SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______to______
Commission file number 0-16487
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INLAND RESOURCES INC.
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(Exact name of Registrant as specified in its charter)
Washington 91-1307042
- ----------------------------------------- ----------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
410 17th Street, Suite 700, Denver, Colorado 80202
- -------------------------------------------- -----
(Address of Principal Executive Offices) (ZIP Code)
Registrant's Telephone Number, Including Area Code: (303) 893-0102
-----------------
(Former name, address and fiscal year, if changed, since
last report) -----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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 XX No
----- -----
Number of shares of common stock, par value $.001 per share, outstanding as
of August 12, 1998: 8,377,545
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PART 1. FINANCIAL INFORMATION
INLAND RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(In thousands)
June 30, December 31,
1998 1997
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $1,752 $604
Accounts receivable 8,483 13,601
Inventory 8,651 6,974
Other current assets 2,319 2,087
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Total current assets 21,205 23,266
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Property and equipment, at cost:
Oil and gas properties (successful efforts method) 163,721 143,829
Accumulated depletion, depreciation and amortization (14,687) (10,009)
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149,034 133,820
Other property and equipment, net 17,129 14,699
Other long-term assets 4,593 4,168
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Total assets $191,961 $175,953
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----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $13,497 $9,852
Current portion of long-term debt 6,003 167
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Total current liabilities 19,500 10,019
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Long-term debt 135,723 122,944
Environmental liability 930 1,000
Mandatorily redeemable Series C preferred stock 9,568 9,568
Accrued Series C preferred stock dividends 978 450
Warrants outstanding 1,300 1,300
Stockholders' equity:
Preferred Class A stock, par value $.001, 20,000,000 shares
authorized; 100,000 shares of Series C outstanding
Common stock, par value $.001; 25,000,000 shares
authorized; issued and outstanding 8,377,545 and
8,359,830, respectively 8 8
Additional paid-in capital 41,892 41,856
Accumulated deficit (17,938) (11,192)
----------- ------------
Total stockholders' equity 23,962 30,672
----------- ------------
Total liabilities and stockholders' equity $191,961 $175,953
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The accompanying notes are an integral part of the consolidated financial
statements
1
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
(In thousands except per share data)
(Unaudited)
Three months end Six months ended
June 3 June 30,
---------------------- -----------------------
1998 1997 1998 1997
------- -------- ---------- --------
Revenues:
Sales of refined product $18,434 $35,238
Sales of oil and gas 3,319 $2,885 8,596 $6,488
------- -------- ---------- --------
Total revenues 21,753 2,885 43,834 6,488
------- -------- ---------- --------
Operating expenses:
Cost of refinery feedstock 12,656 27,605
Refinery operating expenses 2,176 3,954
Lease operating expenses 1,852 620 4,096 1,221
Production taxes 113 56 228 279
Exploration 30 20 91 30
Depletion, depreciation and amortization 2,730 1,221 5,318 2,415
General and administrative, net 840 381 1,789 841
------- -------- ---------- --------
Total operating expenses 20,397 2,298 43,081 4,786
------- -------- ---------- --------
Operating income 1,356 587 753 1,702
Interest expense (3,569) (656) (6,896) (1,296)
Other income, net 77 147 137 304
------- -------- ---------- --------
Net income (loss) before extraordinary loss (2,136) 78 (6,006) 710
Extraordinary loss on early extinguishment of debt (212) (864) (212) (864)
------- -------- ---------- --------
Net loss (2,348) (786) (6,218) (154)
Accrued Series C preferred stock dividend (278) (528)
------- -------- ---------- --------
Net loss available to common stockholders $(2,626) $(786) $(6,746) $(154)
------- -------- ---------- --------
------- -------- ---------- --------
Net loss per share - Basic
Before extraordinary loss $(0.28) $0.01 $(0.78) $0.11
Extraordinary loss $(0.03) $(0.13) $(0.03) $(0.13)
------- -------- ---------- --------
Total $(0.31) $(0.12) $(0.81) $(0.02)
------- -------- ---------- --------
------- -------- ---------- --------
Basic weighted average common shares outstanding 8,369,854 6,316,751 8,364,870 6,314,418
------- -------- ---------- --------
------- -------- ---------- --------
Net loss per share - Diluted
Before extraordinary loss $(0.28) $0.01 $(0.78) $0.08
Extraordinary loss $(0.03) $(0.10) $(0.03) $(0.10)
------- -------- ---------- --------
Total $(0.31) $(0.09) $(0.81) $(0.02)
------- -------- ---------- --------
------- -------- ---------- --------
Diluted weighted average common shares outstanding 8,369,854 8,342,058 8,364,870 8,315,800
------- -------- ---------- --------
------- -------- ---------- --------
Dividends per common share NONE NONE NONE NONE
------- -------- ---------- --------
------- -------- ---------- --------
The accompanying notes are an integral part of the consolidated financial
statements
2
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
(In thousands)
(Unaudited)
1998 1997
-------------- --------------
Cash flows from operating activities:
Net loss $(6,218) $(154)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depletion, depreciation and amortization 5,318 2,415
Amortization of debt issue costs and debt discount 352 140
Loss on early extinguishment of debt 212 864
Effect of changes in current assets and liabilities:
Accounts receivable 5,118 530
Inventory (1,677) (1,335)
Other current assets (295) (192)
Accounts payable 3,574 2,943
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Net cash provided by operating activities 6,384 5,211
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Cash flows from investing activities:
Acquisition of oil and gas properties (3,575)
Development expenditures and equipment purchases (22,263) (12,469)
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Net cash used by investing activities (22,263) (16,044)
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Cash flows from financing activities:
Proceeds from exercise of employee stock options 37 22
Proceeds from issuance of long-term debt 30,775 29,500
Payments of long-term debt (12,997) (25,099)
Debt issue costs (788) (194)
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Net cash provided by financing activities 17,027 4,229
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Net change in cash and cash equivalents 1,148 (6,604)
Cash and cash equivalents at beginning of period 604 10,031
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Cash and cash equivalents at end of period $1,752 $3,427
-------------- --------------
-------------- --------------
The accompanying notes are an integral part of the consolidated financial
statements
3
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------
1. COMPANY ORGANIZATION:
Inland Resources Inc. (the "Company") is an independent energy company
with substantially all of its producing oil and gas property interests
located in the Monument Butte Field within the Uinta Basin of Northeastern
Utah. The Company also owns a refinery located in Woods Cross, Utah with an
optimum refining capacity of 12,500 barrels per day.
2. BASIS OF PRESENTATION:
The preceding financial information has been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC") and, in the opinion of the Company, includes all normal
and recurring adjustments necessary for a fair statement of the results of
each period shown. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
SEC rules and regulations. Management believes the disclosures made are
adequate to ensure that the financial information is not misleading, and
suggests that these financial statements be read in conjunction with the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1997.
3. EARNINGS PER SHARE:
The calculation of earnings per share for the three-month and six-month
periods ended June 30, 1998 and 1997 is as follows (in thousands except per
share data):
Three months ended June 30, 1998 Three months ended June 30, 1997
--------------------------------- --------------------------------
Per Share Per Share
Loss Shares Amount Income Shares Amount
--------- ------- ------- ------- ------- --------
Net loss $ (2,348) $ (786)
Preferred C Stock Premium (278)
---------- ---------
Basic EPS (2,626) 8,370 $ (0.31) (786) 6,317 $ (0.12)
---------- ----------
---------- ----------
Effect of Dilutive Securities:
Options and Warrants 279
Convertible preferred stock 1,746
----------------------- -------------------
Diluted EPS $ (2,626) 8,370 $ (0.31) $ (786) 8,342 $ (0.09)
--------------------------------- --------------------------------
--------------------------------- --------------------------------
Six months ended June 30, 1998 Six months ended June 30, 1997
--------------------------------- --------------------------------
Per Share Per Share
Loss Shares Amount Income Shares Amount
--------- ------- ------- ------- ------- --------
Net loss $ (6,218) $ (154)
Preferred C Stock Premium (528)
---------- ---------
Basic EPS (6,746) 8,365 $ (0.81) (154) 6,314 $ (0.02)
---------- ----------
---------- ----------
Effect of Dilutive Securities:
Options and Warrants 280
Convertible preferred stock 1,722
----------------------- -------------------
Diluted EPS $ (6,746) 8,365 $ (0.81) $ (154) 8,316 $ (0.02)
--------------------------------- --------------------------------
--------------------------------- --------------------------------
4
4. ACCOUNTING PRONOUNCEMENT:
The Financial Accounting Standards Board issued Statement No. 133
"Accounting for Derivative Instruments and Hedging Activities" effective
for fiscal years beginning after June 15, 1999. The Statement requires
companies to record derivative transactions on the balance sheet as assets
or liabilities, measured at fair value, and further defines transactions
that qualify for hedge accounting. The Company has not assessed the impact
this Statement may have on reported financial information.
5. INVENTORIES:
Inventories at June 30, 1998 and December 31, 1997 consist of the following
(in thousands):
June 30, December 31,
1998 1997
--------------- -----------------
Crude Oil $ 585 $ 1,006
Refined Product 5,085 3,685
Tubular goods 2,614 1,994
Materials and supplies 367 289
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Total $ 8,651 $ 6,974
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--------------- -----------------
6. DEBT:
On April 22, 1998, the Company entered into amendments of its loan
documents (collectively, the "Amendment") with ING (U.S.) Capital
Corporation ("ING") and Trust Company of the West ("TCW"). Under the terms
of the Amendment, the borrowing base under the ING Credit Agreement was
increased from $45.0 million to $57.0 million. On May 29, 1998, the Company
received a further increase in the borrowing base from $57.0 million to
$65.0 million upon repayment of the Credit Agreement with Banque Paribas.
The Amendment also required the Company to raise $15.0 million from the
sale of equity securities or through farmout transactions prior to June 30,
1998. The Company satisfied this condition by entering into the Farmout
Agreement discussed in Footnote 7. Subsequent to June 30, 1998, certain
covenants common to both the ING Credit Agreement and the TCW Credit
Agreement were either amended or waived, allowing the Company to remain in
compliance as of June 30, 1998. At June 30, 1998, the Company had $62.5
million of borrowings and $2.3 million of letter of credit obligations
outstanding under the ING Credit Agreement and $75.0 million of borrowings
outstanding under the TCW Credit Agreement.
On April 30, 1998 the Company paid $140,000 for an interest rate hedge. The
hedge covers the period June 12, 1998 through December 12, 2000 and
effectively provides a 6.75% LIBOR rate interest ceiling (before
consideration of the 1.75% adjustment) on $35.0 million of borrowings under
the ING Credit Agreement.
7. FARMOUT AGREEMENT:
Effective June 1, 1998, the Company entered into a Farmout Agreement with
Smith Management LLC ("Smith") providing funds for the Company's
anticipated drilling program in the Monument Butte Field during the
remainder of 1998. The program contemplates the drilling and completion of
56 wells aggregating total expenditures of approximately $20.0 million
(including management fees). Under the Farmout Agreement, Smith agreed to
fund 100% of the drilling and completion costs for wells commenced prior to
October 1, 1998 and 70% for wells commenced after September 30, 1998. Smith
also agreed to take production proceeds payments, at the Company's option,
either in cash or in shares of the Company's common stock priced at a 10%
discount of the average bid side of the closing price for each trading day
during the month to which the payment relates. The Farmout Agreement
provides that Smith will reconvey all drillsites to the Company once Smith
has recovered from production an amount equal to 100% of its expenditures,
including management fees and production taxes, plus an additional sum
equal to 18% per annum on such expended sums. The Farmout Agreement with
Smith satisfies the Company's obligation to its senior lenders to obtain a
capital infusion of at least $15.0 million by June 30, 1998. The Company
received advances of $3.3 million under the Farmout Agreement as of
June 30, 1998.
5
PART 1. FINANCIAL INFORMATION (CONTINUED)
INLAND RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION:
RESULTS OF OPERATIONS:
GENERAL:
Effective September 1, 1997, the Company acquired 153 gross (46.9 net)
wells from Enserch Exploration Company ("Enserch"). Effective September 30,
1997, the Company acquired 279 gross (184 net) wells from Equitable Resources
Energy Company ("EREC"). On December 31, 1997, the Company closed the
acquisition of an oil refinery located in Woods Cross, Utah (the "Woods Cross
Refinery"). These acquisitions were accounted for as purchases, therefore,
the assets and results of operations are included in the Company's financial
statements from the effective acquisition dates forward.
THREE MONTH PERIODS ENDED JUNE 30, 1998 AND 1997:
SALES OF REFINED PRODUCTS - The Company averaged sales of 8,500 barrels
per day from the Woods Cross Refinery, of which 54% was gasoline and diesel
products. The Company performed various major repair and maintenance
procedures that negatively impacted the volumes available for sale. The
Company expects its average daily sales to exceed 9,000 barrels per day
during the remainder of 1998, although there can be no assurance of this
increase.
SALES OF CRUDE OIL AND NATURAL GAS - The Company eliminated in
consolidation $1.88 million of sales made between its production operations
and the Woods Cross Refinery during the second quarter of 1998. Prior to
considering intercompany eliminations, crude oil and natural gas sales during
the second quarter of 1998 exceeded the previous year second quarter by 80%.
The increase was attributable to the Enserch and EREC acquisitions and the
effects of the Company's development drilling results. During 1997 the
Company drilled 80 wells and during the first half of 1998 the Company
drilled an additional 60 wells. The Company expects to drill a total of 108
wells during 1998. Although production increased 145% on a barrel of oil
equivalent ("BOE") basis, the sales increase was only 80% due primarily to a
39% decrease in the average price received for crude oil production from
$16.44 during the second quarter of 1997 to $10.11 during the same period in
1998.
As further discussed in "Liquidity and Capital Resources" below, the Company
has entered into price protection agreements to hedge against volatility in
crude oil prices. Although hedging activities do not affect the Company's
actual sales price for crude oil in the field, the financial impact of
hedging transactions is reported as an adjustment to crude oil revenue in the
period in which the related oil is sold. Oil and gas sales were increased by
$31,500 and decreased by $37,000 during the second quarters of 1998 and 1997,
respectively, to recognize hedging contract settlement gains and losses and
contract purchase cost amortization.
COST OF REFINERY FEEDSTOCK - The Company purchases crude oil from a
number of sources, including major oil companies and small independent
producers, under arrangements which contain market-responsive pricing
provisions. The Company's Woods Cross Refinery began purchasing approximately
2,000 barrels per day of the Company's own "Black Wax" crude oil production
during April 1998. The Company has continued its modifications to the Woods
Cross Refinery to allow 5,000 barrels or more per day of Black Wax crude oil
to be processed by September 1998. The Company's average cost of crude oil,
including transportation charges, was $17.08 per barrel during the second
quarter of 1998.
6
REFINERY OPERATING EXPENSE - During the second quarter of refinery
operations, the Company continued to spend considerable resources to upgrade
and repair key refinery equipment which had been neglected by prior owners.
Operating costs, consisting primarily of direct labor, utilities and repairs
averaged $2.79 per barrel sold. The refinery is considered to be in good
operating condition. No additional major turnaround projects are expected in
1998, although the Company will continue to repair and upgrade its buildings,
tanks and roads.
LEASE OPERATING EXPENSES - Lease operating expense increased $1.2 million
between periods due to the large increase in the number of producing wells
the Company operates. Lease operating expense per BOE sold was $3.76 during
the second quarter of 1998, up from the $3.09 experienced during the second
quarter of 1997. The increase on a BOE basis is the result of the Enserch and
EREC acquisitions that included a large number of lower producing wells.
PRODUCTION TAXES - Production tax expense consists of estimates of the
Company's yearly effective tax rate for Utah state severance tax and
production ad valorem tax. Changes in sales prices, tax rates, tax exemptions
and the timing, location and results of drilling activities can all affect
the Company's actual effective tax rate. During the second quarter of 1998
the Company recorded production taxes at 2.2% of sales, consistent with the
actual effective rate for the 1997 tax year. The estimated production tax
rate recorded during the second quarter of 1997 was 1.9%.
EXPLORATION - Exploration expense represents the Company's cost to
retain unproved acreage.
DEPLETION, DEPRECIATION AND AMORTIZATION - The increase in depletion,
depreciation and amortization resulted from increased sales volumes offset by
a lower depletion rate. In addition, the refinery purchase increased the
depreciable basis of assets. Depletion, which is based on the
units-of-production method, comprises the majority of the total charge. The
depletion rate is a function of capitalized costs and related underlying
reserves in the periods presented. The Company's average depletion rate was
$4.89 per BOE sold during the second quarter of 1998 compared to $5.65 per
BOE sold during the second quarter of 1997. Based on the Company's July 1,
1998 reserve report, the depletion rate will change to $5.35 during the
second half of 1998.
GENERAL AND ADMINISTRATIVE, NET - General and administrative expense
increased $459,000 between quarters. This expense would have decreased
slightly if not for the $480,000 of general and administrative expense
related to refining operations which were not present in the prior year.
General and administrative expense for production operations is reported net
of operator fees and reimbursements which were $1.5 million and $0.7 million
during the first quarters of 1998 and 1997, respectively. Gross general and
administrative expense for production operations was $1.85 million in 1998
and $1.1 million in 1997. The increase in reimbursements and expense is a
function of the level of operated field activity which increased dramatically
with the Enserch and EREC purchases.
INTEREST EXPENSE - Borrowings during the second quarter of 1998 were
recorded at an effective interest rate of 10.6%. Borrowings during the second
quarter of 1997 were recorded at an effective interest rate of 11%. The
increase in expense between periods was due to a significant increase in the
average amount of borrowings outstanding due to the leveraged purchases of
Enserch, EREC and the Woods Cross Refinery.
OTHER INCOME - Other income represents interest earned on the investment
of surplus cash balances.
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT - On May 29, 1998,
the Company refinanced its Credit Agreement with Banque Paribas and wrote off
$212,000 of debt issuance cost. On June 30, 1997, the Company refinanced an
obligation to Trust Company of the West. Unamortized debt issue costs of
$291,000 and an unamortized loan discount of $573,000 were written off as an
extraordinary loss.
INCOME TAXES - During the second quarter of 1998 and 1997, no income tax
provision or benefit was recognized due to net operating losses incurred and
the recording and reversal of a full valuation allowance.
7
SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1997:
SALES OF REFINED PRODUCTS - The Company averaged sales of just under
8,500 barrels per day from the Woods Cross Refinery, of which 57% was
gasoline and diesel products. The Company performed various major repair and
maintenance procedures that negatively impacted the volumes available for
sale during the initial six months of the year. The Company expects its
average daily sales to exceed 9,000 barrels per day during the remainder of
1998, although there can be no assurance of this increase.
SALES OF CRUDE OIL AND NATURAL GAS - The Company eliminated in
consolidation $1.88 million of sales made between its production operations
and the Woods Cross Refinery. Prior to considering intercompany eliminations,
crude oil and natural gas sales during the initial six months of 1998
exceeded the previous year by 61%. The increase was attributable to the
Enserch and EREC acquisitions and the effects of the Company's development
drilling results. During 1997 the Company drilled 80 wells and during the
first half of 1998 the Company drilled an additional 60 wells. The Company
expects to drill a total of 108 wells during 1998. Although production
increased 140% on a barrel of oil equivalent ("BOE") basis, the sales
increase was only 61% due primarily to a 42% decrease in the average price
received for crude oil production from $17.96 during the first half of 1997
to $10.42 during the same period in 1998.
As further discussed in "Liquidity and Capital Resources" below, the Company
has entered into price protection agreements to hedge against volatility in
crude oil prices. Although hedging activities do not affect the Company's
actual sales price for crude oil in the field, the financial impact of
hedging transactions is reported as an adjustment to crude oil revenue in the
period in which the related oil is sold. Oil and gas sales were increased by
$94,000 and decreased by $143,000 during the initial six months of 1998 and
1997, respectively, to recognize hedging contract settlement gains and losses
and contract purchase cost amortization.
COST OF REFINERY FEEDSTOCK - The Company purchases crude oil from a
number of sources, including major oil companies and small independent
producers, under arrangements which contain market-responsive pricing
provisions. The Company's Woods Cross Refinery began purchasing approximately
2,000 barrels per day of the Company's own "Black Wax" crude oil production
during April 1998. The Company has continued its modifications to the Woods
Cross Refinery to allow as much as 5,000 barrels or more per day of Black Wax
crude oil to be processed by September 1998. The Company's average cost of
crude oil, including transportation charges, was $17.68 per barrel during the
first half of 1998.
REFINERY OPERATING EXPENSE - The Company spent considerable resources to
upgrade and repair key refinery equipment which had been neglected by prior
owners during the initial six months of 1998. Operating costs, consisting
primarily of direct labor, utilities and repairs averaged $2.58 per barrel
sold. The refinery is considered to be in good operating condition. No
additional major turnaround projects are expected in 1998, although the
Company will continue to repair and upgrade its buildings, tanks and roads.
LEASE OPERATING EXPENSES - Lease operating expense increased $2.9 million
between periods due to the large increase in the number of producing wells
the Company operates. Lease operating expense per BOE sold was $4.28 during
the first half of 1998, up from the $3.06 experienced during the first half
of 1997. The increase on a BOE basis is the result of the Enserch and EREC
acquisitions that included a large number of lower producing wells.
PRODUCTION TAXES - Production tax expense consists of estimates of the
Company's yearly effective tax rate for Utah state severance tax and
production ad valorem tax. Changes in sales prices, tax rates, tax exemptions
and the timing, location and results of drilling activities can all affect
the Company's actual effective tax rate. During the initial six months of
1998 the Company recorded production taxes at 2.2% of sales, consistent with
the actual effective rate for the 1997 tax year. The estimated production tax
rate recorded during the initial six months of 1997 was 4.2%.
8
EXPLORATION - Exploration expense represents the Company's cost to
retain unproved acreage.
DEPLETION, DEPRECIATION AND AMORTIZATION - The increase in depletion,
depreciation and amortization resulted from increased sales volumes offset by
a lower depletion rate. In addition, the refinery purchase increased the
depreciable basis of assets. Depletion, which is based on the
units-of-production method, comprises the majority of the total charge. The
depletion rate is a function of capitalized costs and related underlying
reserves in the periods presented. The Company's average depletion rate was
$4.89 per BOE sold during the first six months of 1998 compared to $5.65 per
BOE sold during the same period in 1997. Based on the Company's July 1, 1998
reserve report, the depletion rate will change to $5.35 during the second
half of 1998.
GENERAL AND ADMINISTRATIVE, NET - General and administrative expense
increased $948,000 between quarters. This expense would have been consistent
between periods if not for the $950,000 of general and administrative expense
related to refining operations which were not present in the prior year.
General and administrative expense for production operations is reported net
of operator fees and reimbursements which were $2.8 million and $1.2 million
during the first six months of 1998 and 1997, respectively. Gross general and
administrative expense for production operations was $3.6 million in 1998 and
$2.0 million in 1997. The increase in reimbursements and expense is a
function of the level of operated field activity which increased dramatically
with the Enserch and EREC purchases.
INTEREST EXPENSE - Borrowings during 1998 were recorded at an effective
interest rate of 10.6%. Borrowings during 1997 were recorded at an effective
interest rate of 11%. The increase in expense between periods was due to a
significant increase in the average amount of borrowings outstanding due to
the leveraged purchases of Enserch, EREC and the Woods Cross Refinery.
OTHER INCOME - Other income represents interest earned on the investment
of surplus cash balances.
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT - On May 29, 1998,
the Company refinanced its Credit Agreement with Banque Paribas and wrote off
$212,000 of debt issuance cost. On June 30, 1997, the Company refinanced an
obligation to Trust Company of the West. Unamortized debt issue costs of
$291,000 and an unamortized loan discount of $573,000 were written off as an
extraordinary loss.
INCOME TAXES - During the first half of 1998 and 1997, no income tax
provision or benefit was recognized due to net operating losses incurred and
the recording and reversal of a full valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had $192.0 million of assets. Total
capitalization was $177.5 million of which 14% was represented by
stockholders' equity, 7% by mezzanine equity, 35% by senior debt and 44% by
subordinated debt. As of June 30, 1998, there were no significant commitments
for capital expenditures. However, the Company anticipates that 1998 net
expenditures for development drilling and water and gas infrastructure
expansion will approximate $38.0 million in the Monument Butte Field with an
additional $2.4 million to be spent for upgrades at the Woods Cross Refinery.
The $38.0 million budgeted capital outlay includes the drilling of 108 gross
wells and the conversion of 40 wells to water injection. The level of these
and other capital expenditures is largely discretionary, and the amount of
funds devoted to any particular activity may increase or decrease
significantly depending on available opportunities and market conditions.
9
The Company plans to finance its ongoing acquisition, development, and
exploration expenditures using internal cash flow, proceeds from borrowings
under its senior credit facility, farmout arrangements, joint ventures, the
selling of assets or future public or private offerings of credit or equity
securities. In addition, future cash flows are subject to a number of
variables, including the level of production and crude oil and natural gas
prices. As a result, the Company cannot give assurance that operations and
other capital resources will provide cash in sufficient amounts to cover
working capital requirements and maintain planned levels of capital
expenditures or that increased capital expenditures will not be undertaken.
The Company believes that the Farmout Agreement discussed below will
substantially satisfy its need for capital during 1998. The Company intends
to continue its aggressive development pace into 1999 which will require
additional debt or equity capital. If the current low oil price environment
continues, it is possible that the Company may be unsuccessful or unwilling
to raise such capital which could have the effect of reducing the planned
development program in the Monument Butte Field.
Effective June 1, 1998, the Company entered into a Farmout Agreement with
Smith Management LLC ("Smith") providing funds for the Company's anticipated
drilling program in the Monument Butte Field during the remainder of 1998.
The program contemplates the drilling and completion of 56 wells aggregating
total expenditures of approximately $20.0 million (including management
fees). Under the Farmout Agreement, Smith agreed to fund 100% of the drilling
and completion costs for wells commenced prior to October 1, 1998 and 70% for
wells commenced after September 30, 1998. Smith also agreed to take
production proceeds payments, at the Company's option, either in cash or in
shares of the Company's common stock priced at a 10% discount of the average
bid side of the closing price for each trading day during the month to which
the payment relates. The Farmout Agreement provides that Smith will reconvey
all drillsites to the Company once Smith has recovered from production an
amount equal to 100% of its expenditures, including management fees and
production taxes, plus an additional sum equal to 18% per annum on such
expended sums. The Farmout Agreement with Smith satisfies the Company's
obligation to its senior lenders to obtain a capital infusion of at least
$15.0 million by June 30, 1998. The Company received advances of $3.3 million
under the Farmout Agreement as of June 30, 1998.
During the first half of 1998, the Company generated $6.2 million from
operations and borrowed $30.8 million from lenders. These sources along with
cash on hand were used to fund $21.0 million of development in the Monument
Butte Field, perform $1.3 million of capital upgrades at the refinery and
repay the $13.0 million outstanding under the Credit Agreement with Banque
Paribas. The remaining net change in cash was caused by changes in working
capital account positions and other miscellaneous items.
FINANCING - On September 30, 1997, the Company closed separate Credit
Agreements with Trust Company of the West and TCW Asset Management Company in
their capacities as noteholder and agent (collectively "TCW") and ING (U.S.)
Capital Corporation ("ING"). Subsequent to the closing of the ING Credit
Agreement, U.S. Bank National Association and Meespierson Capital Corp.
(collectively referred to herein with ING as the "Senior Lenders") became
loan participants in the ING Credit Agreement. The Credit Agreement with TCW
provided the Company with $75.0 million, all of which was funded at closing.
The ING Credit Agreement provides the Company with a borrowing base which is
currently established at $65.0 million. The borrowing base under the ING
facility is limited to the collateral value of proved reserves as determined
semiannually by the Senior Lenders. At June 30, 1998, the Company had $62.5
million of borrowings and $2.3 million of letter of credit obligations
outstanding under the ING Credit Agreement and $75.0 million borrowed under
the TCW Credit Agreement.
The ING Credit Agreement constitutes a revolving line of credit until
March 31, 1999, at which time it converts to a term loan payable in quarterly
installments through March 29, 2003. The quarterly installments, based on a
$65.0 million borrowing base, are $5.8 million for the first three quarters,
$4.3 million for the next four quarters, $3.6 million for the next four
quarters, $3.25 million for the next four quarters, and $2.9 million on March
29, 2003. The ING loan bears interest, at the Company's option, at either (i)
the average prime rates announced from time to time by The Chase Manhatten
Bank, Citibank, N.A. and Morgan Guaranty Trust Company of New York plus 0.5%
per annum; or (ii) at LIBOR plus 1.75%. The Company has consistently selected
the LIBOR rate option resulting in an effective interest rate of
approximately 7.75%. As required by the
10
ING and TCW Credit Agreements, on April 30, 1998 the Company paid $140,000 to
put in place an interest rate hedge. The hedge covers the period June 12,
1998 through December 12, 2000 and effectively provides a 6.75% LIBOR rate
interest ceiling (before consideration of the 1.75% adjustment) on $35.0
million of borrowings under the ING Credit Agreement. The loan from ING is
secured by a first lien on substantially all assets of the Company.
The TCW Credit Agreement is comprised of a $65.0 million tranche and a $10.0
million tranche and is payable interest only, at a rate of 9.75% per annum,
quarterly until the earlier of December 31, 2003 or the date on which the ING
loan is paid in full. At that time, the TCW Credit Agreement converts to a
term loan payable in twelve quarterly installments of principal and interest.
The quarterly principal installments are $6.25 million for the first four
quarters, $8.75 million for the next four quarters and $3.75 million for the
last four quarters. The Company granted warrants to TCW to purchase 100,000
shares of common stock at an exercise price of $10.00 per share (subject to
anti-dilution adjustments) at any time after September 23, 2000 and before
September 23, 2007. The Company also granted registration rights in
connection with such warrants. TCW is also entitled to additional interest on
the $65.0 million tranche in an amount that yields TCW a 12.5% internal rate
of return, such interest payment to be made concurrently with the final
payment of all principal and interest on the TCW Credit Agreement. For
purposes of the internal rate of return calculation, the Company is given
credit for the funding fee of $2.25 million paid to TCW at closing. In
regards to the $10.0 million tranche, upon payment in full of the TCW Credit
Agreement by the Company, TCW may elect to "put" their warrant back to the
Company and accept a cash payment which will cause TCW to achieve a 12.5%
rate of return. The TCW Credit Agreement restricts any repayment of the
indebtedness until October 1, 1999. The TCW Credit Agreement is secured by a
second lien on substantially all assets of the Company.
The TCW and ING Credit Agreements have common covenants that restrict the
payment of cash dividends, borrowings, sale of assets, loans to others,
investment and merger activity and hedging contracts without the prior
consent of the lenders and requires the Company to maintain certain net
worth, interest coverage and working capital ratios. Subsequent to June 30,
1998, certain covenants common to both the ING Credit Agreement and the TCW
Credit Agreement were either amended or waived, allowing the Company to
remain in compliance as of June 30, 1998.
CRUDE OIL HEDGING ACTIVITIES - The Company has a hedge in place with
Enron Capital and Trade Resources Corp. (the "Enron Hedge") that hedges crude
oil production over a five year period beginning January 1, 1996 in monthly
amounts escalating from 8,500 Bbls in January 1996 to 14,000 Bbls in December
2000. The hedge is structured as a cost free collar whereby the average
monthly price, based on NYMEX Light Sweet Crude Oil Futures Contracts, is
between $18.00 and $20.55 per barrel. On January 1, 1997, the Company paid
$34,170 to enter into a contract with Koch Gas Services Company ("Koch") that
exactly offsets the effect of the Enron Hedge during the period January 1998
through December 2000.
The Company also had a put contract with Enron for 100,000 barrels per month
from January 1998 through March 1998 at a put price of $16.00 per barrel. The
Company recorded $95,500 of income under this contract in the first quarter
of 1998.
On March 12, 1998, the Company entered into a cost free collar with Enron
whereby the average monthly price, based on NYMEX Light Sweet Crude Oil
Futures Contracts, is between $14.50 and $17.70 per barrel. The collar covers
75,000 barrels per month for the period from April 1998 through December
1998. The Company recorded income of $62,000 during the second quarter of
1998 under this contract.
11
MARKETS - The availability of a ready market and the prices obtained for
the Company's crude oil and natural gas depend on many factors beyond the
Company's control, including the extent of domestic production, imports of
oil and gas, the proximity and capacity of crude oil and natural gas
pipelines and other transportation facilities, fluctuating demands for oil
and gas, the marketing of competitive fuels, and the effects of governmental
regulation of oil and gas production and sales. Future decreases in the
prices of oil and gas would have an adverse effect on the Company's proved
reserves, revenues, profitability and cash flow, although the Company has
somewhat mitigated this risk by entering into certain hedging arrangements.
The oil produced from the Monument Butte Field is called "Black Wax" and is
sold at the posted field price (an industry term of the fair market value of
oil in a particular field) less a deduction of approximately $0.85 to $1.00
per barrel for oil quality adjustments. As the quantity of Black Wax produced
within the Monument Butte Field grows, physical limitations within the
regional refineries, located in Salt Lake City, Utah, will limit the amount
of Black Wax that can be economically processed. One of the reasons for
acquiring the Woods Cross Refinery was to provide a refining source, if
needed, for the Company's Black Wax production. During April 1998, the
Company began transporting approximately 2,000 barrels per day of its crude
oil production to the Woods Cross Refinery and is currently performing
additional upgrades to the Woods Cross Refinery to accommodate increased
Black Wax crude oil refining. Although the Company has held discussions with
the other Salt Lake City refineries to inform them of the outlook for Black
Wax production in this region, they have been unwilling to make modifications
to their existing plant configurations. Until the complete upgrading of the
Woods Cross Refinery is finished or refinery modifications at one or more of
the other refineries are accomplished, there will continue to be downward
pressure on Black Wax pricing, although there can be no assurance that these
potential changes will significantly impact the price received for Black Wax
production.
The Company continues to aggressively seek other opportunities to acquire
existing oil and gas production in developed fields. The Company will attempt
to finance such acquisitions through (i) seller financing, whenever possible;
(ii) joint operating agreements with industry partners where the Company may
sell part of its position to provide acquisition and development funds; (iii)
sales of equity or debt of the Company; or (iv) traditional bank lines of
credit, although the Company currently has no existing bank lines of credit
or arrangements with any bank to loan funds, except as described above.
ENVIRONMENTAL MATTERS - The Company is subject to numerous federal and
state laws and regulations relating to environmental matters. Increasing
focus on environmental issues nationally has lead the Company to continue to
evaluate its responsibilities to the environment. During 1996, the Vernal,
Utah office of the Bureau of Land Management ("BLM") undertook the
preparation of an Environmental Assessment ("EA") relating to certain lands
within the Monument Butte Field. Due to this process, the Company reduced its
activities on these lands during the last six months of 1996 and January 1997
pending issuance of the EA by the BLM. The formal Record of Decision relating
to the EA was issued by the BLM on February 3, 1997. The Company believes it
will be able to comply with the Record of Decision without causing a material
impact on its future drilling plans in the Monument Butte Field.
The Company believes it is in compliance in all material respects with
applicable federal, state and local environmental regulations. There are no
environmental proceedings pending against the Company.
INFLATION AND CHANGES IN PRICES
The Company's revenues and the value of its oil and gas properties have been
and will be affected by changes in oil and gas prices. The Company's ability
to borrow from traditional lending sources and to obtain additional capital
on attractive terms is also substantially dependent on oil and gas prices.
Oil and gas prices are subject to significant seasonal and other fluctuations
that are beyond the Company's ability to control or predict. Although certain
of the Company's costs and expenses are affected by the level of inflation,
inflation did not have a significant effect on the Company's result of
operations during 1998 or 1997.
12
YEAR 2000 ISSUES
The Company is aware of the issues associated with the programming code in
many existing computer systems as the millennium approaches. The "Year 2000"
problem is pervasive; virtually every computer operation may be affected in
some way by the rollover of the digit value to 00. The risk is that computer
systems will not properly recognize sensitive information when the year
changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail, resulting in
business interruption.
The Company is conducting a review of its computer systems and is taking
steps to correct Year 2000 compliance issues. The Company has identified
computer hardware and software that is not Year 2000 compliant and is taking
steps to update these resources. The Company benefits from having relatively
new computer systems in most locations and management believes the Year 2000
issues can be mitigated without a significant effect on the Company's
financial position. However, given the complexity of the Year 2000 issue,
there can be no assurance that the Company will be able to address the
problem without incurring costs that are material to future financial results
or that may cause reported financial information to not be necessarily
indicative of future operating results or future financial condition.
FORWARD LOOKING STATEMENTS
Statements that are not historical facts included in this Form 10-Q are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 that involve risks and uncertainties that could
cause actual results to differ from projected results. Such statements
address activities, events or developments that the Company expects,
believes, projects, intends or anticipates will or may occur, including such
matters as future capital, development and exploration expenditures
(including the amount and nature thereof), drilling of wells, reserve
estimates (including the present value of future net revenues), future
production of oil and gas, business strategies, expansion and growth of the
Company's operations, cash flow, marketing of crude oil and natural gas,
sources of crude oil for refining, marketing of refined products and refinery
maintenance, operations and upgrades. Factors that could cause actual results
to differ materially ("Cautionary Disclosures") are described throughout this
Form 10-Q. Cautionary Disclosures include, among others: general economic
conditions, the market price of crude oil and natural gas, the Company's
ability to find, acquire, market, develop and produce new properties,
operating hazards attendant to the oil and gas industry and crude oil
refining industry, uncertainties in the estimation of proved reserves and in
the projection of future rates of production and timing of development
expenditures, the strength and financial resources of the Company's
competitors, the Company's ability to find and retain skilled personnel,
climatic conditions, labor relations, availability and cost of material and
equipment, environmental risks and compliance, the results of financing
efforts, and regulatory developments and compliance. All written and oral
forward-looking statements attributable to the Company are expressly
qualified in their entirety by the Cautionary Disclosures. The Company
disclaims any obligation to update or revise any forward-looking statement to
reflect events or circumstances occurring hereafter or to reflect the
occurrence of anticipated or unanticipated events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK:
This Item is not applicable to the Company for this Form 10-Q.
13
PART II. OTHER INFORMATION
INLAND RESOURCES INC.
Items 1and 3 are omitted from this report as inapplicable.
ITEM 2. CHANGES IN SECURITIES.
The Company accrued for issuance 23,212 shares of common stock dividends
related to its Series C preferred stock during the period from April 1, 1998
to June 30, 1998. The Company relied on the exemption provided by Section 4
(2) of the Securities Act of 1933, as amended.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 30, 1998, the Company held its Annual Meeting of Stockholders. During
this meeting, the stockholders voted on the following items:
The holders of Common Stock and Series C Preferred Stock voted on the
election of six members to the Board of Directors to serve until the 1999
annual meeting of stockholders or until their respective successors are
duly elected and qualified;
This item was approved by an affirmative vote of the total outstanding
shares of Common Stock and Series C Preferred Stock as follows:
Director Nominee Votes For Votes Withheld Abstained
--------------------- ---------- -------------- ---------
Kyle R. Miller 7,214,962 200 4,610
Arthur J. Pasmas 7,214,962 200 4,610
Thomas J. Trzanowski 7,214,962 200 4,610
Paul C. Schorr IV 7,214,912 250 4,610
Gregory S. Anderson 7,214,792 370 4,610
Bruce M. Schnelwar 7,214,692 470 4,610
ITEM 5. OTHER INFORMATION.
The Company may exercise its discretionary authority to vote proxies on any
matter raised at next years annual meeting of stockholders which is not
described in the Company's proxy statement unless the Company has received
notice of such matter from a stockholder on or before April 16, 1999.
14
6. EXHIBITS AND REPORTS ON FORM 8-K.
The following documents are filed as part of this Quarterly Report on Form
10-Q.
Exhibit
Number Description of Exhibits
- ------- -----------------------
3.1 Amended and Restated Articles of Incorporation, as amended through
July 21, 1997 (filed as exhibit 3.1 to the Company's Quarterly Report
on Form 10-QSB for the quarter ended June 30, 1997, and incorporated
herein by reference).
3.2 Bylaws of the Company (filed as Exhibit 3.2 to the Company's
Registration Statement of Form S-18, Registration No. 33-11870-F, and
incorporated herein by reference).
3.2.1 Amendment to Article IV, Section 1 of the Bylaws of the Company
adopted February 23, 1993 (filed as Exhibit 3.2.1 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1992, and incorporated herein by reference).
3.2.2 Amendment to the Bylaws of the Company adopted April 8, 1994 (filed as
Exhibit 3.2.2 to the Company's Registration Statement of Form S-4,
Registration No. 33-80392, and incorporated herein by reference).
3.2.3 Amendment to the Bylaws of the Company adopted April 27, 1994 (filed
as Exhibit 3.2.3 to the Company's Registration Statement of Form S-4,
Registration No. 33-80392, and incorporated herein by reference).
27.1 Financial Data Schedule.*
99.1 Press release dated August 11, 1998.*
- ---------------------
* Filed herewith.
(b) Reports on Form 8-K:
A Form 8-K was filed under Item 5 on July 1, 1998 reporting the Farmout
Agreement with Smith Management LLC.
15
INLAND RESOURCES INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INLAND RESOURCES INC.
---------------------
(Registrant)
Date: August 13, 1998 By: /s/ Kyle R. Miller
-----------------------------------
Kyle R. Miller
Chief Executive Officer
Date: August 13, 1998 By: /s/ Michael J. Stevens
-----------------------------------
Michael J. Stevens
Vice President - Accounting and
Administration
(Principal Accounting Officer)
16