U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
Commission File No. 0-25386
FX ENERGY, INC.
(Exact name of registrant as specified in its charter)
NEVADA 87-0504461
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
3006 Highland Drive, Suite 206
Salt Lake City, Utah 84106
(Address of principal executive offices)
(801) 486-5555
(Registrant's telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 of 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 [ ]
The number of shares of $0.001 par value common stock outstanding as of May 11,
2001, was 17,680,235.
FX ENERGY, INC. AND SUBSIDIARIES
Form 10-Q for the three months ended March 31, 2001
TABLE OF CONTENTS
Item Page
- --------- ------
Part I. Financial Information
1. Consolidated Balance Sheets.................................... 3
1. Consolidated Statements of Operations.......................... 5
1. Consolidated Statements of Cash Flows.......................... 6
1. Notes to Consolidated Financial Statements..................... 7
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 10
3. Qualitative and Quantitative Disclosures About Market Risk..... 19
Part II. Other Information
6. Exhibits and Reports on Form 8-K............................... 20
-- Signatures..................................................... 20
2
PART I.
ITEM 1. FINANCIAL STATEMENTS
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
March December
31, 2001 31, 2000
----------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 4,028,608 $ 1,079,038
Investment in marketable debt securities............................ -- 1,281,993
Accounts receivable:
Accrued oil sales................................................. 275,768 250,954
Interest receivable............................................... 6,524 31,935
Joint interest owners and others.................................. 81,152 143,763
Inventory........................................................... 86,814 87,920
Other current assets................................................ 56,715 80,313
----------------- ------------------
Total current assets.............................................. 4,535,581 2,955,916
----------------- ------------------
Property and equipment, at cost:
Oil and gas properties (successful efforts method):
Proved............................................................ 4,602,737 4,318,056
Unproved.......................................................... 3,340,530 3,031,863
Other property and equipment...................................... 3,469,813 3,333,791
----------------- ------------------
Gross property and equipment.................................... 11,413,080 10,683,710
Less accumulated depreciation, depletion and amortization......... (3,567,280) (3,428,649)
----------------- ------------------
Net property and equipment.................................... 7,845,800 7,255,061
----------------- ------------------
Other assets:
Certificates of deposit............................................. 356,500 356,500
Other............................................................... 2,789 2,789
----------------- ------------------
Total other assets................................................ 359,289 359,289
----------------- ------------------
Total assets.......................................................... $ 12,740,670 $ 10,570,266
================= ==================
-- Continued --
The accompanying notes are an integral part of the
consolidated financial statements.
3
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
-- Continued --
March December
31, 2001 31, 2000
----------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 532,556 $ 598,926
Accrued liabilities................................................. 3,447,026 1,740,604
----------------- ------------------
Total current liabilities......................................... 3,979,582 2,339,530
----------------- ------------------
Long-term debt:
Notes payable (Note 3).............................................. 2,295,757 --
----------------- ------------------
Total liabilities................................................. 6,275,339 2,339,530
----------------- ------------------
Stockholders' equity:
Common stock, $.001 par value, 100,000,000 shares
authorized, 17,680,235 outstanding as of
March 31, 2001 and December 31, 2000.............................. 17,914 17,914
Treasury stock, at cost, 233,340 shares............................. (773,055) (773,055)
Note receivable from option exercise................................ (156,000) (156,000)
Deferred compensation from stock option modifications............... (521,991) (913,485)
Additional paid-in capital.......................................... 49,655,675 49,655,675
Accumulated deficit................................................. (41,757,212) (39,600,313)
----------------- ------------------
Total stockholders' equity........................................ 6,465,331 8,230,736
----------------- ------------------
Total liabilities and stockholders' equity............................ $ 12,740,670 $ 10,570,266
================= ==================
The accompanying notes are an integral part of the
consolidated financial statements.
4
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended March 31,
------------------------------------
2001 2000
----------------- ------------------
Revenues:
Oil and gas sales................................................... $ 597,067 $ 596,630
Oilfield services................................................... 43,538 73,738
----------------- ------------------
Total revenues.................................................... 640,605 670,368
----------------- ------------------
Operating costs and expenses:
Lease operating expenses............................................ 300,265 284,992
Production taxes.................................................... 5,428 6,946
Geological and geophysical costs.................................... 1,201,480 484,409
Exploratory dry hole costs.......................................... 1,602 --
Oilfield services................................................... 115,830 75,265
Depreciation, depletion and amortization............................ 138,633 87,068
General and administrative (G&A).................................... 681,896 596,967
Amortization of deferred compensation (G&A)......................... 391,494 --
----------------- ------------------
Total operating costs and expenses................................ 2,836,628 1,535,647
----------------- ------------------
Operating loss........................................................ (2,196,023) (865,279)
----------------- ------------------
Other income (expense):
Interest and other income........................................... 52,384 134,254
Interest expense.................................................... (13,260) (308)
Impairment of notes receivable from officers........................ -- (4,859)
----------------- ------------------
Total other income................................................ 39,124 129,087
----------------- ------------------
Net loss.............................................................. $ (2,156,899) $ (736,192)
================= ==================
Basic and diluted net loss per common share........................... $ (.12) $ (.05)
================= ==================
Basic and diluted weighted average number
of shares outstanding............................................ 17,680,235 14,849,003
================= ==================
The accompanying notes are an integral part of the
consolidated financial statements.
5
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended March 31,
------------------------------------
2001 2000
----------------- ------------------
Cash flows from operating activities:
Net loss........................................................... $ (2,156,899) $ (736,192)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation, depletion and amortization....................... 138,633 87,068
Impairment of notes receivable from officers................... -- 4,859
Interest income on officer loans............................... -- (34,026)
Amortization of deferred compensation (G&A).................... 391,494 --
Exploratory dry hole costs..................................... 1,602 --
Increase (decrease) from changes in working capital items:
Accounts receivable.............................................. 63,208 115,709
Advances to oil and gas ventures................................. -- (13,192)
Inventory........................................................ 1,106 (4,483)
Other current assets............................................. 23,598 19,112
Accounts payable and accrued liabilities......................... 917,622 (447,223)
----------------- ------------------
Net cash used in operating activities.......................... (619,636) (1,008,368)
----------------- ------------------
Cash flows from investing activities:
Additions to oil and gas properties................................ (101,950) (382,475)
Additions to other property and equipment.......................... (110,837) (131,185)
Purchase of marketable debt securities............................. -- (1,384,905)
Proceeds from maturing marketable debt securities.................. 1,281,993 4,542,000
----------------- ------------------
Net cash provided by investing activities........................ 1,069,206 2,643,435
----------------- ------------------
Cash flows from financing activities:
Proceeds from notes payable........................................ 2,500,000 --
----------------- ------------------
Net cash provided by financing activities........................ 2,500,000 --
----------------- ------------------
Increase in cash and cash equivalents................................ 2,949,570 1,635,067
Cash and cash equivalents at beginning of period..................... 1,079,038 1,619,237
----------------- ------------------
Cash and cash equivalents at end of period........................... $ 4,028,608 $ 3,254,304
================= ==================
The accompanying notes are an integral part of the
consolidated financial statements.
6
FX ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
Note 1: Basis of Presentation
The interim financial data are unaudited; however, in the opinion of
the management of FX Energy, Inc. and Subsidiaries ("FX Energy" or the
"Company"), the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim periods. The interim financial statements should be read in conjunction
with FX Energy's annual report on Form 10-K for the year ended December 31,
2000, including the financial statements and notes thereto.
The consolidated financial statements include the accounts of FX Energy
and its wholly-owned subsidiaries and FX Energy's undivided interests in Poland.
All significant inter-company accounts and transactions have been eliminated in
consolidation. At March 31, 2001, FX Energy owned 100% of the voting stock of
all of its subsidiaries.
Note 2: Income Taxes
FX Energy recognized no income tax benefit from the losses generated in
the first quarter of 2001 and the first quarter of 2000.
Note 3: Financing with Rolls Royce Power Ventures
On March 9, 2001, FX Energy signed a $5.0 million, 9.5% loan agreement
and gas purchase option agreement with Rolls Royce Power Ventures ("RRPV"). The
proceeds from the loan are to be used for exploration and development of
additional gas reserves in Poland. In consideration for the loan, FX Energy
granted RRPV an option to purchase up to 17 Mmcf of gas per day from FX Energy's
properties in Poland, subject to availability. FX Energy's gas production will
be delivered to a Polish Oil and Gas Company ("POGC") pipeline connection and
RRPV will be responsible for transportation costs. RRPV will be required to take
at least 80% of the gas it agrees to purchase. FX Energy may sell to others gas
it produces in excess of the reserves required to supply the RRPV agreement. If
RRPV elects to purchase gas from FX Energy, the loan will be repayable over
eight years. If RRPV elects not to buy FX Energy's gas, the loan will be
repayable in March 2003 unless converted to restricted common stock at $5.00 per
share, the market value of FX Energy's common stock at the time the terms with
RRPV were finalized, subject to adjustment under certain circumstances. As
security for the loan, FX Energy will grant RRPV a lien on a portion of the
Company's gas reserves in Poland.
As of March 31, 2001, FX Energy had received $2.5 million from RRPV
under this arrangement. The loan is interest free for the first year. For
financial reporting purposes, FX Energy imputed interest expense for the first
year at 9.5%, or $216,895, to be amortized ratably over the one-year interest
free period and recorded an option premium of $216,895 pertaining to granting
RRPV an option to purchase gas from FX Energy's properties in Poland, to be
amortized ratably to other income over the one-year option period.
7
Note 4: Net Loss Per Share
Basic earnings per share is computed by dividing the net loss by the
weighted average number of common shares outstanding. Diluted earnings per share
is computed by dividing the net loss by the sum of the weighted average number
of common shares and the effect of dilutive unexercised stock options and
warrants and convertible preferred stock. Options and warrants to purchase
4,562,417 shares of common stock at prices ranging from $1.50 to $10.25 per
share with a weighted average of $5.16 per share were outstanding at March 31,
2001. Options and warrants to purchase 4,146,167 shares of common stock at
prices ranging from $1.50 to $10.25 per share with a weighted average price of
$5.25 per share were outstanding at March 31, 2000. No options or warrants were
included in the computation of diluted earnings per share for the periods ended
March 31, 2001 and 2000, because the effect would have been antidilutive.
Note 5: Business Segment Information
FX Energy operates within two segments of the oil and gas industry: the
exploration and production segment ("E&P") and the oilfield services segment.
Identifiable net property and equipment are reported by business segment for
management reporting and reportable business segment disclosure purposes.
Current assets, other assets, current liabilities and long-term debt are not
allocated to business segments for management reporting or business segment
disclosure purposes. Reportable business segment information as of March 31,
2001 and for the three months ended March 31, 2001 follows:
Non-
Oilfield Segmented
E&P Services Items (1) Total
--------------- --------------- --------------- ---------------
Business segment information:
Revenues................................... $ 584,681 $ 43,538 $ -- $ 628,219
Net loss................................... (970,102) (142,324) (1,044,473) (2,156,899)
Identifiable net property and
equipment................................ 6,619,046 1,107,277 119,477 7,845,800
- -------------------
(1) Net loss reconciling items include $10,208 of corporate DD&A, $681,896 of
general and administrative expenses, $391,493 of amortization of deferred
compensation (G&A) and $39,124 of other income and expense. Identifiable
net property and equipment includes $119,477 of corporate office equipment,
hardware and software.
8
Reportable business segment information as of March 31, 2000 and for
the three months ended March 31, 2000 follows:
Non-
Oilfield Segmented
E&P Services Items (1) Total
--------------- --------------- --------------- ---------------
Business segment information:
Revenues.................................. $ 596,630 $ 73,738 $ -- $ 670,368
Net loss.................................. (195,659) (52,713) (487,820) (736,192)
Identifiable net property and
Equipment............................... 2,365,128 630,418 155,128 3,150,674
- --------------------
(1) Net loss reconciling items include $19,940 of corporate DD&A, $596,967 of
general and administrative expenses and $129,087 of other income and
expense. Identifiable net property and equipment includes $155,128 of
corporate office equipment, hardware and software.
Note 6: Supplemental non-cash activity disclosure:
Non-cash investing activities not reflected in the consolidated
statements of cash flows include additions to oil and gas properties of $493,000
and $121,544 acquired with accounts payable and accrued liabilities as of March
31, 2001 and 2000, respectively, and additions to other property and equipment
of $25,185 and $53,960 acquired with accounts payable as of March 31 2001 and
2000, respectively.
Note 7: Subsequent Events
Stock Option Extensions
On April 5, 2001, FX Energy extended the term of options to purchase
125,000 shares of the Company's common stock that were to expire during 2001 for
a period of two years, with a one-year vesting period. FX Energy incurred
deferred compensation cost of $218,750, including $175,000 covering the
intrinsic value applicable to 100,000 options held by an executive and $43,750
covering the intrinsic value applicable to 25,000 options held by an
nonexecutive employee, to be amortized to expense over the one-year vesting
period.
9
PART I.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Information May Prove Inaccurate
This report contains statements about the future, sometimes referred to
as "forward-looking" statements. Forward-looking statements are typically
identified by the use of the words "believe," "may," "will," "should," "expect,"
"anticipate," "estimate," "project," "propose," "plan," "intend" and similar
words and expressions. We intend that the forward-looking statements will be
covered by the safe harbor provisions for forward-looking statements contained
in Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Statements that describe our future strategic plans, goals
or objectives are also forward-looking statements. Readers of this report are
cautioned that any forward-looking statements, including those regarding us or
our management's current beliefs, expectations, anticipations, estimations,
projections, proposals, plans or intentions, are not guarantees of future
performance or results of events and involve risks and uncertainties, such as: o
the future results of drilling individual wells and other exploration and
development activities; o future variations in well performance as compared to
initial test data; o future events that may result in the need for additional
capital; o the prices at which we may be able to sell oil or gas; o fluctuations
in prevailing prices for oil and gas; o uncertainties of certain terms to be
determined in the future relating to our oil and gas interests, including
exploitation fees, royalty rates and other matters; o future drilling and other
exploration schedules and sequences for various wells and other activities; o
uncertainties regarding future political, economic, regulatory, fiscal, taxation
and other policies in Poland; o the cost of additional capital that we may
require and possible related restrictions on our future operating or financing
flexibility;
o our future ability to attract strategic partners to share the costs of
exploration, exploitation, development and acquisition activities; and
o future plans and the financial and technical resources of strategic
partners.
The forward-looking information is based on present circumstances and
on our predictions respecting events that have not occurred, which may not occur
or which may occur with different consequences from those now assumed or
anticipated. Actual events or results may differ materially from those discussed
in the forward-looking statements as a result of various factors, including the
risk factors detailed in this report. The forward-looking statements included in
this report are made only as of the date of this report.
10
Introduction
We are an independent energy company engaged in the exploration,
development and production of oil and gas from properties located in the
Republic of Poland and the United States. In Poland, we produce gas and have
exploration projects with Apache Corporation ("Apache") and POGC. In the United
States, we produce oil from fields in Montana and Nevada and have an oilfield
services company in northern Montana.
We conduct substantially all of our production, exploration and
development activities jointly with others and, accordingly, recorded amounts
for our activities in Poland and the United States reflect only our
proportionate interest in these activities.
Our results of operations may vary significantly from period to period
based on the factors discussed above and on other factors such as our
exploratory and development drilling success. Therefore, the results of any one
period may not be indicative of future results.
We follow the successful efforts method of accounting for our oil and
gas properties. Under this method of accounting, all property acquisition costs
and costs of exploratory and development wells are capitalized when incurred,
pending determination of whether the well has found proved reserves. If an
exploratory well has not found proved reserves, these costs plus the costs of
drilling the well are expensed. The costs of development wells are capitalized,
whether productive or nonproductive. Geological and geophysical costs on
exploratory prospects and the costs of carrying and retaining unproved
properties are expensed as incurred. An impairment allowance is provided to the
extent that capitalized costs of unproved properties, on a property-by-property
basis, are considered not to be realizable. An impairment loss is recorded if
the net capitalized costs of proved oil and gas properties exceed the aggregate
undiscounted future net cash flows determined on a property-by-property basis.
The impairment loss recognized equals the excess of net capitalized costs over
the related fair value, determined on a property-by-property basis. As a result
of the foregoing, our results of operations for any particular period may not be
indicative of the results that could be expected over longer periods.
We have reviewed all recently issued, but not yet adopted, accounting
standards in order to determine their effects, if any, on our results of
operations or financial position, including FASB No. 133 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." Based on that review, we
believe that none of these pronouncements will have a significant effect on
current or future earnings or operations.
Results of Operations by Business Segment
We operate within two segments of the oil and gas industry: the
exploration and production segment, or E&P, and the oilfield services segment.
Depreciation, depletion and amortization costs, or DD&A, and general and
administrative costs, or G&A, directly associated with their respective segments
are detailed within the following discussion. Amortization of deferred
compensation (G&A), interest income, other income, officer loan impairment and
other costs, which are not allocated to individual operating segments for
management or segment reporting purposes, are discussed in their entirety
following the segment discussion. A comparison of the results of operations by
business segment and the information regarding nonsegmented items for three
months ended March 31, 2001 and 2000 follows:
11
Quarter ended March 31, 2001 compared to the same period of 2000
Exploration and Production Segment
FX Energy's oil and gas revenues are comprised of oil production in the
United States and gas production in Poland. A summary of the percentage change
in oil and gas revenues, average prices and production for first quarter of 2001
and 2000 as compared to their respective prior year's period are set forth on
the following table:
Quarter Ended March 31,
-------------------------------------------------------------
2001 2000
----------------------------- ----------------------------
Oil Gas Oil Gas
-------------- -------------- ------------- --------------
Revenues...................................... $ 535,000 $ 62,000 $ 597,000 $ --
Percent change versus prior year's quarter.. -10% -- +155% --
Average price per (Bbl or Mcf)................ $ 22.85 $ 1.58 (1) $ 24.94 $ --
Percent change versus prior year's quarter.. -8% -- +184% --
Production volumes (Bbls or Mcf).............. 23,395 39,570 23,924 --
Percent change versus prior year's quarter.. -2% -- -10% --
- --------------------
(1) The contract price prior to adjusting for Btu content was $2.02 per Mcf.
Oil Revenues. Oil revenues were $535,000 during the first quarter of
2001, a decrease of $62,000 as compared to $597,000 during the same period of
2000. During the first quarter of 2001, our oil revenues were negatively
affected by lower oil prices and lower production rates attributable to the
natural production declines of our producing properties, as compared to the same
period of 2000. During the first quarter of 2000, our oil revenues were
positively affected by higher oil prices and negatively affected by lower
production rates attributable to the natural production declines of our
producing properties, as compared to the same period of 1999.
Gas Revenues. Gas revenues were $62,000 during the first quarter of
2001, as compared to no gas revenues during the same period of 2000. The Kleka
11, our first producing well in Poland, began producing in late February 2001.
We are currently selling gas produced by the Kleka 11 to POGC under a five-year
contract based on U.S. dollar pricing that may be terminated by us with a 90-day
written notice.
Lease Operating Costs. Our lease operating costs are composed of normal
recurring lease operating expenses and production taxes. Lease operating costs
were $306,000 during the first quarter of 2001, an increase of $14,000 as
compared to $292,000 during the same period of 2000.
Lease operating expense was $300,000 during the first quarter of 2001,
an increase of $15,000 as compared to $285,000 during the same period of 2000.
Lease operating expense incurred during the first quarter of 2001 includes
approximately $6,000, or an estimated $0.16 per Mcf produced, associated solely
with the Kleka 11 well that began producing in Poland during February 2001.
There were no lease operating expenses in Poland during same period of 2000.
During the first quarter of 2001, we incurred $294,000 of lease operating
expenses in the United
12
States, relatively unchanged as compared to $285,000 during the same period of
2000. During the first quarter of 2001 in the United States, lifting costs were
$12.56 per barrel, an increase of $0.65, as compared to $11.91 during the same
period of 2000. During the first quarter of 2000, our lease operating expense in
the United States increased as compared to the same period of 1999 as a result
of various repair and maintenance items that were previously deferred due to low
oil prices.
Production taxes are solely attributable to our United States oil
production. Production taxes were $6,000 during the first quarter of 2001, a
decrease of $1,000 as compared to $7,000 during the same period of 2000. The
$1,000 decrease is attributable to lower oil prices and production volumes
during the first quarter of 2001, as compared to the same period of 2000.
Production taxes averaged approximately 1.0% and 1.2% of oil revenues during the
first quarter of 2001 and 2000, respectively.
DD&A Expense - Exploration and Production. DD&A expense for producing
properties was $59,000 for the first quarter of 2001, an increase of $43,000 as
compared to $16,000 during the same period of 2000. DD&A expense incurred during
the first quarter of 2001 includes approximately $44,000, or $1.10 per Mcf,
associated solely with the Kleka 11 well that began producing in Poland during
February 2001. There was no DD&A expense in Poland during same period of 2000.
During the first quarter of 2001, the DD&A expense per barrel for oil produced
in the United States was $0.63, relatively unchanged, as compared to $0.67
during the same period of 2000.
Exploration Costs. Our exploration costs consist of geological and
geophysical costs, exploratory dry holes and non-producing leasehold
impairments. Exploration costs were $1.203 million during the first quarter of
2001, an increase of $719,000 as compared to $484,000 during the same period of
2000.
Geological and geophysical costs were $1.201 million during the first
quarter of 2001, an increase of $717,000 as compared to $484,000 during the same
period of 2000. During the first quarter of 2001, we incurred $1.031 million of
3-D seismic costs on the Fences project area and $170,000 on other geological
and geophysical activities in Poland. During the first quarter of 2000, we spent
$162,000 reprocessing seismic data on the Pomeranian project area, $108,000
reprocessing seismic data on the Warsaw West project area and $214,000 on other
geological and geophysical activities in Poland. Geological and geophysical
costs will continue to fluctuate from period to period, based on our level of
exploratory activity in Poland and the respective cost participation percentage
of our industry partners.
Exploratory dry hole costs were $2,000 during the first quarter of
2001, as compared to no exploratory dry hole costs during the same period of
2000. During the first quarter of 2001, we incurred $2,000 of exploratory dry
hole costs relating to the Andrychow 6, an exploratory dry hole drilled on the
Carpathian project area during 1999. On May 8, 2001, we announced that the
Chojnice 108-6 was an exploratory dry hole. Apache will cover our 42.5% share of
costs to drill the Chojnice 108-6, the tenth and final carried exploratory well
under terms of the Apache Exploration Program.
There were no non-producing leasehold impairments during the first
quarter of 2001 and 2000. As of March 31, 2001, we had capitalized unproved
property costs of $3.341 million, consisting of $2.450 million relating to the
Mieszkow 1 (as of the date of this report drilling
13
operations on the Mieszkow 1 had been suspended pending the reprocessing and
interpretation of 3-D seismic data to evaluate the continuation of drilling
operations), $873,000 relating to other properties in Poland and $18,000 in the
United States. Non-producing leasehold impairments may vary from period to
period based on our determination that capitalized costs of unproved properties,
on a property-by-property basis, are not realizable.
Apache Poland G&A Costs. Apache Poland G&A costs consist of our share
of direct overhead costs incurred by Apache in Poland in accordance with the
terms of the Apache Exploration Program. There were no recorded Apache Poland
G&A costs during the first quarter of 2001 and 2000. Prior to July 1, 2000,
Apache covered all of our pro rata share of Apache Poland G&A costs. As of the
date of this report, we are responsible for 45% of Apache Poland G&A costs, to
be adjusted up to 50% after Apache completes drilling the Chojnice 108-6. Under
an amendment to the Apache Exploration Program effective January 1, 2001,
referred to as the Poland 2001 Agreement, Apache agreed to issue us a credit of
$932,000 against any outstanding invoices as of December 31, 2000, as well as
any future costs billed by Apache in return for the release of its commitment to
cover our share of costs to shoot 339 kilometers of 2-D seismic data in the
Carpathian project area. As of March 31, 2001, $532,000 had been applied against
the $932,000 credit, including $283,000 of Apache Poland G&A costs incurred
during the first quarter of 2001.
Oilfield Services Segment
Oilfield Services Revenues. Oilfield services revenues were $44,000
during the first quarter of 2001, a decrease of $30,000 as compared to $74,000
for the first quarter of 2000. During most of the first quarter of 2001 and
2000, our drilling rig was idle due to winter weather. Oilfield servicing
revenues were generated primarily by our well servicing equipment during these
periods. Oilfield services revenues will continue to fluctuate from period to
period based on market demand, weather, the number of wells drilled, downtime
for equipment repairs, the degree of emphasis on utilizing our oilfield
servicing equipment on our company-owned properties and other factors.
Oilfield Services Costs. Oilfield services costs were $116,000 during
the first quarter of 2001, an increase of $41,000 as compared to $75,000 for the
same period of 2000. During the first quarter of 2001, our well and servicing
equipment generated a gross profit of approximately 25% on direct costs of
$33,000 and incurred downtime maintenance costs of $83,000 associated primarily
with our drilling rig. During the first quarter of 2000, our well and servicing
equipment generated a gross profit of approximately 25% on direct costs of
$55,000 and incurred downtime maintenance costs of $20,000 associated primarily
with our drilling rig. In general, oilfield servicing costs are directly
associated with oilfield services revenues. As such, oilfield servicing costs
will continue to fluctuate year to year based on revenues generated, market
demand, weather, the number of wells drilled, downtime for equipment repairs,
the degree of emphasis on utilizing our oilfield servicing equipment on our
company-owned properties and other factors.
DD&A Expense - Oilfield Services. DD&A expense for oilfield services
was $70,000 during the first quarter of 2001, an increase of $19,000 as compared
to $51,000 during the same period of 2000. DD&A expense for oilfield services
was $19,000 higher during the first quarter of 2001 as compared to the same
quarter of 2000, primarily due to capital additions incurred after the first
quarter of 2000 being depreciated during the first quarter of 2001.
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Non-segmented Information
DD&A - Corporate. DD&A for corporate activities was $10,000 during the
first quarter of 2001, a decrease of $10,000 as compared to $20,000 during the
same period of 2000. DD&A expense for corporate activities was $10,000 lower
during the first quarter of 2001 as compared to the same quarter of 2000,
primarily due to capital items being depreciated in the first quarter of 2000
subsequently becoming fully depreciated prior to the first quarter of 2001.
G&A Costs. G&A costs were $682,000 during the first quarter of 2001, an
increase of $85,000 as compared to $597,000 for the same period of 2000. During
the first quarter of 2001, we incurred substantially more legal, travel and
other associated costs, primarily related to the recently completed RRPV loan
agreement, as compared to the same period of 2000. Subject to available funding,
G&A costs are expected to be at current or higher levels in future periods as we
expand our presence in Poland.
Amortization of Deferred Compensation (G&A). Amortization of deferred
compensation was $391,000 during the first quarter of 2001, as compared to no
amortization of deferred compensation during the same period of 2000. On August
4, 2000, we extended the term of options and warrants to purchase 678,000 shares
of our common stock that were to expire during 2000 for a period of two years,
with a one-year vesting period. Accordingly, we incurred deferred compensation
costs of $1.566 million, including $1.188 million covering the intrinsic value
applicable to officers and employees and $378,000 covering the fair market value
calculated using the Black-Scholes model for a consultant, to be amortized to
expense over the one-year vesting period.
Interest and Other Income. Interest and other income was $52,000 during
the first quarter of 2001, a decrease of $82,000 as compared to $134,000 during
the same period of 2000. Our cash and marketable debt securities balance was
$4.028 million as of March 31, 2001, $1.318 million less than the balance of
$5.346 million as of March 31, 2000. As a result of no outstanding officer loans
and lower average cash and marketable debt securities balances during the first
quarter of 2001 as compared to the same period of 2000, we earned $47,000 of
interest income during the first quarter of 2001, a decrease of $79,000 as
compared to $126,000 for the same period of 2000. Also, during the first quarter
of 2001, we recorded other income of $13,000 pertaining to amortizing an option
premium resulting from granting RRPV an option to purchase gas from our
properties in Poland.
Interest Expense. Interest expense was $13,000 during the first quarter
of 2001, as compared to $300 during the same period of 2000. During the first
quarter of 2001, we recorded $13,000 of imputed interest expense relating to our
arrangement with RRPV.
Officer Loan Impairment. There was no officer loan impairment during
the first quarter of 2001 as compared $5,000 for the same period of 2000. There
were no outstanding notes receivable from officers during the first quarter of
2001. On December 28, 2000, two of our officers surrendered their collateral
shares to us in return for the cancellation of the notes receivable from
officers and we recorded the resulting acquisition of 233,340 shares of treasury
stock at a cost of $773,000. During the first quarter of 2000, we recorded an
officer loan impairment of $5,000 in accordance with SFAS No. 114 "Accounting by
Creditors for Impairment of a Loan."
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Liquidity and Capital Resources
General. Historically, we have relied primarily on proceeds from the
sale of securities to fund our operating and investing activities. During March
2001, we signed a $5.0 million loan agreement with Rolls Royce Power Ventures,
or RRPV, to partially fund our planned ongoing activities in Poland during 2001.
As of the date of this report, we had received $2.5 million under the RRPV
arrangement. During 2000 and 1999, we received net proceeds from the sale of
securities of $9.272 million and $7.067 million, respectively. We also benefit
from funds provided by industry partners.
Working Capital (current assets less current liabilities). Our working
capital was $556,000 as of March 31, 2001, a decrease of $60,000 as compared to
$616,000 at December 31, 2000. As of March 31, 2001, our cash, cash equivalents
and marketable debt securities totaled $4.028 million, $1.667 million more than
the $2.361 million balance as of December 31, 2000, primarily due to funds
received under our arrangement with RRPV. The $1.667 million increase in cash,
cash equivalents and marketable debt securities was offset by a $1.706 million
increase in accrued liabilities as of March 31, 2001, as compared to December
31, 2000, primarily due to costs relating to our ongoing activities on the
Fences project area in Poland.
Operating Activities. Net cash used in operating activities was
$620,000 during the first quarter of 2001, a decrease of $388,000 as compared to
$1.008 million for the same period of 2000. We used net cash of $1.625 million
and $678,000 during the first quarter of 2001 and 2000, respectively, exclusive
of changes in working capital items, in our operating activities. During the
first quarter of 2001, funds provided by changes in working capital items was
$1.005 million. During the first quarter of 2000, $330,000 was used to fund
changes in working capital items.
Investing Activities. Our investing activities provided net cash of
$1.069 million during the first quarter of 2001, a decrease of $1.574 million,
as compared to $2.643 million during the same period of 2000. During the first
quarter of 2001, we incurred $16,000 of costs relating to our Polish properties,
spent $85,000 on upgrading our producing properties in the United States, spent
a net amount of $109,000 on upgrading our oilfield servicing equipment, spent
$3,000 on office equipment and received $1.282 million from maturing marketable
debt securities. During the first quarter of 2000, we spent $338,000 on our
Polish properties, spent $44,000 to upgrade our domestic properties, spent
$16,000 on office equipment, spent a net amount of $116,000 to upgrade our
oilfield servicing equipment, spent $1.385 million on purchasing marketable debt
securities and realized $4.542 million from maturing marketable debt securities.
Financing Activities. Cash provided by financing activities was $2.5
million during the first quarter of 2001, as compared to no cash provided from
or used in financing activities during the same period of 2000. During March
2001, we signed a $5.0 million loan agreement with RRPV. As of March 31, 2000,
we had received $2.5 million under the arrangement with RRPV.
In the past, our strategic partners have provided us with a substantial
amount of the capital required for our share of costs under our exploration
agreements with them. For instance, in 1997, Apache committed to cover our share
of an exploration program (the "Apache Exploration Program") in Poland
originally estimated to cost approximately $60.0 million gross (approximately
$30.0 million net to us). As of March 31, 2001, Apache was committed to
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covering our share of costs for the following remaining items under terms
of the Apache Exploration Program:
o our 42.5% share of costs to drill the Chojnice 108-6 exploratory well
on the Pomeranian project area;
o $400,000 of costs (other than carried costs) relating to our joint
activities in Poland in accordance with the Poland 2001 agreement;
o our 45.0% share of costs to flow test and, if warranted, complete the
Wilga 2 for production; and
o Our 5% share of Apache Poland G&A relating to the Chojnice 108-6
exploratory well carry. Upon completing the drilling of the Chojnice
108-6, Apache will no longer be required to cover our share of Apache
Poland G&A attributable to the Chojnice 108-6.
Capital Requirements
General. As of March 31, 2001, we had approximately $4.029 million of
cash and cash equivalents. We believe this amount, along with the $2.5 million
of proceeds we have yet to receive under our $5.0 million loan agreement we
signed during March 2001 with RRPV, the remaining Apache carried costs and
positive cash flow generated from our E&P and oilfield services segments, will
be sufficient to cover our minimum exploration and operating commitments during
2001. We have initiated discussions with commercial lenders and other gas
purchasers for possible project funding related to our recent discoveries in
Poland as well as possible other future discoveries. In order to fully fund or
accelerate our current planned exploration and development activities, we will
need additional capital. The timing, pace, scope and amount of our capital
expenditures are largely dependent on the availability of capital.
RRPV Financing. In March 2001, we signed a $5.0 million 9.5% loan
agreement with RRPV. The loan is interest free for the first year. The proceeds
are to be used for exploration and development of additional gas reserves in
Poland. In consideration for the loan, we granted RRPV an option to purchase up
to 17 Mmcf per day of gas we produce in Poland. If RRPV elects to buy gas we
produce in Poland, the loan will be repayable over eight years. If RRPV elects
not to buy our gas, the loan will be repayable in March 2003 unless converted to
restricted common stock at $5.00 per share, the market value of FX Energy's
common stock at the time the terms with RRPV were finalized, subject to
adjustment in certain circumstances. As security for the loan, we have granted
RRPV a lien on a portion of our gas reserves in Poland.
Fences Project Area. We have agreed to spend $16.0 million of
exploration costs on the Fences project area to earn a 49.0% interest. To date,
we have paid approximately $6.7 million of this commitment, including $2.4
million to drill the Kleka 11, $2.2 million of drilling costs relating to the
Mieszkow 1 and $2.1 million to commence two separate 3-D seismic data surveys.
After we complete our $16.0 million commitment, POGC will begin bearing its
51.0% share of further costs. During the remainder of 2001, we expect to spend
approximately $1.7 million to finish processing the Zaniemysl and Donatowo 3-D
seismic grids, $1.2 million on the Mieszkow 1 (assuming it is commercial) and
approximately $2.8 million each on one or more additional exploratory wells, as
warranted and as funding permits. As of March 31, 2001, we had accrued $1.317
million of costs relating to the above items, including $1.024 million for the
3-D seismic grids and $293,000 for the Mieszkow 1.
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As of the date of this report, drilling on the Mieszkow 1 had been
suspended, pending the reprocessing and interpretation of 3-D seismic data to
evaluate the continuation of drilling operations.
Apache Exploration Program. During the remainder of 2001, we expect
that a substantial portion of our share of costs relating to the Apache
Exploration Program will be covered by Apache as discussed above in "Liquidity
and Capital Resources - Financing Activities." A discussion of our capital
requirements for the remainder of 2001 on each project area in Poland for which
we have joint activities with Apache follows:
Pomeranian project area: During the second quarter of 2001, we and our
partners plan to complete and test the Tuchola 108-2, which is expected to cost
approximately $1.470 million ($625,000 net), commence an approximately $1.2
million gross ($515,000 net) 2-D seismic program covering approximately 280
kilometers to confirm Main Dolomite Reef leads on regional 2-D seismic data and
plug and abandon the Chojnice 108-6, the tenth and final carried exploratory
well under terms of the Apache Exploration Program. During the remainder of
2001, we and our partners may commence additional exploratory drilling on the
Pomeranian project area at a cost of approximately $2.8 million gross to drill
and complete each well, as warranted and as funding permits.
Lublin project area: During the second quarter of 2001, Apache will
cover our 45.0% share of costs for an extended flow test on the Wilga 2 well
and, if warranted, completion of the well for production. The Wilga 2 extended
flow test will assess the potential for commercial production in light of
pipeline and facility expenditures that would be required.
Warsaw West project area: We and Apache are currently evaluating
whether to acquire an additional 520 kilometers of 2-D seismic data by November
2001, in order to fulfill the remaining work commitment required for the first
three year exploration period on the Warsaw West project area usufruct.
Carpathian project area: We and Apache are currently evaluating whether
to acquire an additional 339 kilometers of 2-D seismic data and commence
drilling an exploratory well by the end of 2001, in order to fulfill the
remaining work commitments required for the first three year exploration period
on the usufruct.
Other. During the remainder of 2001, we expect to incur minimal
exploration expenditures on our Baltic project area in Poland and on our
operations in the United States. If we have the opportunity to participate in
additional appraisal, development or exploration projects with POGC, it will be
necessary to obtain additional capital.
We may change the allocation of capital among the categories of
anticipated expenditures depending upon future events that we cannot predict.
For example, we may change the allocation of our expenditures based on the
actual results and costs of future exploration, appraisal, development,
production, property acquisition and other activities. In addition, we may have
to change our anticipated expenditures if costs of placing any particular
discovery into production are higher, if the field is smaller or if the
commencement of production takes longer than expected. We may obtain funds for
future capital investments from the sale of additional securities, project
financing, sale of partial property interests, strategic alliances with other
energy or financial partners or other arrangements, all of which may dilute the
interest of our existing stockholders or our interest in the specific project
financed.
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We face a number of risks in our business, including, but not limited
to, the risk factors discussed in our annual report on Form 10-k for the year
ended December 31, 2000 and other SEC filings.
ITEM 3. QUANITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Price Risk
Realized pricing for our oil production in the United States is
primarily driven by the prevailing worldwide price of oil, subject to gravity
and other adjustments for the actual oil sold. Historically, oil prices have
been volatile and unpredictable. Price volatility relating to our oil production
in the United States is expected to continue in the foreseeable future.
Our gas production in Poland is currently being sold to POGC under a
five-year contract based on U.S. dollar pricing that may be terminated by us
with a 90-day written notice. The limited volume and single source of our gas
production means we cannot assure uninterruptible production or production in
amounts that would be meaningful to industrial users, which may depress the
price we may be able to obtain. There is currently no competitive market for the
sale of gas in Poland. Accordingly, we expect that the prices we receive for the
gas we produce will be lower than would be the case in a competitive setting and
may be lower than prevailing western European prices, at least until a fully
competitive market develops in Poland. Similarly, there is no established market
relationship between gas prices in short-term and long-term sales agreements.
The availability of abundant quantities of gas from former members of the Soviet
Union and the low cost of electricity from coal-fired generating facilities may
also tend to depress gas prices in Poland.
We currently do not engage in any hedging activities or have any
derivative financial instruments to protect ourselves against market risks
associated with oil and gas price fluctuations, although we may elect to do so
if we achieve a significant amount of production in Poland.
Foreign Currency Risk
We have entered into various agreements in Poland, primarily in U.S.
Dollars or the U.S. Dollar equivalent of the Polish Zloty. We conduct our
day-to-day business on this basis as well. The Polish Zloty is subject to
exchange rate fluctuations that are beyond our control. The exchange rate for
the Polish Zloty per U.S. Dollar was 4.09 as of March 31, 2001 and 4.13 and 4.14
as of December 31, 2000, and 1999, respectively.
We do not currently engage in hedging transactions to protect ourselves
against foreign currency risks, nor do we intend to do so in the foreseeable
future.
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PART II.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
There are no exhibits included as part of this report.
(b) Reports on form 8-K
During the quarter ended March 31, 2001, FX Energy filed the following
reports on Form 8-K:
Date of Event Reported Item Reported
------------------------------------ ------------------------------
January 9, 2001 Item 5. Other Events
February 14, 2001 Item 5. Other Events
March 6, 2001 Item 5. Other Events
March 12, 2001 Item 5. Other Events
March 13, 2001 Item 5. Other Events
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FX ENERGY, INC.
(Registrant)
Date: May 11, 2001 By /s/ David N. Pierce
-----------------------------------
President, Director , Chief
Executive Officer
Date: May 11, 2001 By /s/ Dennis L. Tatum
-----------------------------------
Vice-President, Treasurer and
Chief Accounting Officer
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