SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-7914
BASIC EARTH SCIENCE SYSTEMS, INC.
---------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 84-0592823
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
8547 E. Arapahoe Road, #J-464, Greenwood Village, CO 80112
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(Address for principal executive offices) (Zip Code)
(303) 773-8000
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 ____
Shares of common stock outstanding on November 10, 2000: 16,530,487
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BASIC EARTH SCIENCE SYSTEMS, INC.
FORM 10-QSB
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements .......................................... 3
Consolidated Balance Sheets - September 30, 2000
and March 31, 2000 ............................................ 3
Consolidated Statements of Operations - Quarters and Six Months
Ended September 30, 2000 and September 30, 1999 ............... 5
Consolidated Statements of Cash Flows - Six Months Ended
September 30, 2000 and September 30, 1999 ..................... 6
Notes to Consolidated Financial Statements .................... 7
Item 2. Management's Discussion and Analysis and Plan of Operation .... 8
Results of Operations ......................................... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................. 16
Item 2. Changes in Securities ......................................... 16
Item 3. Defaults Upon Senior Securities ............................... 16
Item 4. Submission of Matters to a Vote of Security Holders ........... 16
Item 5. Other Information ............................................. 16
Item 6. Exhibits and Reports on Form 8-K .............................. 16
Signatures ............................................................ 16
2
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PART I.
FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
----------------------------
Basic Earth Science Systems, Inc.
Consolidated Balance Sheets
Page 1 of 2
September 30 March 31
2000 2000
------------ ------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 277,000 $ 265,000
Accounts receivable
Oil and gas sales 327,000 305,000
Joint interest and other receivables 262,000 286,000
Less: allowance for doubtful accounts (50,000) (50,000)
Other current assets 94,000 132,000
------------ ------------
Total current assets 910,000 938,000
------------ ------------
Property and equipment
Oil and gas property (full cost method) 32,967,000 32,914,000
Support equipment 307,000 303,000
------------ ------------
33,274,000 33,217,000
Accumulated depletion - FCP (includes cumulative
ceiling limitation charges of $14,961,000) (31,771,000) (31,674,000)
Accumulated depreciation (271,000) (262,000)
------------ ------------
Net property and equipment 1,232,000 1,281,000
Other non-current assets 159,000 163,000
------------ ------------
Total non-current assets 1,391,000 1,444,000
------------ ------------
Total Assets $ 2,301,000 $ 2,382,000
============ ============
See accompanying notes to consolidated financial statements.
3
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Basic Earth Science Systems, Inc.
Consolidated Balance Sheets
Page 2 of 2
September 30 March 31
2000 2000
------------ ------------
Liabilities
Current liabilities
Accounts payable $ 248,000 $ 484,000
Accrued liabilities 295,000 246,000
Current portion of long-term debt 33,000 240,000
------------ ------------
Total current liabilities 576,000 970,000
------------ ------------
Long-term debt, less current portion 221,000 221,000
------------ ------------
Shareholders' Equity
Preferred stock, $.001 par value
Authorized - 3,000,000 shares
Issued - 0 shares -- --
Common stock, $.001 par value
32,000,000 shares authorized;
16,879,752 shares issued at September 30
and at March 31 17,000 17,000
Additional paid-in capital 22,692,000 22,692,000
Accumulated deficit (21,182,000) (21,495,000)
Treasury stock (349,265 shares at September 30
and March 31); at cost (23,000) (23,000)
------------ ------------
Total shareholders' equity 1,504,000 1,191,000
------------ ------------
Total Liabilities and Shareholders' Equity $ 2,301,000 $ 2,382,000
============ ============
See accompanying notes to consolidated financial statements.
4
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Basic Earth Science Systems, Inc.
Consolidated Statements of Operations
Six Months Ended Quarters Ended
September 30 September 30
2000 1999 2000 1999
------------ -------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue
Oil and gas sales $ 1,384,000 $ 897,000 $ 759,000 $ 503,000
Well service revenue 16,000 16,000 6,000 16,000
------------ ------------ ------------ ------------
Total revenue 1,400,000 913,000 765,000 519,000
------------ ------------ ------------ ------------
Expenses
Oil and gas production 787,000 481,000 398,000 211,000
Production tax 113,000 76,000 67,000 41,000
Well service expenses 15,000 14,000 7,000 14,000
Depreciation, depletion and
amortization 99,000 120,000 49,000 59,000
General and administrative 55,000 42,000 32,000 24,000
------------ ------------ ------------ ------------
Total operating expenses 1,069,000 733,000 553,000 349,000
------------ ------------ ------------ ------------
Income from operations 331,000 180,000 212,000 170,000
------------ ------------ ------------ ------------
Other income (expense)
Interest and other income 6,000 4,000 3,000 2,000
Interest expense (24,000) (27,000) (11,000) (13,000)
------------ ------------ ------------ ------------
Total other expense (18,000) (23,000) (8,000) (11,000)
------------ ------------ ------------ ------------
Income before income taxes 313,000 157,000 204,000 159,000
Income taxes -- -- -- --
------------ ------------ ------------ ------------
Net income $ 313,000 $ 157,000 $ 204,000 $ 159,000
============ ============ ============ ============
Basic weighted average number
of shares outstanding 16,530,487 16,530,487 16,530,487 16,530,487
============ ============ ============ ============
Diluted weighted average number
of shares outstanding 16,729,406 16,729,406 16,729,406 16,729,406
============ ============ ============ ============
Basic and diluted net income
per share $ .019 $ .010 $ .012 $ .010
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
5
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Basic Earth Science Systems, Inc.
Consolidated Statements of Cash Flows
Six Months Ended
September 30
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 313,000 $ 157,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 99,000 120,000
Change in current assets and current liabilities:
Accounts receivable, net 2,000 (145,000)
Other assets 35,000 10,000
Accounts payable and accrued liabilities (187,000) (23,000)
Other 7,000 6,000
--------- ---------
Net cash provided by operating activities 269,000 125,000
--------- ---------
Cash flows from investing activities:
Capital expenditures
Oil and gas property (180,000) (133,000)
Support equipment (4,000) --
Purchase of lease and well equipment inventory (9,000) --
Proceeds from sale of lease and well equipment inventory 45,000 --
Proceeds from sale of oil and gas property and equipment 98,000 140,000
--------- ---------
Net cash provided by (used in) investing activities (50,000) 7,000
--------- ---------
Cash flows from financing activities:
Long-term debt payments (207,000) (80,000)
Proceeds from borrowing -- 50,000
--------- ---------
Net cash used in financing activities (207,000) (30,000)
--------- ---------
Cash and cash equivalents:
Net increase 12,000 102,000
Balance at beginning of period 265,000 38,000
--------- ---------
Balance at end of period $ 277,000 $ 140,000
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 24,000 $ 27,000
See accompanying notes to consolidated financial statements.
6
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Basic Earth Science Systems, Inc.
Notes to Consolidated Financial Statements
September 30, 2000
The accompanying interim financial statements of Basic Earth Science Systems,
Inc. (Basic or the Company) are unaudited. However, in the opinion of
management, the interim data includes all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim period.
The financial statements included herein have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations.
Management believes the disclosures made are adequate to make the information
not misleading and suggests that these condensed financial statements be read in
conjunction with the financial statements and notes thereto included in Basic's
Form 10-KSB for the year ended March 31, 2000.
FORWARD-LOOKING STATEMENTS
--------------------------
This Form 10-QSB includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact included in this Form 10-QSB, including, without
limitation, the statements under both "Notes to Consolidated Financial
Statements" and "Item 2. Management's Discussion and Analysis and Plan of
Operation" located elsewhere herein regarding the Company's financial position
and liquidity, the amount of and its ability to make debt service payments, its
strategies, financial instruments, and other matters, are forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from the Company's expectations are
disclosed in this Form 10-QSB in conjunction with the forward-looking statements
included in this Form 10-QSB.
FASB 133
--------
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which establishes accounting and reporting
standards for derivative instruments including certain derivative instruments
embedded in other contracts and for hedging activities. SFAS 133 is effective
for all fiscal periods beginning after June 15, 1999. During the past year the
FASB adopted SFAS No. 137 that extended the effective date of SFAS No. 133 from
fiscal periods beginning after June 15, 1999 to fiscal periods beginning after
June 15, 2000. Management believes the adoption of this statement will have no
material impact on the Company's financial statements.
7
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
RECLASSIFICATIONS. Certain prior year amounts may have been reclassified to
conform to current year presentation.
CASH AND CASH EQUIVALENTS. For purposes of the Consolidated Balance Sheets and
Statements of Cash Flows, Basic considers all highly liquid investments with a
maturity of ninety days or less when purchased to be cash equivalents.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. There are many factors, including global events, which may influence
the production, processing, marketing, and valuation of crude oil and natural
gas. A reduction in the valuation of oil and gas properties resulting from
declining prices or production could adversely impact depletion rates and
ceiling test limitations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
LIQUIDITY. During the six months ended September 30, 2000 Basic's current assets
decreased 3% from $938,000 at year end March 31, 2000 (March 31) to $910,000 at
September 30, 2000 (September 30) while current liabilities decreased 41% from
$970,000 at March 31 to $576,000 at September 30. Consequently, the Company's
current ratio increased from 0.97:1 at March 31 to 1.58:1 at September 30. A
specific bank covenant requires the maintenance of a current ratio of at least
1:1 after adjustment for the removal of the current portion of long-term debt.
At September 30 the Company was in compliance with all bank covenants and
Basic's current ratio was approximately 1.68:1 as calculated per the provisions
of the covenants.
The drop in current assets was primarily the result of a $38,000 (29%) decrease
in Other Current Assets. Included in this category is the Company's lease and
well equipment inventory that is held for re-sale. During the quarter ended
September 30 Basic sold from this inventory two pumping units for their carrying
value of $31,000. The $22,000 (7%) increase in oil and gas sales receivable was
a direct result of higher oil prices at September 30 relative to prices at March
31 as discussed in more detail in the Results of Operations section below. As
for joint interest and other receivables, the $24,000 (8%) decrease was
primarily due to a drop in the level of workover/repair activity (operating
expenses beyond the normal day-to-day operations and maintenance) on
Company-operated wells in August/September compared to February/March.
8
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As for the substantial drop in current liabilities, the continued strong cash
flow fueled by the current level of oil prices has allowed Basic the opportunity
to pay down its trade accounts payable by 49%, from $484,000 at March 31 to
$248,000 at September 30. Also, the drop in the level of workover/repair
activity mentioned above contributed to the decrease in trade accounts payable.
The 20% increase in accrued liabilities from $246,000 at March 31 to $295,000 at
September 30 can be attributed primarily to two factors. First, effective May 1,
Basic purchased an approximate 5.9% working interest (approximate 4.2% net
revenue interest) in two gas wells in Matagorda County, Texas. The Company took
over as operator and is responsible for distribution of the gas and condensate
revenues to the 100% working interest. Revenue received but not yet distributed
added approximately $35,000 to accrued liabilities relative to March 31. Second,
subsequent to September 30 and retroactive to July 1, the state of Montana
eliminated stripper-well production tax incentives due to high oil prices. This
increased Basic's severance tax liability to Montana for the quarter ended
September 30 approximately $16,000, which was included in accrued liabilities at
September 30. The decrease in current portion of long-term debt is discussed in
the following "Debt" section.
DEBT. Under the terms of the loan agreement with its bank at March 31, the
Company had a borrowing base of $461,000 with no remaining borrowing capacity.
Effective June 29, 2000 the loan agreement was amended such that Basic's
borrowing capacity was increased $120,000 to facilitate the previously disclosed
acquisition in Matagorda County, Texas. It should be noted that these funds were
never utilized. Offsetting this increase, under the terms of the loan agreement,
the borrowing base was reduced $20,000 per month. As a result, at September 30
the borrowing base remained at $461,000.
Effective July 1, 2000 Basic sold at auction its non-operated working interests
in two gas wells. Net proceeds from the sale of these properties were $87,000.
These funds were used to pay down the Company's long-term debt. With this debt
reduction and $20,000 monthly principal payments for the six months ended
September 30, the outstanding principal balance was reduced to $254,000 by
September 30.
These efforts left Basic with additional borrowing capacity at September 30 of
$207,000. With this additional borrowing capacity, if Basic so elected, it would
only be obligated to make principal payments totaling $33,000 by September 30,
2001. However, as long as oil prices sustain their current levels and cash flow
remains strong, the Company intends to continue making monthly principal
payments of $20,000. As of November 10, 2000 none of the additional borrowing
capacity had been utilized.
HEDGING. On August 31, 1999 Basic and its bank entered into an agreement to
hedge two thousand barrels per month (slightly less than one-third of the
Company's anticipated oil production) for a one-year period from September 1999
through August 2000. The type of hedge used was a "Zero-Cost Collar" whereby
Basic was protected for the stated quantity against a drop in oil prices below
the NYMEX floor price of $18.00, but would forfeit any additional revenue should
oil prices exceed the NYMEX cap price of $22.12. There would be no effect should
oil prices remain between the floor and cap prices. This hedge expired on August
31, 2000. During the five months beginning with the start of the current fiscal
year through August 31 Basic incurred hedging losses of approximately $81,000.
9
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At September 30 the Company had no hedging contracts in place. This should not
be construed as a change in Company policy. Rather, it reflects the high level
of backwardation in the current futures market and, as a result, the high
cost/inability to hedge future sales at current prices. Basic intends to monitor
the futures market in an effort to identify, and participate in, hedging
opportunities that the Company views as favorable.
LIQUIDITY OUTLOOK. The Company's primary source of funding is the net cash flow
from the sale of its oil and gas production. The profitability and cash flow
generated by the Company's operations in any particular accounting period will
be directly related to: (a) the volume of oil and gas produced and then sold,
(b) the average realized prices for oil and gas sold, and (c) lifting costs.
Assuming oil prices do not decline significantly from current levels, management
believes the cash generated from operations will enable the Company to meet its
existing and normal recurring obligations as they become due in fiscal 2001. In
addition, as mentioned in the "Debt" section above, Basic has $207,000 available
in additional borrowing capacity.
STRATEGY IMPLEMENTATION
-----------------------
GENERAL. The Company's long term plan of operation involving Development,
Acquisitions, Drilling and Divestitures/Abandonments is described below. The
Company may alter or vary this plan of operation based upon changes in
circumstances, unforeseen opportunities, inability to negotiate favorable
acquisition or loan terms, lack of funding and other events which the Company is
not able to anticipate.
DEVELOPMENT. The Company holds a number of properties that management believes
has the potential for increased cash flow and may have additional unproved
reserves that could be exploited. This exploitation may be realized by
conventional and unconventional petroleum engineering techniques and field
management practices. Management intends to pursue these potential opportunities
as long as oil prices remain at current levels and the exploitation costs can be
funded with cash flow from operations and/or any available borrowing capacity on
its revolving line of credit.
ACQUISITIONS. Effective May 1, 2000 Basic, through a series of transactions,
purchased an approximate 5.9% working interest (approximate 4.2% net revenue
interest) in two gas wells in Matagorda County, Texas for $70,000. This purchase
was financed entirely by cash flow from operations. As part of the transaction
the Company will operate both wells. Currently, one of the wells is shut in,
while the other produces approximately 30 barrels of condensate and 375 cubic
feet of gas per day. Basic believes that both wells have further potential in
other intervals, although the Company has no immediate plans to recomplete
either well. Net income from the one producing well was $15,000 during the six
months ended September 30.
Also, effective July 1, 2000, Basic purchased at auction for $11,000 approximate
15% and 12% non-operated working interests in, respectively, an oil well and
adjacent salt water disposal well in Billings County, North Dakota. These wells
added approximately $2,000 to cash flow from operations in the quarter ended
September 30. At the same auction the Company was also able to acquire for $600
a 25% non-operated working interest in an oil well in Sheridan County, Montana.
This well contributed more than $3,000 to cash flow from operations in the
quarter ended September 30.
10
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Basic continues to evaluate properties that are made available for sale.
However, there can be no assurances that funds in excess of its additional
borrowing capacity will be available to pursue such opportunities or that offers
the Company may submit will be accepted.
DRILLING. While drilling is no longer the major focus of the Company's strategy,
Basic may participate in high quality development or exploratory prospects which
management believes are capable of increasing reserves and cash flow with
reasonable risk.
DIVESTITURES/ABANDONMENTS. Effective July 1, 2000 Basic sold at auction its
non-operated working interests in two gas wells, one in Oklahoma and one in
Texas. Net proceeds from the sale of these properties were $87,000. These two
wells accounted for $24,000 of net income in fiscal 2000 and comprised
approximately 2 percent of the Company's total estimated oil and gas reserves at
March 31, 2000.
The Company holds a number of marginal, operated and non-operated properties in
several states. Basic intends to continue its efforts to plug or sell these
wells.
RESULTS OF OPERATIONS
---------------------
Year-to-Date Comparison
OVERVIEW. Operations in the six months ended September 30, 2000 (2000) resulted
in net income of $313,000 compared to net income of $157,000 for the six months
ended September 30, 1999 (1999).
REVENUES. Oil and gas sales revenue increased $487,000 (54%) in 2000 over 1999.
Oil sales revenue increased $457,000 (58%). A significant jump in oil prices
contributed $430,000 to this increase in oil sales revenue while an increase in
oil sales volume added $27,000. Hedging losses totaling $81,000 in 2000 and
$6,000 in 1999 negatively impacted oil sales revenue. Gas sales revenue
increased $30,000 (29%) in 2000 from 1999. A decrease in gas sales volume
accounted for a $24,000 drop in gas sales revenue. However, this was more than
offset by a $54,000 increase resulting from a rise in gas prices.
VOLUMES AND PRICES. Total liquid sales volume increased 3%, from 46,300 barrels
in 1999 to 47,900 barrels in 2000 while there was a 52% increase in the average
price per barrel from $17.13 in 1999 to $26.09 in 2000. Total gas sales volume
decreased 23%, from 56,000 Mcf in 1999 to 43,000 Mcf in 2000 while the average
price per Mcf increased 67%, from $1.84 in 1999 to $3.08 in 2000. The hedging
losses mentioned above reduced the average price per barrel $1.68 in 2000 while
the effect of the hedging loss in 1999 was negligible.
11
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Concerning the increase in oil sales volume, normal production decline and a
loss of sales from shut-in wells (6,400 barrels from four wells that management
elected to shut in pending further evaluation) and wells that have been sold
(700 barrels) were more than offset by a gain in sales volume generated from
three sources. First, eight new wells contributed 3,500 barrels to 2000 sales.
These wells were either purchased subsequent to the 1999 period or contributed
only negligible amounts to 1999 sales as they were put on production at the end
of the period. Second, three recompleted wells increased 2000 sales by 7,500
barrels. And finally, Basic realized an additional 1,600 barrels from three
wells that were shut in during all or a portion of 1999 due to low oil prices
and placed back on production subsequent to September 30, 1999.
The decrease in gas sales volumes from 1999 to 2000 was primarily due to normal
production decline and the loss of sales (8,100 Mcf) from non-operated
properties that were sold. In addition, Basic realized larger than expected
production declines from three gas wells in Weld County, Colorado. The Company
is currently evaluating these properties for further development to either
restore production to anticipated levels or possibly enhance production.
EXPENSES. Oil and gas production expense increased $306,000 (64%) in 2000 over
1999. The main sources of the increase are the same wells that had a positive
impact on oil sales volumes in 2000 mentioned above. The eight new wells
purchased at the end of the 1999 period or subsequent to September 30, 1999
added $43,000 to production expense in 2000. In addition to these eight wells,
Basic acquired five other wells that were shut in at the time of purchase. These
wells added $41,000 to production expense in 2000. Of this amount, $38,000 has
been spent attempting to re-establish production on three of the wells. The
Company is still evaluating the results of its efforts. The three recompletions
increased 2000 production expense $137,000 over 1999. Finally, the three wells
that were shut in for all or a portion of 1999 and were placed back on
production added $38,000 to production expense in 2000. In addition, an increase
in workovers/repairs on other properties was only partially offset by a decrease
in oil and gas production expense from properties that were either sold
($13,000) or shut in ($37,000) subsequent to September 30, 1999.
Production taxes increased $37,000 (49%) as a result of two factors. First,
production taxes are a function of oil and gas sales revenue. Therefore, the
increase in oil and gas sales revenue directly resulted in an increase in
production taxes. Second, effective July 1, 2000, the state of Montana
eliminated stripper-well production tax incentives due to high oil prices. This
increased production taxes approximately $16,000.
As a result of a 62% increase in oil and gas production expense and production
taxes combined and a 1% decrease in equivalent barrel sales volume, the overall
lifting cost per equivalent barrel increased 63% from $10.00 in 1999 to $16.31
in 2000. Management cautions that this cost per equivalent barrel is not
indicative of all wells, and that certain high cost wells would once again be
shut in should oil prices begin to drop.
Depreciation, depletion and amortization expense decreased $21,000 (18%) in 2000
from 1999. Production levels and changes in reserve estimates affect
depreciation, depletion and amortization rates. The slight decline in equivalent
barrel production in 2000 relative to 1999 combined with a significant increase
in estimated oil and gas reserves at year end March 31, 2000 over March 31, 1999
caused the depletion rate (the ratio of production for the year divided by the
estimated reserves at the beginning of the year) to drop from 10.0% in 1999 to
7.3% in 2000. As a result, the depletion rate per equivalent barrel decreased
from $2.11 in 1999 to $1.76 in 2000.
12
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Gross general and administrative (G&A) expense increased $40,000 (30%), in 2000
over 1999 while net G&A increased $13,000 (31%). Gross G&A expense differs from
net G&A expense in that the Company is allowed to recover an overhead fee on
wells that it operates. This fee is applied against, and serves to reduce, gross
G&A expense. The increase in gross G&A expense was primarily due to three
factors. First, was the reinstatement of the Company president's salary that had
been voluntarily reduced 50% in 1999 to improve cash flow during the period of
depressed oil prices. As prices recovered and showed signs of stabilizing in the
$20-$30 per barrel range, his salary was restored in December 1999 to its
original level. The second factor was the additional expenses incurred with
respect to Basic's change in independent auditors for the year ended March 31,
2000 and the previous auditor's review of the Company's Form 10-KSB. And the
last factor was the increased use of financial consulting services in 2000
relative to 1999. The percentage of gross general and administrative expense
that Basic was able to charge to Company-operated wells was 63% in 2000 compared
to 66% in 1999. Net general and administrative expense per equivalent barrel
increased 30% from $0.77 in 1999 to $1.00 in 2000.
OTHER INCOME/(EXPENSE). Other income/(expense) decreased $5,000 (22%) from a net
expense of $23,000 in 1999 to a net expense of $18,000 in 2000. The decrease was
primarily the result of reduced interest expense due to a lower average
outstanding balance due on the Company's bank debt.
Quarter Ended September 30, 2000 Compared to Quarter Ended September 30, 1999
OVERVIEW. Operations in the quarter ended September 30, 2000 (2000) resulted in
net income of $204,000 compared to net income of $159,000 in the quarter ended
September 30, 1999 (1999).
REVENUES. Oil and gas sales revenue increased $256,000 (51%) in 2000 over 1999.
Oil sales revenue increased $234,000 (52%). Higher oil sales volume accounted
for a $15,000 increase while a jump in oil prices contributed $219,000. Hedging
losses totaling $33,000 in 2000 and $3,000 in 1999 negatively impacted oil sales
revenue. Gas sales revenue increased $22,000 (43%) in 2000 over 1999. A decrease
in gas sales volume accounting for a drop of $9,000 was more than offset by a
$31,000 benefit from higher gas prices.
VOLUMES AND PRICES. Total liquid sales increased 3%, from 23,800 barrels in 1999
to 24,500 barrels in 2000 while there was a 47% jump in the average price per
barrel from $19.00 in 1999 to $27.88 in 2000. Total gas sales decreased 17%,
from 24,700 Mcf in 1999 to 20,500 Mcf in 2000, while the average price per Mcf
increased 73%, from $2.04 in 1999 to $3.53 in 2000. Hedging losses reduced the
average price per barrel $1.35 in 2000 while the effect of the hedging loss in
1999 was negligible.
13
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Concerning the increase in oil sales volume, normal production decline and a
loss of sales from shut-in wells (3,300 barrels from four wells that management
elected to shut in pending further evaluation) were more than offset by a gain
in sales volume generated from three sources. First, eight new wells contributed
1,700 barrels to 2000 sales. Second, three recompleted wells increased 2000
sales by 3,700 barrels. And finally, Basic realized an additional 1,400 barrels
from three wells that were shut in during all or a portion of the 1999 period
due to low oil prices and placed back on production subsequent to September 30,
1999.
The decrease in gas sales volume can again be attributed to normal production
decline, loss of sales (5,400 Mcf) from non-operated properties that were sold
and larger than expected production declines from some gas wells in Weld County,
Colorado. The Company is currently evaluating these properties for further
development to either restore production to anticipated levels or possibly
enhance production.
EXPENSES. Oil and gas production expense increased $187,000 (89%) in 2000 over
1999. New wells purchased at the end of the 1999 period or subsequent to
September 30, 1999 added $41,000 to production expense in 2000. The three wells
that were recompleted increased 2000 production expense $63,000 over 1999 while
the three wells that were shut in for all or a portion of 1999 and were placed
back on production added $33,000 to production expense in 2000. In addition,
Basic incurred additional expenses of $60,000 in 2000 over 1999 in an effort to
enhance production from the Company's waterflood project in Webb County, Texas.
Results of these efforts should be realized in the third quarter. These
increases were partially offset by a decrease in oil and gas production expense
from properties that were either sold ($5,000) or shut in ($23,000) subsequent
to September 30, 1999.
Production taxes increased $26,000 (63%) as a direct result of the increase in
oil and gas sales revenue and the elimination of stripper-well production tax
incentives in Montana. An 85% increase in oil and gas production expense and
production taxes combined together with equivalent barrel sales volume that was
flat from 1999 to 2000 resulted in the overall lifting cost per equivalent
barrel increasing from $8.99 in 1999 to $16.58 in 2000.
Depreciation, depletion and amortization expense decreased $10,000 (17%) in 2000
from 1999. Again, this was due to the significant increase in estimated oil and
gas reserves at year end March 31, 2000 over March 31, 1999 that caused the
depletion rate to drop from 5.0% in 1999 to 3.7% in 2000. As a result, the
depletion rate per equivalent barrel decreased from $2.06 in 1999 to $1.73 in
2000.
Gross general and administrative expense increased $21,000 (29%) in 2000 over
1999 while net general and administrative expense increased $8,000 (33%). The
increase in gross G&A expense was again primarily due the reinstatement of the
Company president's salary discussed above and a related increase in certain
employee benefits that had been reduced during the period of depressed oil
prices in order to improve cash flow. The percentage of gross general and
administrative expense that Basic was able to charge to Company-operated wells
was 59% in 2000 compared to 64% in 1999. Net general and administrative expense
per equivalent barrel increased 28% from $0.88 in 1999 to $1.13 in 2000.
14
<PAGE>
OTHER INCOME/(EXPENSE). Other income/(expense) decreased $3,000 (27%) from a net
expense of $11,000 in 1999 to an $8,000 net expense in 2000. The decrease was
primarily the result of reduced interest expense due to a lower average
outstanding balance due on the Company's bank debt in 2000 compared to 1999.
Liquids and Natural Gas Production, Sales Price and Production Costs
--------------------------------------------------------------------
The following table shows selected financial information for the six months and
quarter ended September 30 in the current and prior year. Certain prior year
amounts may have been reclassified to conform to current year presentation.
<TABLE>
<CAPTION>
Six Months Ended Quarters Ended
September 30 September 30
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales volume
Oil (barrels) 47,900 46,300 24,500 23,800
Gas (mcf) 43,000 56,000 20,500 24,700
Revenue
Oil $1,251,000 $ 794,000 $ 686,000 $ 452,000
Gas 133,000 103,000 73,000 51,000
---------- ---------- ---------- ----------
1,384,000 897,000 759,000 503,000
Total production expense(1) 900,000 557,000 465,000 252,000
---------- ---------- ---------- ----------
Gross profit $ 484,000 $ 340,000 $ 294,000 $ 251,000
========== ========== ========== ==========
Depletion expense $ 97,000 $ 117,000 $ 48,000 $ 57,000
Average sales price(2)
Oil (per barrel) $ 26.09 $ 17.13 $ 27.88 $ 19.00
Gas (per mcf) $ 3.08 $ 1.84 $ 3.53 $ 2.04
Average production expense(1,2,3) $ 16.31 $ 10.00 $ 16.58 $ 8.99
Average gross profit(2,3) $ 8.80 $ 6.11 $ 10.48 $ 8.99
Average depletion expense(2,3) $ 1.76 $ 2.11 $ 1.73 $ 2.06
Average general and administrative expense(2,3) $ 1.00 $ 0.77 $ 1.13 $ 0.88
----------------------------
</TABLE>
(1) Operating expenses, including production tax
(2) Averages calculated based upon non-rounded figures
(3) Per equivalent barrel (6 mcf of gas is equivalent to 1 barrel of oil)
15
<PAGE>
PART II.
OTHER INFORMATION
-----------------
(Cumulative from March 31, 2000)
Item 1. Legal Proceedings
-------------------------
None.
Item 2. Changes in Securities
-----------------------------
None.
Item 3. Defaults Upon Senior Securities
---------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------
During the six months ended September 30, 2000, there were no meetings of
Basic's shareholders nor were any matters submitted to a vote of security
holders through the solicitation of consents, proxies or otherwise.
Item 5. Other Information
-------------------------
None.
Item 6. Exhibits and Reports on Form 8-K
----------------------------------------
None.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is signed by the following authorized person on behalf of Basic.
BASIC EARTH SCIENCE SYSTEMS, INC.
/s/ Ray Singleton
-------------------------
Ray Singleton, President and
Principal Accounting Officer
Date: November 10, 2000
16
