SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2001
[ ] 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)
DELAWARE 72-1440714
(State of Incorporation) (I.R.S. Employer Identification No.)
400 E. KALISTE SALOOM RD., SUITE 3000
LAFAYETTE, LOUISIANA 70508
(Address of principal executive offices) (Zip code)
----------------------------
Registrant's telephone number, including area code: (337) 232-7028
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
As of November 9, 2001, there were 32,524,124 shares of the
Registrant's Common Stock, par value $.001 per share, outstanding.
PETROQUEST ENERGY, INC.
Table of Contents
<Table>
<Caption>
Part I. Financial Information Page No.
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 2001 and December 31, 2000............ 3
Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2001 and
2000................................................ 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2001 and 2000....... 5
Notes to Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....... 8
Item 3. Quantitative and Qualitative Disclosures About Market
Risk................................................ 11
Part II. Other Information
Item 1. Legal Proceedings...................................... 12
Item 2. Changes in Securities and Use of Proceeds.............. 12
Item 3. Defaults upon Senior Securities........................ 12
Item 4. Submission of Matters to a Vote of Security Holders.... 12
Item 5. Other Information...................................... 12
Item 6. Exhibits and Reports on Form 8-K....................... 13
</Table>
2
PETROQUEST ENERGY, INC.
Consolidated Balance Sheets
(Amounts in Thousands)
<Table>
<Caption>
September 30, December 31,
2001 2000
------------ -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,080 $ 7,549
Oil and gas revenue receivable 6,327 5,148
Joint interest billing receivable 5,950 10,151
Other current assets 1,341 1,432
--------- ---------
Total current assets 17,698 24,280
--------- ---------
Oil and gas properties:
Oil and gas properties, full cost method 135,618 85,443
Unevaluated oil and gas properties 14,447 12,431
Accumulated depreciation, depletion and amortization (56,791) (41,530)
--------- ---------
Oil and gas properties, net 93,274 56,344
--------- ---------
Plugging and abandonment escrow 757 495
Other assets, net of accumulated depreciation and amortization
of $2,004 and $558, respectively 1,274 1,953
--------- ---------
Total assets $ 113,003 $ 83,072
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 17,566 $ 18,893
Advances from co-owners 4,941 7,297
Current portion of long-term debt 5,011 7,873
--------- ---------
Total current liabilities 27,518 34,063
Long-term debt 25,702 6,804
Other liabilities 6,458 749
Commitments and contingencies -- --
Stockholders' equity:
Common stock, $.001 par value; authorized 75,000
shares; issued and outstanding 32,524 and 30,256
shares, respectively 33 30
Paid-in capital 63,693 62,290
Other comprehensive income 728 --
Unearned deferred compensation (769) --
Accumulated deficit (10,360) (20,864)
--------- ---------
Total stockholders' equity 53,325 41,456
--------- ---------
Total liabilities and stockholders' equity $ 113,003 $ 83,072
========= =========
</Table>
See accompanying Notes to Consolidated Financial Statements.
3
PETROQUEST ENERGY, INC.
Consolidated Statements of Operations
(unaudited)
(Amounts in Thousands, Except Per Share Data)
<Table>
<Caption>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues:
Oil and gas sales $ 15,611 $ 6,035 $ 42,546 $ 12,937
Interest and other income (143) 97 363 205
-------- -------- -------- --------
15,468 6,132 42,909 13,142
-------- -------- -------- --------
Expenses:
Lease operating expenses 1,984 540 5,140 1,837
Production taxes 317 275 822 626
Depreciation, depletion and amortization 7,223 1,642 15,413 3,988
General and administrative 1,264 652 3,179 1,993
Interest expense 699 4 1,682 13
-------- -------- -------- --------
Income from operations 3,981 3,019 16,673 4,685
Income tax expense 1,473 -- 6,170 --
-------- -------- -------- --------
Net income $ 2,508 $ 3,019 $ 10,503 $ 4,685
======== ======== ======== ========
Earnings per common share:
Basic $ 0.08 $ 0.10 $ 0.33 $ 0.18
======== ======== ======== ========
Diluted $ 0.07 $ 0.10 $ 0.31 $ 0.17
======== ======== ======== ========
Weighted average number of common shares:
Basic 32,471 29,334 31,579 25,835
======== ======== ======== ========
Diluted 34,875 30,799 33,602 27,906
======== ======== ======== ========
</Table>
See accompanying Notes to Consolidated Financial Statements.
4
PETROQUEST ENERGY, INC.
Consolidated Statements of Cash Flows
(unaudited)
(Amounts in Thousands)
<Table>
<Caption>
Nine Months Ended
-----------------
September 30,
-------------
2001 2000
-------- --------
Cash flows from operating activities:
Net income $ 10,503 $ 4,685
Adjustments to reconcile net income to net cash provided by
operating activities:
Deferred tax expense 6,170 --
Depreciation, depletion and amortization 15,413 3,988
Amortization of debt issuance costs 1,294 --
Compensation expense 266 --
Stock based compensation -- 116
Derivative mark to market (13) --
Changes in working capital accounts:
Accounts receivable (1,179) (1,653)
Joint interest billing receivable 4,201 (8,503)
Other assets (958) (548)
Accounts payable and accrued liabilities (627) 15,053
Advances from co-owners (2,356) 3,262
Plugging and abandonment escrow (263) (180)
Other 273 (175)
-------- --------
Net cash provided by operating activities 32,724 16,045
-------- --------
Cash flows from investing activities:
Investment in oil and gas properties (52,893) (22,556)
-------- --------
Net cash used in investing activities (52,893) (22,556)
-------- --------
Cash flows from financing activities:
Exercise of options and warrants 663 1,153
Proceeds from borrowings 25,000 3,100
Repayment of debt (8,963) (6,504)
Issue of common stock -- 11,294
-------- --------
Net cash provided by financing activities 16,700 9,043
-------- --------
Net increase (decrease) in cash and cash equivalents (3,469) 2,532
Cash balance and cash equivalent, beginning of period $ 7,549 $ 3,006
======== ========
Cash balance and cash equivalent, end of period $ 4,080 $ 5,538
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,086 $ 272
======== ========
Income taxes $ -- $ --
======== ========
</Table>
See accompanying Notes to Consolidated Financial Statements.
5
PETROQUEST ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION
The consolidated financial information for the three- and nine-month periods
ended September 30, 2001 and 2000, respectively, have been prepared by the
Company and was not audited by its independent public accountants. In the
opinion of management, all normal and recurring adjustments have been made to
present fairly the financial position, results of operations, and cash flows of
the Company at September 30, 2001 and for all reported periods. Results of
operations for the interim periods presented are not necessarily indicative of
the operating results for the full year or any future periods.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted. These consolidated
financial statements should be read in conjunction with the financial statements
and related notes thereto included in the Company's Annual Report on Form 10-K
for the year ended December 31, 2000.
Unless the context otherwise indicates, any references in this Quarterly Report
on Form 10-Q to the "Company" refer to PetroQuest Energy, Inc. (Delaware) and
its wholly-owned consolidated subsidiaries, PetroQuest Energy, L.L.C. (a single
member Louisiana limited liability company) and PetroQuest Oil & Gas, L.L.C. (a
single member Louisiana limited liability company).
Certain reclassifications of prior year amounts have been made to conform with
the current year presentation.
NOTE 2 EARNINGS PER SHARE
Basic earnings per common share was computed based on the weighted average
number of common shares issued and outstanding during the relevant periods.
Diluted earnings per common share was computed based on the weighted average
number of common shares issued and outstanding plus all potentially dilutive
common shares that would have been outstanding in the relevant periods assuming
the issuance of common shares for stock options and warrants through the
application of the treasury stock method. Options to purchase 80,000 and 180,000
shares of common stock were outstanding during the three- and nine-month periods
ended September 30, 2001, respectively, but were not included in the computation
of diluted earnings per share because the options' exercise prices were greater
than the average market prices of the common shares during the periods. These
options' exercise prices were $7.65 and between $5.89-$7.65, respectively, and
expire in 2011. There were no antidilutive shares for the three- and nine-month
periods ended September 30, 2000.
NOTE 3 LONG-TERM DEBT
On May 11, 2001, PetroQuest Energy, Inc. and its subsidiary PetroQuest Energy,
L.L.C., (the "Borrower") amended its then existing credit agreement with
Hibernia National Bank to increase the $50 million revolving credit facility to
$100 million, increase the borrowing base from $14.3 million to $36 million, and
add lenders to the facility. Outstanding balances on the revolving credit
facility bear interest at either the prime rate or the Eurodollar rate plus a
margin (based on a sliding scale of 1.375% to 2.125% depending on borrowing base
usage). The credit facility matures on June 30, 2004. In addition, the credit
facility allows the Borrower to use up to $10 million of the borrowing base for
letters of credit for fees of 2% per annum. The credit facility is secured by a
mortgage on substantially all of the Borrower's oil and gas properties, a pledge
of the membership interest of PetroQuest Energy, L.L.C. and PetroQuest Energy,
Inc.'s corporate guarantee of the indebtedness of the Borrower. The credit
facility contains covenants and restrictions common to borrowings of this type,
including maintenance of certain financial ratios. The Company was in compliance
with all of its covenants at September 30, 2001.
The borrowing base under this reducing revolving line of credit is based upon
the valuation of the Borrower's mortgaged properties, projected oil and gas
prices, and any other factors deemed relevant by Hibernia National Bank. On July
17, 2001, the borrowing base under the revolving credit facility was increased
from $36 million to $50 million. On July 31, 2001, the Company drew down $7.5
million to pay off the bridge facility with Encap Energy Capital Fund III, L.P.
At September 30, 2001, $30 million of the existing credit facility was
outstanding. Also, a $2.6 million letter of credit was outstanding at September
30, 2001. The borrowing base availability was
6
$17.4 million as of September 30, 2001 and is subject to quarterly reductions
that commenced on October 31, 2001. The borrowing base was reduced to $40
million on October 31, 2001 and will be reduced by $5 million each quarter
thereafter. The Company is currently engaged in a regularly scheduled
semi-annual borrowing base redetermination that will be completed during the
fourth quarter.
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. The property is security for the loan. Interest is payable
at 12% and the lender receives a 2 1/2% overriding royalty interest in the
property. The loan agreement requires 85% of the net cash flow from the property
(assuming production levels of 12.5 MMcf/day) to be dedicated to debt service.
At September 30, 2001, $714,000 remained outstanding under this loan.
NOTE 4 NEW ACCOUNTING STANDARDS
On January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, as amended (SFAS 133), pertaining to the
accounting for derivative instruments and hedging activities. SFAS 133 requires
an entity to recognize all of its derivatives as either assets or liabilities on
its balance sheet and measure those instruments at fair value. If the conditions
specified in SFAS 133 are met, those instruments may be designated as hedges.
Changes in the value of hedge instruments would not impact earnings, except to
the extent that the instrument is not effective as a hedge. At January 1, 2001,
the Company recognized a liability of $609,295 before tax, related to costless
collars; the cumulative catch-up adjustment was recorded as a charge to other
comprehensive income.
The Company recognized $413,000 in oil and gas revenues during the nine
months ended September 30, 2001 as a result of the settlement of costless
collars. As of September 30, 2001, the fair value of the open collar contracts
was an asset of $1,168,000. During the nine months ended September 30, 2001, the
Company recognized $13,000 in other income related to marking-to-market of the
collars. The remaining adjustment to the fair value of the collars was recorded
in other comprehensive income.
As of September 30, 2001, the Company had open costless collar
contracts with third parties whereby minimum floor prices and maximum ceiling
prices are contracted and applied to related contract volumes. These agreements
in effect for the remainder of 2001 are for gas volume of 6,000 MMBtu per day at
weighted average ceiling and floor prices of $8.93 and $4.00, respectively.
Additionally, the Company entered into a costless collar contract for the period
from July 1, 2001 through December 31, 2001 for 750 barrels of oil per day with
a floor price of $26.00 and a ceiling price of $30.90.
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations," which requires recording the fair value of a liability for an
asset retirement obligation in the period incurred. The standard is effective
for fiscal years beginning after June 15, 2002, with earlier application
permitted. The Company has not completed an evaluation of the impact of this new
standard.
NOTE 5 EQUITY
Other Comprehensive Income
The following table presents a recap of the Company's comprehensive
income for the nine-month period ended September 30, 2001(in thousands):
<Table>
Net income $10,503
Cumulative effect of change in accounting principle, net of taxes 14
Change in fair value of derivative instruments, net of taxes 714
-------
Comprehensive income $11,231
</Table>
7
Common Stock Issue Rights
Pursuant to the September 1, 1998 merger and reorganization (the
"Merger"), the Company issued to the original owners (the "Original Owners") of
American Explorer L.L.C. and their respective affiliates, certain of whom
currently serve as officers and directors of the Company, 7,335,001 shares of
the Company's common stock, par value $.001 per share (the "Common Stock"), and
1,667,001 Contingent Stock Issue Rights (the "CSIRs"). The CSIRs entitle the
holders to receive an additional 1,667,001 shares of Common Stock at such time
within three years of the anniversary date of the issuance of the CSIRs as the
trading price for the Common Stock closes at $5.00 or higher for 20 consecutive
trading days. On May 3, 2001 the Common Stock closed higher than $5.00 for the
twentieth consecutive trading day, and 1,667,001 shares of Common Stock were
issued under the terms of the CSIRs.
In April 2001, the Original Owners of American Explorer L.L.C. entered into an
agreement with an officer of the Company whereby the Original Owners granted to
the officer an option to acquire, at a fixed price, certain of the original
shares the Original Owners were issued in the Merger. As the fixed price of the
April grant was below the market price as of the date of grant, the Company will
recognize non-cash compensation expense over the three-year vesting period of
the option. In addition, the Original Owners granted to the officer an interest
in a portion of the Common Stock issuable pursuant to the CSIRs, if any, that
might be issued. This agreement is similar to agreements previously entered into
with two other officers of the Company. Non-cash compensation expense will be
recognized for the Common Stock issuable pursuant to the CSIRs granted to the
three officers over the three-year vesting period based on the fair value of the
Common Stock issuable pursuant to the CSIRs in May 2001, when the Common Stock
issuable pursuant to the CSIRs was issued to the Original Owners. The Company
has recorded the effects of the transactions as deferred compensation until
fully amortized. The Company recorded non-cash compensation expense of $86,000
and $266,000 during the quarter and nine months ended September 30, 2001,
respectively, which is included in general and administrative expense.
ITEM 2.
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
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, 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. At September 30, 2001, the Company operated
approximately 95% of all of its proved reserves. For the nine months ended
September 30, 2001, approximately 38% of the Company's equivalent production was
oil and 62% was natural gas.
8
RESULTS OF OPERATIONS
The following table (unaudited) sets forth certain operating information with
respect to our oil and gas operations for the periods noted:
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
2001 2000 2001 2000
---- ---- ---- ----
Production:
Oil (Bbls) 235,531 42,274 600,073 110,615
Gas (Mcf) 2,830,053 1,044,625 5,875,142 2,704,730
Total Production (Mcfe) 4,243,239 1,298,269 9,475,580 3,368,420
Sales:
Total oil sales $ 6,113,127 $ 1,474,966 $16,073,126 $ 3,301,896
Total gas sales 9,497,928 4,559,883 26,472,954 9,635,138
Average sales prices:
Oil (per Bbl) $ 25.95 $ 34.89 $ 26.79 $ 29.85
Gas (per Mcf) 3.36 4.37 4.51 3.56
Per Mcfe 3.68 4.65 4.49 3.84
</Table>
Net income totaled $2,508,000 and $3,019,000 for the quarters ended September
30, 2001 and 2000, respectively. Net income totaled $10,503,000 and $4,685,000
for the nine-month periods ended September 30, 2001 and 2000, respectively. The
positive results are attributable to the following components:
PRODUCTION. Oil production in 2001 increased 457% and 442% over the third
quarter and nine months ended September 30, 2000, respectively. Natural gas
production in 2001 increased 171% and 117% over the third quarter and nine
months ended September 30, 2000, respectively. On a Mcfe basis, production for
the third quarter and nine months ended September 30, 2001 increased 227% and
181%, respectively, over the same periods in 2000. The increase in 2001
production volumes, as compared to 2000, was due primarily to fifteen new
offshore wells that were not producing in 2000.
PRICES. Average oil prices per Bbl for the third quarter and nine months ended
September 30, 2001 were $25.95 and $26.79, respectively, as compared to $34.89
and $29.85 for the same periods in 2000. Average gas prices per Mcf were $3.36
and $4.51 for the third quarter and nine months ended September 30, 2001,
respectively, as compared to $4.37 and $3.56 for the same periods in 2000.
Stated on a Mcfe basis, unit prices received during the third quarter and first
nine months of 2001 were 21% lower and 17% higher, respectively, than the prices
received during the comparable 2000 periods.
REVENUE. Oil and gas sales during the third quarter ended September 30, 2001
increased 159% to $15,611,000, as compared to third quarter 2000 revenues of
$6,035,000. For the nine months ended September 30, 2001, oil and gas sales
increased 229% to $42,546,000 as compared to 2000 revenues of $12,937,000. The
growth in production volumes resulted in significant increases in revenue.
EXPENSES. Lease operating expenses for the third quarter of 2001 increased to
$1,984,000 from $540,000 during the third quarter of 2000. For the nine months
ended September 30, 2001, lease operating expenses increased to $5,140,000 from
$1,837,000 during the nine months ended September 30, 2000. The increases for
the third quarter and nine months ended September 30, 2001, as compared to the
same periods in 2000 are primarily due to the 227% and 181% increases in
production on a Mcfe basis, respectively. On a Mcfe basis, lease operating
expenses for the third quarter increased from $0.42 per Mcfe in 2000 to $0.47 in
2001. For the nine months ended September 30, lease operating expenses per Mcfe
decreased from $0.55 in 2000 to $0.54 in 2001.
General and administrative expenses during the third quarter of 2001 totaled
$1,264,000 as compared to expenses of $652,000 during the 2000 quarter, net of
amounts capitalized of $688,000 and $327,000, respectively. General and
administrative expenses during the nine-month period ended September 30, 2001
increased to $3,179,000 as
9
compared to expenses of $1,993,000 during the 2000 period, net of amounts
capitalized of $1,924,000 and $1,300,000, respectively. The increases in general
and administrative expenses are primarily due to an 80% increase in staffing
levels related to the generation of prospects, exploration for oil and gas
reserves and operation of properties. Additionally, we have recognized $86,000
and $266,000 of non-cash compensation expense during the quarter and nine months
ended September 30, 2001, respectively. Subsequent to September 30, 2001, we
incurred a one-time, non-cash charge of approximately $400,000 due to the
modification of the terms of certain stock option agreements.
Depreciation, depletion and amortization ("DD&A") expense for the three- and
nine-month periods ended September 30, 2001 increased 340% and 286%,
respectively, from the 2000 periods. The rise in DD&A is primarily due to
increased production from bringing new wells on-line since the first quarter of
2000. On a Mcfe basis, which reflects the changes in production, the DD&A rate
for the third quarter of 2001 was $1.70 per Mcfe as compared to $1.26 per Mcfe
for the same period in 2000. The DD&A rate for the nine months ended September
30, 2001 was $1.63 per Mcfe compared to $1.18 per Mcfe for the same period in
2000. The increase in 2001 as compared to 2000 is due primarily to the
significant capital and future development costs related to our offshore
projects.
Interest expense, net of amounts capitalized on unevaluated prospects, increased
$695,000 and $1,669,000 during the third quarter and nine months ended September
30, 2001, respectively, as compared to same periods in 2000. The increases are
the result of an increase in debt levels at the end of 2000 and into 2001
resulting from property acquisitions and a higher capital budget, which has been
partially funded by borrowings. We capitalized $215,000 and $63,000 of interest
during the three months ended September 30, 2001 and 2000, respectively, and
$823,000 and $292,000 during the nine months ended September 30, 2001 and 2000,
respectively.
Income tax expense of $1,473,000 and $6,170,000 was recognized during the third
quarter and nine months ended September 30, 2001, respectively, as compared to
no provision being recorded in the same periods of 2000. The increases are the
result of fully reversing the valuation allowance on our deferred tax asset
during 2000. We provide for income taxes at a statutory rate of 37%.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our exploration and development activities to date principally
through cash flow from operations, bank borrowings, and private placements of
Common Stock. Net cash flow from operations before working capital changes
during the nine-month period increased from $8,789,000 in 2000 to $33,633,000 in
2001. This increase resulted from better natural gas prices and increased
production as the result of successful exploration and development activities.
However, working capital (before considering debt) decreased from $(1.9) million
at December 31, 2000 to $(4.8) million at September 30, 2001. This was caused
primarily by significant capital expenditures related to our active exploration
and development during the first nine months of 2001.
On May 11, 2001, PetroQuest Energy, Inc. and our subsidiary PetroQuest Energy,
L.L.C., (the "Borrower") amended our existing credit agreement with Hibernia
National Bank to increase the existing $50 million revolving credit facility to
$100 million, increase the borrowing base from $14.3 million to $36 million, and
add lenders to the facility. Outstanding balances on the revolving credit
facility bear interest at either the prime rate or the Eurodollar rate plus a
margin (based on a sliding scale of 1.375% to 2.125% depending on borrowing base
usage). The credit facility matures on June 30, 2004. In addition, the credit
facility allows the Borrower to use up to $10 million of the borrowing base for
letters of credit for fees of 2% per annum. The credit facility is secured by a
mortgage on substantially all of the Borrower's oil and gas properties, a pledge
of the membership interest of PetroQuest Energy, L.L.C. and PetroQuest Energy,
Inc.'s corporate guarantee of the indebtedness of the Borrower. The credit
facility contains covenants and restrictions common to borrowings of this type,
including maintenance of certain financial ratios. We were in compliance with
all of its covenants at September 30, 2001.
The borrowing base under this reducing revolving line of credit is based upon
the valuation of the Borrower's mortgaged properties, projected oil and gas
prices, and any other factors deemed relevant by Hibernia National Bank. On July
17, 2001, the borrowing base under the revolving credit facility was increased
from $36 million to $50 million. On July 31, 2001, we drew down $7.5 million to
pay off the bridge facility with Encap Energy Capital Fund III, L.P. At
September 30, 2001, $30 million of the existing credit facility was outstanding.
Also, a $2.6 million letter of credit was outstanding at September 30, 2001. The
borrowing base availability was $17.4 million as of September 30, 2001 and is
subject to quarterly reductions that commenced on October 31, 2001. The
borrowing was reduced to $40 million on October 31, 2001 and will be reduced by
$5 million each quarter thereafter. We are
10
currently engaged in a regularly scheduled semi-annual borrowing base
redetermination that will be completed during the fourth quarter.
On April 21, 1999, we entered into a loan agreement for non-recourse financing
to fund completion, flow line and facility costs of our High Island Block 494
property. The property is security for the loan. Interest is payable at 12% and
the lender receives a 2 1/2% overriding royalty interest in the property. The
loan agreement requires 85% of the net cash flow from the property (assuming
production levels of 12.5 MMcf/day) to be dedicated to debt service. At
September 30, 2001, $714,000 remains outstanding under this loan.
We have budgeted for capital expenditures for 2001 and have an exploration and
development program for the year 2001 which will require significant capital.
Our budget for direct capital for new projects in 2001 is approximately
$67,300,000 of which approximately $49,444,000 has been incurred as of September
30, 2001. Our management believes the cash flows from operations and additional
borrowing capacity will be sufficient in the near term to fund exploration and
development activities. In the future, our exploration activities could require
additional financings, which may include sales of additional equity or debt
securities, additional bank borrowings, or joint venture arrangements with
industry partners. There can be no assurances that such additional financings
will be available on acceptable terms, if at all. If we are unable to obtain
additional financing, we could be forced to delay or even abandon some of our
exploration and development opportunities.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Form 10-Q 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 10-Q are
forward-looking statements. These forward-looking statements are subject to
certain risks, trends and uncertainties that could cause actual results to
differ materially from those projected. Among those risks, trends and
uncertainties are the Company's estimate of the sufficiency of its existing
capital sources, its ability to raise additional capital to fund cash
requirements for future operations, the uncertainties involved in estimating
quantities of proved oil and natural gas reserves and in projecting future rates
of production, the timing of development expenditures and the operating hazards
attendant to the oil and gas business. In particular, careful consideration
should be given to cautionary statements made in the various reports the Company
has filed with the Securities and Exchange Commission. The Company undertakes no
duty to update or revise these forward-looking statements.
When used in the Form 10-Q, 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" and elsewhere in this Form
10-Q.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company experiences market risks primarily in two areas: interest rates and
commodity prices. The Company believes that its business operations are not
exposed to significant market risks relating to foreign currency exchange 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 the remaining three
months of 2001, a 10% decline in the prices the Company receives for its crude
oil and natural gas production would have an approximate $1.1 million impact on
the Company's revenues.
In a typical hedge transaction, the Company will have the right to receive from
the counterparts to the hedge, the excess of the fixed price specified in the
hedge over a floating price based on a market index, multiplied by the quantity
hedged. If the floating price exceeds the fixed price, the Company is required
to pay the counterparts this difference multiplied by the quantity hedged. The
Company is required to pay the difference between the floating price and the
fixed price (when the floating price exceeds the fixed price) regardless of
whether the Company has sufficient production to cover the quantities specified
in the hedge. Significant reductions in production at times
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when the floating price exceeds the fixed price could require the Company to
make payments under the hedge agreements even though such payments are not
offset by sales of production. Hedging will also prevent the Company from
receiving the full advantage of increases in oil or gas prices above the fixed
amount specified in the hedge. As of September 30, 2001, the Company had open
collar contracts with third parties whereby minimum floor prices and maximum
ceiling prices are contracted and applied to related contract volumes. These
agreements in effect for the remainder of 2001 are for gas volume of 6,000 MMBtu
per day at weighted average ceiling and floor prices of $8.93 and $4.00,
respectively. Additionally, the Company entered into a costless collar contract
for the period from July 1, 2001 to December 31, 2001 for 750 barrels of oil per
day with a floor price of $26.00 and ceiling price of $30.90. At September 30,
2001, the Company recognized an asset of $1,168,000 related to these costless
collars.
The Company also evaluated the potential effect that reasonably possible near
term changes may have on the Company's credit facility. Debt outstanding under
the facility is subject to a floating interest rate and represents approximately
98% of the Company's total debt as of September 30, 2001. Based upon an
analysis, utilizing the actual interest rate in effect and balances outstanding
as of September 30, 2001 and assuming a 10% increase in interest rates and no
changes in the amount of debt outstanding, the potential effect on interest
expense for the remaining three months of 2001 is approximately $41,000.
PART II
Item 1. LEGAL PROCEEDINGS
NONE.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
NONE.
Item 3. DEFAULTS UPON SENIOR SECURITIES
NONE.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
Item 5. OTHER INFORMATION
NONE.
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
NONE.
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K on July 18, 2001
relating to the Company's second quarter results.
The Company filed a report on form 8-K on July 30, 2001
relating to the filing of a $100 million universal shelf
registration statement with the Securities and Exchange
Commission.
The Company filed a report on Form 8-K on September 5, 2001
relating to officer appointments.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PETROQUEST ENERGY, INC.
Date: November 14, 2001 By: /s/ Michael O. Aldridge
---------------------- ---------------------------------
Michael O. Aldridge
Senior Vice President, Chief
Financial Officer and Treasurer
(Authorized Officer and Principal
Financial and Accounting Officer)
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