 2,189 $
Acquisition costs 954 1,060
Exploration costs 1,011 2,541
Capitalized interest 434
Transfer to evaluated (2,393) (43)
---------- ---------- ----------
Balance, end of year $ 5,753 $ 5,747 $ 2,189
========== ========== ==========
At December 31, 1999 and 1998, unevaluated oil and gas properties with
capitalized costs of $5,753,000 and $5,747,000 respectively, were not subject to
depletion. Management expects that these properties will be evaluated over the
next one to three years.
The Company uses the full cost method of accounting for its investment
in oil and natural gas properties. Under the full cost method of accounting, all
costs of acquisition, exploration and development of oil and natural gas
reserves are capitalized into a "full cost pool" (the pool) as incurred, and
properties in the pool are depleted and charged to operations using the units of
production method based on the ratio of current production to total proved
future production. Additionally, the cost in excess of the net book value of
assets and liabilities acquired in the Merger with American of $7.9 million,
discussed above, is recorded in the pool at December 31, 1998, and is subject to
depletion or write-down. To the extent that costs capitalized in the pool (net
of accumulated depreciation, depletion and amortization) exceed the present
value (using a 10% discount rate) of estimated future net cash flow from proved
oil and natural gas reserves, and the lower of cost and fair value of unproved
properties, excess costs are charged to operations. Once incurred, a write-down
of oil and natural gas properties is not reversible at a later date even if oil
or natural gas prices increase. The Company was required to write-down its asset
base in
F-13
37
1998 due primarily to the cost in excess of net book value recorded in
the Merger with American and significant declines in oil prices during 1998.
NOTE 8 - INCOME TAXES
The Company follows the provisions of SFAS No. 109, "Accounting For
Income Taxes," which provides for recognition of a deferred tax asset for
deductible temporary timing differences, operating loss carryforwards, statutory
depletion carryforwards and tax credit carryforwards net of a "valuation
allowance." An analysis of the Company's deferred taxes follows:
December 31,
-------------------------
1999 1998
---------- ----------
(000's omited)
Net operating loss carryforwards $ 7,662 $ 4,094
Statutory depletion carryforward 345 195
Alternative minimum tax credit 4 4
Temporary differences:
Oil and gas properties--full cost (901) (1,563)
---------- ----------
7,110 2,730
Valuation allowance (7,110) (2,730)
---------- ----------
$ -- $ --
========== ==========
For tax reporting purposes, the Company had operating loss
carryforwards of $20,902,000 at December 31, 1999. If not utilized, such
carryforwards would begin expiring in 2001 and would completely expire by the
year 2008. The Company had available for tax reporting purposes $942,000 in
statutory depletion deductions that may be carried forward indefinitely. A
valuation allowance is provided for that portion of the net deferred tax asset
for which it is deemed more likely than not that it will not be realized. Due to
the Company's recent losses, management has provided a valuation allowance for
the entire net deferred tax asset.
The Company's effective tax rate differs from the statutory rate each
year because the Company was not able to recognize the tax benefit related to
losses under the SFAS No. 109 criteria. The Company's statutory rates used in
calculating tax attributes for 1999, 1998 and 1997 were 37%, 37% and 40%,
respectively. The change in the statutory rate for 1998 and 1999 is due to the
conversion of the Company to a domestic tax paying entity during 1998 (Note 3).
Current income tax expense relates to certain Canadian and domestic liabilities
for which offsets related to the Company's tax preference items is not
available.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
S.W. HOLMWOOD
PetroQuest Energy, Inc. f/k/a Optima Energy (U.S.) Corp. v The Meridian
Resource & Exploration Company f/k/a Texas Meridian Resources Exploration, Inc.
bearing Civil Action No. 99-2394 of the United States District Court for the
Western District of Louisiana. The Company asserts a claim for damages against
Meridian resulting from defendant's activities as operator of the Southwest
Holmwood property, Calcasieu Parish, Louisiana which resulted in a final
judgment of the United States District Court for the Western District of
Louisiana ordering cancellation of the parties' productive oil and gas lease and
joint exploration agreement with Amoco Production Company, forfeiture of two
producing wells on the lease and substantial damages against the defendant
causing the Company the loss of its investment and profits.
The Meridian Resource & Exploration Company v. PetroQuest Energy, Inc.,
bearing Docket No. 996192A of the 15th Judicial District court in and for the
Parish of Lafayette, Louisiana. Meridian asserts that the Company is responsible
as an investor under its participation agreement with Meridian for $530,004.45
of the losses, costs, expense and liability of Meridian resulting from the final
judgment that was rendered in favor of Amoco and against Meridian in legal
proceedings relative to the Southwest Holmwood Field, Calcasieu Parish,
Louisiana in the matter "Amoco Production Company v. Texas Meridian Resource &
Exploration Company," bearing Civil Action No. 96-1639 in the United States
District Court for the Western District of Louisiana (Civil Action No. 98-30724
in the United States Court of Appeals for the Fifth Circuit). Although the
F-14
38
Company accrued $70,000 when the district court decision was rendered against
Meridian in December 1997, the Company denies liability to Meridian for losses
sustained by Meridian as operator as a result of the Amoco litigation.
ABANDONMENT
The Company maintains abandonment escrows that have been established
for future abandonment obligations of certain oil and gas properties of the
Company. The management of the Company believes the escrows will be sufficient
to offset those future abandonment liabilities; however, the Company is
responsible for any abandonment expenses in excess of the escrow balances. As of
December 31, 1999, total estimated site restoration, dismantlement and
abandonment costs were approximately $3,538,000, net of expected salvage value.
NOTE 10 - EMPLOYEE BENEFIT PLANS
Prior to the Merger, under the Company's stock option plan (the 1996
Plan), 750,000 common shares were reserved for issuance and outstanding options
exercisable into 730,000 common shares of the Company under the 1996 Plan as
well as outstanding options under the Company's previous plan (the 1995 Plan)
exercisable into 52,500 common shares of Optima. After the Merger, these options
(the Amended Options) under the 1995 and 1996 Plans became subject to the new
stock option plan described below. The new exercise price of the Amended Options
is the higher of the weighted average trading price of the common shares of
Optima for the 5 business days immediately prior to the amendment and the
closing price of the common shares of Optima on the business day immediately
prior to the amendment. The Amended Options expire three years from the
amendment but in no event greater than 10 years from the date of the original
grant. All other options outstanding under the 1995 and 1996 Plans were
cancelled. The amendment and cancellation of the options occurred on the closing
date of the Merger.
In March, 1998, management of the Company, in conjunction with the
proposed Merger, adopted a new stock option plan (the "New Plan") which was
effective upon the closing of the Merger in order to attract new management and
retain key employees. Key employees, including officers (whether or not they are
directors), and consultants of the Company and outside directors are eligible to
participate in the New Plan. Under Toronto Stock Exchange policies, a new plan
was required to be adopted in order to grant options in excess of those reserved
under the 1996 and 1995 plans. The Company's stock option plans reserved
1,950,000 common shares for issuance. Prior to the Merger, 787,000 common shares
had been issued pursuant to the exercise of options granted under the 1995 and
1996 Plans and options exerciseable into 782,500 shares were outstanding,
leaving 380,500 options available for issuance. Under the New Plan, 1,800,000
common shares had been allotted and reserved for future issuance.
On the closing of the Merger, options to purchase a total of 1,012,300
shares of Common Stock were outstanding. Of these options, 500,000 vested
immediately on grant, and 512,300 vest one third on each of December 31, 1998,
1999 and 2000.
Generally, options must be exercised within 10 years of the grant date
and may be granted only to employees, directors and consultants. The exercise
price of each option may not be less than 100% of the fair market value of a
share of Common Stock on the date of grant.
Upon a change in control of the Company, all outstanding options become
immediate exercisable.
If the compensation cost for the Company's 1999, 1998 and 1997 grants
for stock-based compensation plans had been determined consistent with SFAS No.
123, the Company's 1999, 1998 and 1997 net income and basic and diluted earnings
per common share would have approximated the pro forma amounts below (in
thousands, except per share amounts):
F-15
39
Year Ended December 31,
-------------------------------------------------------------------------------------
1999 1998 1997
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) ............... $ (310) $ (978) $ (16,240) $ (17,182) $ (2,914) $ (3,467)
Earnings (loss) per common share:
Basic ....................... $ (0.01) $ (0.05) $ (1.20) $ (1.27) $ (0.26) $ (0.31)
Diluted ..................... $ (0.01) $ (0.05) $ (1.20) $ (1.27) $ (0.26) $ (0.31)
The effects of applying SFAS No. 123 in this pro forma disclosure are
not indicative of future amounts. SFAS No. 123 does not apply to grants prior to
1995, and additional awards in the future are anticipated. The contingent stock
rights assigned in connection with the Merger are excluded from the calculation
of pro forma net loss and loss per share.
A summary of the Company's stock options as of December 31, 1999, 1998
and 1997 and changes during the years ended on those dates is presented below.
Year Ended December 31,
----------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Wgtd. Wgtd. Wgtd.
Number Avg. Number Avg. Number Avg.
of Exer. of Exer. of Exer.
Options Price Options Price Options Price
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at beginning of year 1,012,300 $ 0.85 1,163,000 $ 2.73 1,163,000 $ 2.87
Granted 88,000 1.23 1,012,300 0.85 -- --
Expired/cancelled/forfeitures (20,000) 0.85 (1,163,000) 2.73 -- --
Exercised (89,000) 0.85 -- -- -- --
---------- ---------- ----------
Outstanding at end of year 991,300 0.87 1,012,300 .85 1,163,000 2.73
Options exerciseable at year-end 762,533 0.85 694,100 .85 1,163,000 2.73
Options available for future grant 719,700 787,700 --
Weighted average fair value of
options granted during the year $ 0.47 $ 0.58 --
The fair value of each option granted during the periods presented is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions: (a) divided yield of 0% (b) expected volatility range
of 55.02% - 61.23%, (c) risk-free interest rate range of 5.31% - 6.33%, 5.30%
and 6.50% in 1999, 1998 and 1997, respectively, and (d) expected life of 10
years for 1999 and 1998 grants, and 3 years for 1997 grants.
The following table summarizes information regarding stock options
outstanding at December 31, 1999:
Options Outstanding Options Exercisable
------------------------------------------- ----------------------------
Range of Options Wgtd. Avg. Wgtd. Avg. Options Wgtd. Avg.
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/99 Contractual Life Price at 12/31/99 Price
- ----------- ----------- ----------- ----------- ----------- -----------
$0.81-$0.85 933,300 5.7 Years $ 0.85 762,533 $ 0.85
$1.44 58,000 10 Years $ 1.44 -- --
----------- ----------- -----------
991,300 5.9 Years $ .87 762,533 $ 0.85
F-16
40
NOTE 12 - OIL AND GAS RESERVE INFORMATION - UNAUDITED
A majority of the Company's net proved oil and gas reserves at December
31, 1999 have been estimated by independent petroleum consultants in accordance
with guidelines established by the Securities and Exchange commission ("SEC").
Accordingly, the following reserve estimates are based upon existing economic
and operating conditions at the respective dates.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in providing the future rates of production and timing of
development expenditures. The following reserve data represents estimates only
and should not be construed as being exact. In addition, the present values
should not be construed as the current market value of the Company's oil and gas
properties or the cost that would be incurred to obtain equivalent reserves.
The following table sets forth an analysis of the Company's estimated
quantities of net proved and proved developed oil (including condensate) and gas
reserves, all located onshore and offshore the continental United States:
Oil Natural
in Gas in
MBbls MMcf
---------- ----------
Proved reserves as of December 31, 1996 1,450 20,397
Revisions of previous estimates (345) (2,065)
Extensions, discoveries and other additions -- 371
Purchase of producing properties -- --
Sale of reserves (311) (15,254)
Production (140) (1,002)
---------- ----------
Proved reserves as of December 31, 1997 654 2,447
Revisions of previous estimates (134) (602)
Extensions, discoveries and other additions 5 874
Purchase of producing properties 63 8,891
Production (84) (1,049)
---------- ----------
Proved reserves as of December 31, 1998 504 10,561
Revisions of previous estimates 199 128
Extensions, discoveries and other addition 1,596 7,257
Production (105) (2,831)
Purchase of reserves in place -- 13
---------- ----------
Proved reserves as of December 31, 1999 2,194 15,128
Proved developed reserves:
as of December 31, 1997 554 2,333
========== ==========
as of December 31, 1998 275 7,722
========== ==========
as of December 31, 1999 400 6,456
========== ==========
The following tables present the standardized measure of future net
cash flows related to proved oil and gas reserves together with changes therein,
as defined by the FASB. The oil, condensate and gas price structure utilized to
project future net cash flows reflects current prices at each year end and has
been escalated only where known and determinable price changes are provided by
contracts and law. Future production and development costs are based on current
costs with no escalations. No future income taxes were included in the
computation of standardized measure in 1999, 1998 and 1997 because the Company's
tax basis in oil and gas properties, along with its other tax preference
attributes, net, exceeded pretax estimated discounted future net cash flows.
Estimated future cash flows have been discounted to their present values based
on a 10% annual discount rate.
F-17
41
Standardized Measure
December 31,
------------
1999 1998 1997
---------- ---------- ----------
(000's omitted)
Future cash flows $ 92,788 $ 28,958 $ 16,235
Future production and development costs (33,732) (14,208) (3,389)
Future income taxes - -
---------- ---------- ----------
Future net cash flows $ 59,056 $ 14,750 $ 12,846
10% annual discount (15,987) (3,074) (3,789)
---------- ---------- ----------
Standardized measure of discounted
future net cash flows $ 43,069 $ 11,676 $ 9,057
========== ========== ==========
Changes in Standardized Measure
Year Ended December 31,
-------------------------------------------
1999 1998 1997
----------- ----------- -----------
(000's omitted)
Standardized measure at beginning of year $ 11,676 $ 9,057 $ 30,305
Sales and transfers of oil and gas produced,
net of production costs (5,472) (1,752) (2,926)
Changes in price, net of future production costs 7,691 (3,350) (5,050)
Extensions and discoveries, net of future
production and development costs 25,974 850 480
Changes in estimated future development costs,
net of development costs incurred during this period 1,013 237 199
Revisions of quantity estimates 2,547 (1,592) (4,401)
Accretion of discount 1,168 906 3,107
Net change in income taxes -- -- 1,068
Purchase of reserves in place 179 7,566 --
Sale of reserves in place -- -- (10,007)
Changes in production rates (timing) and other (1,707) (246) (3,718)
----------- ----------- -----------
Standardized measure at end of year $ 43,069 $ 11,676 $ 9,057
=========== =========== ===========
F-18
42
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Plan and Agreement of Merger by and among Optima Petroleum
Corporation, Optima Energy (U.S.) Corporation, its
wholly-owned subsidiary, and Goodson Exploration Company, NAB
Financial L.L.C., Dexco Energy, Inc., American Explorer,
L.L.C. (incorporated herein by reference to Appendix G of the
Proxy Statement on Schedule 14A filed July 22, 1998).
3.1 Certificate of Incorporation of the Company (incorporated
herein by reference to Exhibit 4.1 to Form 8-K dated September
16, 1998).
3.2 Bylaws of the Company (incorporated herein by reference to
Exhibit 4.2 to Form 8-K dated September 16, 1998).
3.3 Certificate of Domestication of Optima Petroleum Corporation
(incorporated herein by reference to Exhibit 4.4 to Form 8-K
dated September 16, 1998).
4.1 Registration Rights Agreement dated as of September 1, 1998
among Optima Petroleum Corporation, Charles T. Goodson, Alfred
J. Thomas, II, Ralph J. Daigle, Janell B. Thomas, Alfred J.
Thomas, III, Blaine A. Thomas, and Natalie A. Thomas
(incorporated herein by reference to Exhibit 99.1 to Form 8-K
dated September 16, 1998).
4.2 Form of Certificate of Contingent Stock Issue Right
(incorporated herein by reference to Exhibit 4.3 to Form 8-K
dated September 16, 1998).
4.3 Form of Warrant to Purchase Shares of Common Stock of
PetroQuest Energy, Inc. (incorporated herein by reference to
Exhibit 4.1 to Form 8-K dated August 9, 1999)
4.4 Form of Placement Agent Warrant to Purchase Shares of Common
Stock of PetroQuest Energy, Inc. (incorporated herein by
reference to Exhibit 4.2 to Form 8-K dated August 9, 1999)
10.1 1998 Stock Option Plan (incorporated herein by reference to
Exhibit 10.2 to Form 8-K dated September 16, 1998).
10.2 Employment Agreement dated September 1, 1998, between
PetroQuest Energy, Inc. and Alfred J. Thomas, II (incorporated
herein by reference to Exhibit 10.3 to Form 8-K dated
September 16, 1998).
10.3 Employment Agreement dated September 1, 1998, between
PetroQuest Energy, Inc. and Charles T. Goodson (incorporated
herein by reference to Exhibit 10.2 to Form 8-K dated
September 16, 1998).
10.4 Employment Agreement dated September 1, 1998, between
PetroQuest Energy, Inc. and Ralph J. Daigle (incorporated
herein by reference to Exhibit 10.4 to Form 8-K dated
September 16, 1998).
10.5 Employment Agreement dated September 1, 1998, between
PetroQuest Energy, Inc. and Robert R. Brooksher (incorporated
herein by reference to Exhibit 10.5 to Form 8-K dated
September 16, 1998).
10.6 First Amendment to Employment agreement dated September 1,
1998 between PetroQuest Energy, Inc. and Charles T. Goodson
dated July 30, 1999 (incorporated herein by reference to
Exhibit 10.1 to For 8-K dated August 9, 1999)
10.7 First Amendment to Employment Agreement dated September 1,
1998 between PetroQuest Energy, Inc. and Alfred J. Thomas, II
dated July 30, 1999 (incorporated herein by reference to
Exhibit 10.2 to Form 8-K dated August 9, 1999).
10.8 First Amendment to Employment Agreement dated September 1,
1998 between PetroQuest Energy, Inc. and Ralph J. Daigle dated
July 30, 1999 (incorporated herein by reference to Exhibit
10.3 to Form 8-K dated August 9, 1999).
10.9 First amendment to Employment Agreement dated September 1,
1998 between PetroQuest Energy, Inc. and Robert R. Brooksher
dated July 30, 1999 (incorporated herein by reference to
Exhibit 10.4 to Form 8-K dated August 9, 1999)
43
10.10 Credit Agreement dated September 24, 1998, among PetroQuest
Energy, Inc. (a Louisiana corporation), PetroQuest Energy One,
L.L.C. (a Louisiana limited liability company), PetroQuest
Energy, Inc. (a Delaware corporation) and Compass Bank
(Incorporated herein by reference to Exhibit 10.6 to the Form
10-K filed March 31, 1999).
10.11 Termination Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Charles T. Goodson
(Incorporated herein by reference to Exhibit 10.7 to the Form
10-K filed March 31, 1999).
10.12 Termination Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Alfred J. Thomas, II
(Incorporated herein by reference to Exhibit 10.8 to the Form
10-K filed March 31, 1999).
10.13 Termination Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Ralph J. Daigle
(Incorporated herein by reference to Exhibit 10.9 to the Form
10-K filed March 31, 1999).
10.14 Termination Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Robert R. Brooksher
(Incorporated herein by reference to Exhibit 10.10 to the Form
10-K filed March 31, 1999).
10.15 First Amendment to Termination Agreement dated December 16,
1998, between PetroQuest Energy Inc. and Charles T. Goodson
dated July 30, 1999 (incorporated herein by reference to
Exhibit 10.5 to Form 8-K dated August 9, 1999).
10.16 First Amendment to Termination Agreement dated December 16,
1998, between PetroQuest Energy, Inc. and Alfred J. Thomas, II
dated July 30, 1999 (incorporated herein by reference to
Exhibit 10.6 to Form 8-K dated August 9, 1999).
10.17 First Amendment to Termination Agreement dated December 16,
1998, between PetroQuest Energy, Inc. and Ralph J. Daigle
dated July 30, 1999 (incorporated herein by reference to
Exhibit 10.7 to Form 8-K dated August 9, 1999).
10.18 First Amendment to Termination Agreement dated December 16,
1998, between PetroQuest Energy, Inc. and Robert R. Brooksher
dated July 30, 1999 (incorporated herein by reference to
Exhibit 10.8 to Form 8-K dated August 9, 1999).
10.19 Indemnification Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Charles T. Goodson
(Incorporated herein by reference to Exhibit 10.11 to the Form
10-K filed March 31, 1999).
10.20 Indemnification Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Alfred J. Thomas, II
(Incorporated herein by reference to Exhibit 10.12 to the Form
10-K filed March 31, 1999).
10.21 Indemnification Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Ralph J. Daigle
(Incorporated herein by reference to Exhibit 10.13 to the Form
10-K filed March 31, 1999).
10.22 Indemnification Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Robert R. Brooksher
(Incorporated herein by reference to Exhibit 10.14 to the Form
10-K filed March 31, 1999).
10.23 Indemnification Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Daniel G. Fournerat
(Incorporated herein by reference to Exhibit 10.15 to the Form
10-K filed March 31, 1999).
10.24 Indemnification Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and William C. Leuschner
(Incorporated herein by reference to Exhibit 10.16 to the Form
10-K filed March 31, 1999).
10.25 Indemnification Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Robert L. Hodgkinson
(Incorporated herein by reference to Exhibit 10.17 to the Form
10-K filed March 31, 1999).
16.1 Letter from KPMG dated December 18, 1998 (incorporated herein
by reference to Exhibit 16.1 to Form 8-K dated December 21,
1998)
21.1 Subsidiaries of the Company (incorporated herein by reference
to Exhibit 21.1 to the Registration Statement No. 333-55745
filed June 2, 1998)
23.1 Consent of KPMG
23.2 Consent of Arthur Andersen L.L.P.
27.1 Financial data schedule