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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) April 1, 1999
INLAND RESOURCES INC.
(Exact Name of Registrant as Specified in its Charter)
Washington 0-16487 91-1307042
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification No.)
410 17th Street
Suite 700 80202
Denver, Colorado (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (303) 893-0102
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ITEM 5. OTHER EVENTS.
The following risk factors are intended to inform investors of the most
significant factors that should be considered in making an investment in our
securities. If any of the following risks actually occur, our business prospects
could be materially adversely affected, the trading price of our common stock
could decline, and investors might lose all or part of their investment.
OUR ABILITY TO CONTINUE AS A GOING CONCERN
As of December 31, 1998, we had a working capital deficit of $145.0
million and generated a net loss of $23.5 million. Approximately $141.7 million
of the deficit is caused by principal amounts related to our long-term credit
facilities. Based on current conditions, we will not be able to make our
principal payments as scheduled under our long-term credit facilities. Moreover,
at December 31, 1998, we were in default of certain provisions of our credit
agreements and required additional capital outside of cash flow from operations
to fund a portion of our outstanding accounts payable. The short-term liquidity
issues were temporarily mitigated in March 1999 when our senior lenders advanced
$3.25 million which we used to immediately reduce outstanding accounts payable.
We have substantial doubt about our ability to continue as a going concern.
We are currently seeking alternative sources of financing; however, we
cannot be certain that we will be able to obtain financing from another source.
One possible solution that we are currently pursuing is the following
transaction. On January 18, 1999, we entered into a non-binding letter of intent
with Flying J Inc. ("Flying J") and Smith Management LLC ("Smith Management")
regarding the acquisition by us of certain assets from Flying J or one of its
subsidiaries. The purchase price is $80 million in cash and approximately 12.8
million shares of our common stock, par value $0.001 per share, which is equal
to approximately 60% of the shares outstanding after the acquisition. A
restructuring of our capital and debt structure could be required to effectuate
the acquisition. If the acquisition is consummated and we restructure our
capital and debt structure, there could be adverse consequences for our existing
stockholders.
Other possible solutions include obtaining additional modifications to
our credit agreements, selling assets, issuing additional debt or selling
equity. We believe that our lenders will assist in solving our liquidity and
working capital issues, although we cannot be certain that we will be able to
obtain modifications or concessions from our lenders or raise the necessary
capital from other sources in the time frames required.
RECENT ADVERSE MARKET CONDITIONS
Our success will depend on the market prices of oil and gas, which tend
to fluctuate significantly and which have declined significantly in recent
months. Oil prices in particular have reached multi-year lows in some markets in
recent weeks and gas prices for the current winter season have been lower than
in recent winters. Because of these conditions, we incurred substantial net
losses for the 1998 fiscal year. If the current low price environment continues,
our business will be adversely affected.
Low oil and gas prices not only reduce revenues and profits, but also
reduce the quantities of reserves that are commercially recoverable. If the
current oil and gas pricing conditions continue or worsen, we may not be able to
generate enough cash flow from operations to meet our obligations and make
planned capital expenditures.
SIGNIFICANT LEVERAGE AND FINANCING OBLIGATIONS
We have incurred significant indebtedness with substantial debt service
requirements under two credit facilities: one with ING (U.S. ) Capital
Corporation and one with Trust Company of the West. At December 31, 1998, our
debt under the ING Credit Agreement was $67.7 million of borrowings and $2.3
million letter of credit obligations and under the Trust Company Agreement was
$75 million. Stockholder's equity was approximately $7.0 million at December 31,
1998. Substantially all of our assets are pledged to secure the repayment of
these credit facilities. These credit facilities impose substantial restrictions
on our operations. Our significant debt will (1) require the use of a
substantial portion of our operating cash flow to pay interest and principal on
our debt instead of for other corporate purposes, (2) limit our flexibility in
planning for or reacting to changes in market conditions, (3) make us more
vulnerable in the event of an economic downturn, and (4) make us more vulnerable
to increases in interest rates.
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WE WILL HAVE SUBSTANTIAL CAPITAL REQUIREMENTS
We currently have to make a substantial amount of capital expenditures
for the acquisition, exploration and development of oil and gas reserves.
Historically, we have paid for these expenditures with cash from operating
activities, proceeds from debt and equity financings and asset sales. If our
revenues or cash flows decrease, whether as a result of lower oil and gas prices
or for some other reason, we may not have the funds available to replace our
reserves or to maintain production at current levels. If this occurs, it would
result in a decrease in production over time.
ECONOMIC RISKS OF OIL AND GAS OPERATIONS
Our oil and gas operations are subject to economic risks typically
associated with exploration, development and production activities, including
the necessity of significant expenditures to locate and acquire producing
properties and to drill exploratory wells. In conducting exploration and
development activities, (1) the presence of unanticipated pressures or
irregularities in formations, (2) miscalculations or (3) accidents may cause our
exploration, development and production activities to be unsuccessful. This
could result in a total loss of our investment. The cost of drilling, completing
and operating wells is also often uncertain. Our drilling operations may be
curtailed, delayed or canceled as a result of numerous factors, many of which
may be beyond our control. Some of these factors include title problems, weather
conditions, compliance with governmental requirements and shortages or delays in
the delivery of equipment and services.
LACK OF WATER SUPPLY
The success of the Monument Butte field is dependent upon secondary
recovery operations through water flooding, which consists of pumping volumes of
water at controlled pressures and rates through modified wells into the oil
producing areas of the reservoir. Therefore, the availability of a consistent
water supply is critical. Water flooding enables us to maintain higher reservoir
pressures and increase production in other producing wells connected to that
reservoir. The repressurization process may take months or years depending on
the level of prior reservoir depletion. We proved that the geology of certain
portions of the field is suitable to such flooding techniques. We estimate that
peak demand for water will occur in 2003. We believe that we have sufficient
water supplies to handle all water injection at peak field development; however,
a lack of a sufficient amount of water to continue the planned secondary
recovery operations would have a severe adverse effect on us.
VOLATILITY OF CRUDE OIL PRICES AND REFINING MARGINS
Our cash flow from refining operations will be primarily dependent upon
producing and selling quantities of refined products at refinery margins
sufficient to cover fixed and variable expenses. In recent years, crude oil
costs and prices of refined products have fluctuated substantially. These costs
and prices depend on numerous factors, including the demand for crude oil,
gasoline and other refined products. Our crude oil requirements are supplied
from sources that include major oil companies, large independent producers and
smaller local producers.
Crude oil supply contracts are generally relatively short-term
contracts with market-responsive pricing provisions. The prices we receive for
our refined products are affected by local factors such as product pipeline
capacity, local market conditions and the level of operations of out of state
refineries. A large, rapid increase in crude oil prices would adversely affect
our operating margins if the increased cost of raw materials could not be passed
along to our customers. We generally do not hedge a signification portion of our
feedstock purchases or refined product sales.
SEASONALITY
We experience seasonal fluctuations with our gasoline, diesel and
roofing asphalt products. The demand for such products is significantly stronger
during the spring, summer and early fall because of
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(1) increased tourist travel with respect to gasoline and (2) increased
construction activity with respect to our asphalt products.
DRILLING HAZARDS
The oil and gas business involves certain inherent operating hazards
such as (1) well blowouts, (2) cratering, (3) explosions, (4) uncontrollable
flows of oil, gas or well fluids, (5) fires, (6) formations with abnormal
pressures, (7) pollution, (8) releases of toxic gas and (9) other environmental
hazards and risks. Any of these operating hazards could result in substantial
losses to us. In accordance with customary industry practices, we maintain
insurance against some, but not all, of these risks and losses. We are also
required under various operating agreements to (1) maintain certain insurance
coverage on existing wells and all new wells drilled during drilling operations,
and (2) name others as additional insureds under such insurance coverage. The
occurrence of an event that is not fully covered by insurance could have an
adverse impact on our financial condition and results of operations.
ESTIMATES OF OIL AND GAS RESERVES WILL LIKELY CHANGE AS A RESULT OF LOWER OIL
AND GAS PRICES
Our historical proved oil and gas reserve information represents only
estimates. Petroleum engineering is a subjective process of estimating
underground accumulations of oil and gas that cannot be measured in an exact
manner. Estimates of economically recoverable oil and gas reserves and of future
net cash flows necessarily depend upon a number of variable factors and
assumptions, including the following:
o historical production from the area compared with production from other
producing areas;
o the assumed effects of regulations by governmental agencies;
o assumptions concerning future oil and gas prices; and
o assumptions concerning future operating costs, severance and excise taxes,
development costs and workover and remedial costs.
Because all reserve estimates are to some degree subjective, (1) the
quantities of oil and gas that are ultimately recovered, (2) the production and
operating costs incurred, (3) the amount and timing of future development
expenditures and (4) future oil and gas sales prices may differ materially from
those assumed in estimating reserves. Furthermore, different reserve engineers
may make different estimates of reserves and cash flows based on the same
available data. Our actual production, revenues and expenditures with respect to
reserves will likely vary from estimates and the variances may be material.
You should not construe the discounted future net cash flows as the
current market value of the estimated oil and gas reserves attributable to our
properties. As required by the Securities and Exchange Commission (the "SEC"),
the estimated discounted future net cash flows from proved reserves are
generally based on prices and costs as of the date of the estimate. In reality,
future prices and costs may be materially higher or lower. Actual future net
cash flows also will be affected by factors such as (1) the amount and timing of
actual production, (2) supply and demand for oil and gas, (3) increases or
decreases in consumption and (4) changes in governmental regulations or
taxation.
The timing of actual future net cash flows from proved reserves, and
thus their actual present value, will be affected by the timing of both the
production and the incurrence of expenses in connection with development and
production of oil and gas properties. The SEC requires that a 10% discount
factor be used to calculate discounted future net cash flows for reporting
purposes. This 10% discount factor is not necessarily the most appropriate
percentage based on interest rates in effect from time to time and risks
associated with Inland or the oil and gas industry in general.
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GOVERNMENT REGULATIONS AFFECTING THE OIL AND GAS INDUSTRY
Our business is subject to federal, state and local laws and
regulations relating to the exploration for, and the development, production and
transportation of, oil and gas, refining, as well as environmental and safety
matters. Many of these laws and regulations have become stricter in recent
years. Under certain circumstances, the U.S. Minerals Management Service may
require our operations on federal leases to be suspended or terminate. This
could have a material adverse effect on our financial condition and operations.
The requirements imposed by these laws and regulations are frequently changed
and reinterpreted. It is possible that the costs of compliance could increase
the cost of operating offshore drilling equipment or significantly limit
drilling activity.
COMPETITION
The petroleum industry is highly competitive in all phases, including
(1) the refining of crude oil, (2) the marketing of refined petroleum products
and (3) the exploration and production of oil and gas reserves. We currently
compete with four other refineries in the Salt Lake City metropolitan area owned
by Amoco, Chevron, Flying J and Phillips Petroleum. These companies have
substantially greater financial resources, staffs and facilities than ours and
therefore, may be better able than us to withstand volatile industry conditions,
such as shortages or excesses of crude oil or refined products or intense price
competition at the wholesale and retail level.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) None.
(b) None.
(c) Exhibits
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
INLAND RESOURCES INC.
Date: April 1, 1999 By: /s/ Bill I. Pennington
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Bill I. Pennington
Chief Financial Officer
and Vice President