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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
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[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1997
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: 000-23185
PETROGLYPH ENERGY, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 74-2826234
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
6209 NORTH HIGHWAY 61
HUTCHINSON, KANSAS 67502
(Address of principal executive offices) (Zip Code)
(316) 665-8500
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes No X
--- ---
As of November 30, 1997, 5,458,333 shares of common stock, par value $.01
per share, of Petroglyph Energy, Inc. were outstanding.
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TABLE OF CONTENTS
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Page
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Forward Looking Information and Risk Factors................................. 1
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
Combined Balance Sheets as of September 30, 1997 and
December 31, 1996............................................. 2
Combined Statements of Operations for the Three and Nine
Months Ended September 30, 1997 and 1996...................... 3
Combined Statements of Cash Flows for the Nine Months Ended
September 30, 1997 and 1996................................... 4
Notes to Combined Financial Statements............................ 5
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations..................................... 7
-------------------------
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................. 12
--------------------------------
Signatures........................................................ 13
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PETROGLYPH ENERGY, INC.
FORWARD LOOKING INFORMATION AND RISK FACTORS
Petroglyph Energy, Inc. (the "Company") or its representatives may make
forward looking statements, oral or written, including statements in this
report's Management's Discussion and Analysis of Financial Condition and Results
of Operations, press releases and filings with the Securities and Exchange
Commission, regarding estimated future net revenues from oil and natural gas
reserves and the present value thereof, planned capital expenditures (including
the amount and nature thereof), increases in oil and natural gas production, the
number of wells the Company anticipates drilling in quarterly and annual
periods, the Company's projected financial position, results of operations,
business strategy and other plans and objectives for future operations.
Although the Company believes that the expectations reflected in these forward
looking statements are reasonable, there can be no assurance that the actual
results or developments anticipated by the Company will be realized or, even if
substantially realized, that they will have the expected effects on its business
or results of operations. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include but are not limited to
risks inherent in drilling and other development activities, the timing and
extent of changes in commodity prices, unforeseen engineering and mechanical or
technological difficulties in drilling wells and implementing enhanced oil
recovery programs, the availability, proximity and capacity of refineries,
pipelines and processing facilities, shortages or delays in the delivery of
equipment and services, land issues, federal, state and tribal regulatory
developments and other risks more fully described in the Company's filings with
the Securities and Exchange Commission. All subsequent oral and written forward
looking statements attributable to the Company or persons acting on its behalf
are expressly qualified in their entirety by these factors. The Company assumes
no obligation to update any of these statements.
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ITEM 1. FINANCIAL STATEMENTS
PETROGLYPH ENERGY, INC.
Combined Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, DECEMBER 31,
1997 1996
-------------- -------------
(Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,573 $ 1,578
Accounts receivable:
Oil and natural gas sales 1,061 1,178
Other 634 237
Inventory 1,016 1,065
Prepaid expenses 149 125
------- -------
Total Current Assets 4,433 4,183
------- -------
Property and equipment, successful efforts method at cost:
Proved properties 20,372 13,267
Unproved properties 2,014 1,270
Pipelines, gas gathering and other 6,941 3,430
------- -------
29,327 17,967
Less---Accumulated depletion, depreciation, and amortization (6,299) (5,084)
------- -------
Property and equipment, net 23,028 12,883
Other assets, net of accumulated amortization 1,528 404
------- -------
$28,989 $17,470
======= =======
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities:
Trade $ 5,693 $ 3,768
Oil and natural gas sales 482 657
Deferred revenue - 46
Current portion of long-term debt 89 25
Other 1,177 227
------- -------
Total Current Liabilities 7,441 4,723
Long-term debt 9,065 52
Owners' equity 12,483 12,695
------- -------
$28,989 $17,470
======= =======
</TABLE>
See accompanying notes to combined financial statements.
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PETROGLYPH ENERGY, INC.
Combined Statements of Operations
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating Revenues:
Oil sales $ 1,011 $ 986 $ 2,736 $ 3,530
Natural gas sales 243 175 756 767
Other 10 - 79 -
---------- ---------- ---------- ----------
Total operating revenues 1,264 1,161 3,571 4,297
Operating Expenses:
Lease operating 366 492 1,206 1,821
Production taxes 49 56 147 177
Exploration costs - - - 42
Depletion, depreciation and amortization 449 762 1,469 2,040
General and administrative 367 133 913 722
---------- ---------- ---------- ----------
Total operating expenses 1,231 1,443 3,735 4,802
---------- ---------- ---------- ----------
Operating income (loss) 33 (282) (164) (505)
---------- ---------- ---------- ----------
Other income (expense):
Interest income (expense), net (73) (23) (54) (8)
Gain on sales of property and equipment, net - 204 6 1,378
---------- ---------- ---------- ----------
Net income (loss) before income taxes (40) (101) (212) 865
Pro forma income tax expense (benefit):
Current - (117) - 218
Deferred - 78 - 120
---------- ---------- ---------- ----------
Total pro forma income tax expense
(benefit) - (39) - 338
---------- ---------- ---------- ----------
Pro forma net income (loss) $ (40) $ (62) $ (212) $ 527
========== ========== ========== ==========
Pro forma net income (loss) per share $(.01) $(.02) $(.06) $.19
========== ========== ========== ==========
Pro forma weighted average common shares
outstanding 3,607,527 2,833,333 3,607,527 2,833,333
========== ========== ========== ==========
</TABLE>
See accompanying notes to combined financial statements.
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PETROGLYPH ENERGY, INC.
Combined Statements of Cash Flows
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1997 1996
--------- --------
<S> <C> <C>
Operating Activities:
Net income (loss) before income taxes $ (212) $ 865
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depletion, depreciation and amortization 1,469 2,040
Gain on sales of property and equipment, net (6) (1,378)
Amortization of deferred revenue (46) (252)
Exploration costs - -
Property abandonments - 42
Proceeds from deferred revenue - 570
Changes in assets and liabilities:
Increase in accounts receivable (280) (2,515)
Increase (decrease) in inventory 49 (17)
Increase in prepaid expenses (24) (11)
Increase in accounts payable and accrued liabilities 2,698 1,584
-------- -------
Net cash provided by operating activities 3,648 928
-------- -------
Investing Activities:
Proceeds from sales of property and equipment 740 8,532
Additions to oil and natural gas properties, including
exploration costs (8,015) (6,306)
Additions to pipelines, natural gas gathering and other (4,324) (348)
-------- -------
Net cash provided by (used in) investing activities (11,599) 1,878
-------- -------
Financing Activities:
Proceeds from issuance of, and draws on, notes payable 9,097 2,085
Payments on notes payable (20) (5,900)
Payments for organization and financing costs (1,131) (37)
-------- -------
Net cash provided by (used in) financing activities 7,946 (3,852)
-------- -------
Net decrease in cash and cash equivalents (5) (1,046)
Cash and cash equivalents, beginning of period 1,578 1,075
-------- -------
Cash and cash equivalents, end of period $ 1,573 $ 29
======== =======
</TABLE>
See accompanying notes to combined financial statements.
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PETROGLYPH ENERGY, INC.
Notes to Combined Financial Statements
(1) ORGANIZATION AND BASIS OF PRESENTATION
Petroglyph Energy, Inc. ("Petroglyph" or the "Company") was incorporated
in Delaware in April 1997 for the purpose of consolidating and continuing the
activities previously conducted by Petroglyph Gas Partners, L.P. ("PGP" or the
"Partnership"). PGP is a Delaware limited partnership, which was organized on
April 15, 1993 to acquire, explore for, produce and sell oil, natural gas and
related hydrocarbons. The general partner is Petroglyph Energy, Inc., a Kansas
corporation ("PEI"), and the primary limited partner is Natural Gas Partners,
L.P. ("NGP"). Petroglyph Gas Partners II, L.P. ("PGP II") is a Delaware limited
partnership, which was organized on April 15, 1995 to acquire, explore for,
produce and sell oil, natural gas and related hydrocarbons. The general partner
of PGP II is PEI (1% interest) and the limited partner is PGP (99% interest).
Pursuant to the terms of an Exchange Agreement dated August 22, 1997 (the
"Exchange Agreement"), the Company acquired all of the outstanding partnership
interests of the Partnership and all of the stock of PEI in exchange for shares
of Common Stock of the Company (the "Conversion"). The Conversion and other
transactions contemplated by the Exchange Agreement were consummated on October
24, 1997, immediately prior to the closing of the initial public offering of the
Company's Common Stock (the "Offering"). See Note 4. The Conversion was
accounted for as a transfer of assets and liabilities between affiliates under
common control in October 1997 and will result in no change in carrying values
of these assets and liabilities.
The accompanying combined financial statements of Petroglyph include the
assets, liabilities and results of operations of PGP, its wholly owned
subsidiary, Petroglyph Operating Company, Inc. ("POCI"), and PGP's proportionate
share of assets, liabilities and revenues and expenses of PGP II. PGP owned a
99% interest in PGP II as of December 31, 1996 and 1995 and September 30, 1997.
POCI is a subchapter C corporation. POCI is the designated operator of all
wells for which PGP has acquired operating rights. Accordingly, all producing
overhead and supervision fees were charged to the joint accounts by POCI. All
material intercompany transactions and balances have been eliminated in the
preparation of the accompanying combined financial statements.
The Company's operations are primarily focused in the Uinta Basin of
Utah and the Raton Basin of Colorado.
The accompanying combined financial statements of Petroglyph, with the
exception of the combined balance sheet at December 31, 1996, have not been
audited by independent public accountants. In the opinion of the Company's
management, the accompanying financial statements reflect all adjustments
necessary to present fairly the financial position at September 30, 1997 and the
results of operations for the three and nine month periods ended September 30,
1997 and 1996 and cash flows of the Company for the nine-month periods ended
September 30, 1997 and 1996. All such adjustments are of a normal recurring
nature. Certain amounts presented in prior period financial statements have
been reclassified for consistency with current period presentation. These
interim results are not necessarily indicative of results for a full year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted in this Form 10-Q pursuant to the
rules and regulations of the Securities and Exchange Commission.
(2) LONG-TERM DEBT
In May 1995, the Company entered into a credit agreement with Texas
Commerce Bank National Association ("TCB") (the "Original Agreement"). The
Original Agreement was a combination credit facility with a one year revolving
credit agreement that originally expired on May 25, 1997, at which time all
balances outstanding under the revolving credit agreement were to convert to a
term loan, expiring on October 1, 1999. The borrowing base was redetermined at
$7.5 million on July 2, 1997. This effectively allowed the Company to continue
to borrow on the facility in place until September 15, 1997, when the Company
amended the Original Agreement and entered into the Amended and Restated Loan
Agreement with The Chase Manhattan Bank ("Chase") (as amended, the "Credit
Agreement"). As part of the Credit Agreement, the agent was changed from TCB to
Chase; however, the group of
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lenders remains unchanged. The Credit Agreement includes a $20.0 million
combination credit facility with a two-year revolving credit facility with an
original borrowing base of $7.5 million to be redetermined semi-annually
("Tranche A"), which expires on September 15, 1999, at which time all balances
outstanding under Tranche A will convert to a term loan expiring on September
15, 2002. Additionally, the Credit Agreement contains a separate revolving
facility of $2.5 million ("Tranche B"), which expires on March 15, 1999, at
which time all balances outstanding become immediately payable. Subsequent to
September 30, 1997, the Company borrowed an additional $1.0 million, for a total
outstanding obligation under the Credit Agreement of $10.0 million at October
24, 1997. The Company utilized a portion of the proceeds from the Offering to
eliminate all outstanding amounts under the Credit Agreement on October 24,
1997. With the repayment of the Tranche B indebtedness, the $2.5 million under
that portion of the Credit Agreement is no longer available to the Company.
Interest on borrowings outstanding under Tranche A is calculated, at the
Company's option, at either Chase's prime rate or the London interbank offer
rate plus a margin determined by the amount outstanding under the tranche.
(3) COMMITMENTS
The Company had one open hedging contract at September 30, 1997, which
is a crude oil collar on 343,500 Bbls of oil with a floor price of $17.00 per
Bbl and a ceiling price of $20.75 per Bbl indexed to the NYMEX light crude
future settlement price. This contract covers 343,500 Bbls of oil over the next
27 months as follows:
<TABLE>
<CAPTION>
YEAR BBLS
-------- -------
<S> <C>
1997... 34,500
1998... 150,000
1999... 159,000
-------
Total.. 343,500
=======
</TABLE>
Natural gas prices have remained relatively strong because of increased
domestic consumption. Fourth quarter prices, which have been strong to date,
will be affected by natural gas storage levels and weather-related demand. The
Company uses price hedging arrangements and fixed price natural gas sales
contracts to reduce price risk on a portion of its natural gas production. The
Company has entered into a natural gas sales contract for substantially all of
its current Utah production, effectively fixing its price from October 1997
through September 1998 at an average price of $1.85 per MBtu. The Company's
current Mcf conversion factor would result in an equivalent price of $2.11 per
Mcf.
(4) INITIAL PUBLIC OFFERING
On October 24, 1997, Petroglyph completed its initial public offering of
2,500,000 shares of common stock at $12.50 per share, resulting in net proceeds
to the Company of approximately $29.1 million. Approximately $10.0 million of
the net proceeds were used to eliminate all outstanding amounts under the
Company's Credit Agreement, with the balance of the proceeds expected to be
utilized to develop production and reserves in the Company's core Uinta Basin
and Raton Basin development properties and for other working capital needs.
On November 24, 1997, the Company's underwriters exercised a portion of
an over-allotment option granted in connection with the Offering, resulting in
the issuance of an additional 125,000 shares of common stock at $12.50 per
share, with net proceeds to the Company of approximately $1.5 million.
(5) COMMON SHARES OUTSTANDING AND EARNINGS PER COMMON SHARE
Pro forma earnings (loss) per common share is calculated giving effect
to the sale of zero and 774,194 shares as of January 1, 1996 and 1997,
respectively, out of the 2,500,000 shares offered in the Company's initial
public offering. Weighted average common shares outstanding used in the
calculation of pro forma earnings (loss) per common share for the nine months
ended September 30, 1996 and the nine months ended September 30, 1997 were
2,833,333 and 3,607,527 shares, respectively, as compared to the 5,458,333
common shares that are outstanding after the offering and the purchase of
125,000 shares out of the underwriters' over-allotment option.
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In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share, which
changes the method of computing and disclosing earnings per share for periods
ending after December 15, 1997. The Company has determined that basic and
diluted earnings per share (as defined by SFAS No. 128) would be approximately
the same as earnings per share disclosed for the three and nine months ended
September 30, 1997 and 1996.
(6) ACQUISITIONS AND DEVELOPMENT
In July 1997, the Company acquired 56,000 net mineral acres in the Raton
Basin in Colorado for approximately $700,000. This acquisition had an effective
date of May 15, 1997. In addition, the Company also acquired, simultaneously,
an 80% interest in a 25 mile pipeline strategically located across the Company's
acreage positions in the Raton Basin for total consideration of approximately
$320,000. The Company, together with an industry partner, formed a partnership
to operate this pipeline. Under the terms of the purchase and sale agreement,
the Company paid $75,000 at closing and is obligated to pay an additional
$70,000 by July 1998, and an additional $41,000 by July, 1999. Additionally,
the Company assumed an obligation for delinquent property taxes of approximately
$135,000, which were paid in November of 1997.
(7) INCOME TAXES
Prior to the Conversion, the results of operations of the Company were
included in the tax returns of its owners. As a result, tax strategies were
implemented that are not necessarily reflective of strategies the Company would
have implemented. In addition, the tax net operating losses generated by the
Company during the period from its inception to the date of the Conversion are
not available to the Company to offset future taxable income as such benefit
accrued to the owners.
In conjunction with the Conversion, the Company adopted SFAS No. 109,
"Accounting for Income Taxes", which provides for determining and recording
deferred income tax assets or liabilities based on temporary differences between
the financial statement carrying amounts and the tax bases of assets and
liabilities using enacted tax rates. SFAS No. 109 requires that the net deferred
tax liabilities of the Company on the date of the Conversion be recognized as a
component of income tax expense. The Company recognized deferred tax liabilities
and income tax expense of approximately $2.5 million in the fourth quarter of
1997.
Upon the Conversion, the Company became taxable as a corporation. Pro
forma income tax information for the three and nine month periods ended
September 30, 1996, presented in the accompanying combined statements of
operations, reflects the income tax expense (benefit), net income (loss) and net
income (loss) per common share as if all Partnership income for 1996 had been
subject to corporate federal and state income tax, exclusive of the effects of
recording the Company's net deferred tax liabilities upon the Conversion. The
pro forma tax expense was computed at the federal statutory rate of 35% and an
average of the state statutory rates for those states in which the Company has
operations of 4% for each period presented.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Petroglyph is an independent energy company engaged in the exploration,
development and acquisition of crude oil and natural gas properties. The
Company's strategy is to increase oil and natural gas reserves, oil and natural
gas production and cash flow per share through (i) the development of the
Company's drillsite inventory, (ii) the exploitation of the Company's existing
reserve base, (iii) the control of operations and (iv) the acquisition of
additional interests in oil and natural gas properties that meet its selection
criteria.
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OPERATING DATA
The following table sets forth certain operating data of the Company for
the periods presented.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Production Data:
Oil (Bbls).......................... 65,041 62,031 182,811 203,806
Natural gas (Mcf)................... 148,854 109,326 391,950 467,748
Total (BOE)......................... 89,850 80,252 248,136 281.764
Average Daily Production:
Oil (Bbls).......................... 707 674 670 744
Natural gas (Mcf)................... 1,618 1,188 1,436 1,707
Total (BOE)......................... 977 872 909 1,028
Average Sales Price Per Unit (1):
Oil (per Bbl) (2)................... $ 15.55 $ 15.90 $ 14.97 $ 17.32
Natural gas (per Mcf)............... 1.63 1.60 1.93 1.64
Costs Per BOE:
Lease operating expenses............ $ 4.07 $ 6.13 $ 4.86 $ 6.46
Production taxes.................... .55 .70 .59 .63
Depletion, depreciation and
amortization...................... 5.00 9.50 5.92 7.24
General and administrative.......... 4.08 1.66 3.68 2.56
</TABLE>
_________________________________
(1) Before deduction of production taxes.
(2) Excluding the effects of losses from crude oil hedging transactions and
amortization of deferred revenue, the weighted average sales price per Bbl
of oil was $15.61 and $20.79 for the three months ended September 30, 1997
and 1996, and $15.83 and $19.15 for the nine months ended September 30, 1997
and 1996, respectively.
Bbl - Barrel
Mcf - Thousand cubic feet
BOE - Barrels of oil equivalent (six Mcf equal one Bbl)
The Company uses the successful efforts method of accounting for its oil and
natural gas activities. Costs to acquire mineral interests in oil and natural
gas properties, to drill and equip exploratory wells that result in proved
reserves, and to drill and equip development wells are capitalized. Costs to
drill exploratory wells that do not result in proved reserves, geological,
geophysical and seismic costs, and costs of carrying and retaining properties
that do not contain proved reserves are expensed. Costs of significant
nonproducing properties, wells in the process of being
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drilled and development projects are excluded from depletion until such time as
the related project is developed and proved reserves are established or
impairment is determined.
The Company's predecessor was classified as a partnership for federal income
tax purposes. Therefore, no income taxes were paid or provided for by the
Company prior to the Conversion. Future tax amounts, if any, will be dependent
upon several factors, including but not limited to the Company's results of
operations.
During the nine months ended September 30, 1997, the Company drilled and
completed 44 gross (24 net) wells, which compares with 24 gross (12 net) wells
drilled and completed during the nine months ended September 30, 1996.
Currently injected water volumes are approximately 5,000 barrels per day and are
expected to increase to an exit rate of approximately 10,000 barrels per day by
year end.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1997 Compared to Three Months Ended
September 30, 1996
OPERATING REVENUES
Oil revenues increased by 3% to $1,011,000 for the quarter ended September
30, 1997, as compared to $986,000 for the 1996 period primarily as a result of
an increase in the Company's oil production volume of 3,010 Bbls, partially
offset by a decline in average oil sales prices from $15.90 per Bbl in the 1996
period to $15.55 in 1997. The increase in production volume is a result of the
success of the Company's continued drilling program on its Utah properties which
began in the second half of 1996, slightly offset by production lost from the
sale of non-strategic properties during the third quarter of 1996. The decline
in average oil sales price of $.35 per Bbl was primarily due to crude oil price
declines during the third quarter of 1997 as global production capacity outpaced
demand. The average posted price for West Texas Intermediate ("WTI"), a
benchmark crude, was $17.64 for the third quarter of 1997 compared to $20.79 for
the third quarter of 1996. The commodity price decline was offset by
amortization of deferred revenue of $200,000 in the third quarter of 1996 and
improved demand for the Company's product attributed to the Company's increasing
percentage of area production and strategic alliances with key refiners in the
Salt Lake City area.
Natural gas revenues increased by 39% to $243,000 for the quarter ended
September 30, 1997, as compared to $175,000 for the 1996 period primarily due to
an increase in natural gas production of 39,528 Mcf. The increase in natural gas
production volumes related to the success of the Company's aggressive drilling
program on its Utah properties which began in the second half of 1996.
OPERATING EXPENSES
Lease operating expenses decreased to $366,000 for the quarter ended
September 30, 1997, as compared to $492,000 for the same 1996 period primarily
as a result of the sale of certain non-strategic oil and natural gas properties
during the third quarter of 1996 through the first quarter of 1997, partially
offset by an increase in the number of producing wells in which the Company has
an interest due to the aggressive drilling program on the Company's Utah
properties. In addition, the Company's lease operating expenses on a per BOE
basis declined by 34% to $4.07 per BOE during the 1997 period as compared to
$6.13 per BOE for the 1996 period. This decline in lease operating expenses per
BOE is due to the benefits of increasing economies of scale as the production
volumes of the Utah properties continue to increase and the Company's continued
focus on reduction of operating costs through improved efficiencies.
Depreciation, depletion and amortization expense decreased by 41% to
$449,000 for the quarter ended September 30, 1997, as compared to $762,000 for
the same period in 1996 primarily as a result of an increase in proved reserves
in 1997 resulting from the Company's aggressive drilling program which began in
the second half of 1996, and the sale of certain other non-strategic oil and
natural gas properties during the third quarter of 1996 through the first
quarter of 1997, partially offset by increased production from the Company's
remaining interest in the Utah properties.
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<PAGE>
General and administrative expenses increased by 176% to $367,000 for the
quarter ended September 30, 1997, as compared to $133,000 for the same 1996
period. This increase was due to a decrease in overhead charges billed to non-
operating partners of $128,000 as a result of the conclusion of a carried
interest agreement with an industry partner, an increase in engineering,
geological and administrative staff as a result of increased development
activity and increased accounting staff as a result of increased financial
reporting requirements associated with being a public company.
OTHER INCOME (EXPENSES)
Interest income (expense) net, for the quarter ended September 30, 1997
increased to ($73,000), as compared to ($23,000) in 1996 primarily as a result
of an increase in average outstanding debt.
Gain on sales of property and equipment declined to zero for the quarter
ended September 30, 1997, as compared to $204,000 for the same 1996 period due
to gains recognized from sales of certain non-strategic oil and natural gas
properties in the third quarter of 1996.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996
OPERATING REVENUES
Oil revenues decreased by 22% to $2,736,000 for the nine months ended
September 30, 1997, as compared to $3,530,000 for the 1996 period primarily as a
result of a decrease in the Company's oil production volume of 20,995 Bbls and a
decline in average oil sales prices from $17.32 per Bbl in the 1996 period to
$14.97 in 1997. The decline in the Company's oil production is due to the sale
of the 50% interest in the Utah properties in June 1996 and the sale of certain
other non-strategic properties between the third quarter of 1996 and the first
quarter of 1997, partially offset by increased production volume from the
Company's remaining 50% interest in the Utah properties as a result of the
Company's aggressive drilling program on its Utah properties which began in the
second half of 1996. The decline in average oil sales price of $2.35 per Bbl
was due to a reduction in demand for the Company's production as a result of a
temporary shutdown for major maintenance of one of the refineries which is a
primary user of the Company's Utah production during late 1996 and early 1997, a
crude oil hedge loss of $118,000 and amortization of deferred revenue of
$46,000. The Company's average oil sales price for the nine months ended
September 30, 1997, excluding the effects of the hedge loss and amortization of
deferred revenue, was $15.83 per Bbl.
Natural gas revenues declined by 1% to $756,000 for the nine months ended
September 30, 1997, as compared to $767,000 for the 1996 period primarily due to
a decline in natural gas production of 75,798 Mcf due to dispositions of certain
non-strategic natural gas properties during 1996, the sale of the 50% interest
in the Utah properties in June 1996 and the inception of the secondary oil
recovery program on the Company's Utah properties in mid-1996. These declines
in natural gas production volumes were partially offset by increased natural gas
production volumes related to the Company's remaining 50% interest in the Utah
properties as a result of the Company's aggressive drilling program on the Utah
properties which began in the second half of 1996. The decline in natural gas
production volumes was partially offset by an increase in the average natural
gas sales price to $1.93 per Mcf during the nine months ended September 30,
1997, as compared to $1.64 per Mcf for the 1996 period.
OPERATING EXPENSES
Lease operating expenses decreased to $1,206,000 for the nine months ended
September 30, 1997, as compared to $1,821,000 for the same 1996 period primarily
as a result of the sale of the 50% interest in the Company's Utah properties in
June 1996 and the sale of certain other non-strategic oil and natural gas
properties during the third quarter of 1996 through the first quarter of 1997
partially offset by an increase in the number of producing wells in which the
Company has an interest due to the aggressive drilling program on the Company's
Utah properties which began in the second half of 1996. In addition, the
Company's lease operating expenses on a per BOE basis declined by 25% to $4.86
per BOE during the 1997 period as compared to $6.46 per BOE for the 1996 period.
This decline in lease operating expenses per BOE is due to the benefits of
increasing economies of scale as the production volumes of the Utah properties
continue to increase and the Company's continued focus on reduction of operating
costs through
-10-
<PAGE>
improved efficiencies. This decline was partially offset by a significant
increase in per BOE production costs of the Company's non-Utah properties due to
several workovers performed during the first half of 1997.
Depreciation, depletion and amortization expense decreased by 28% to
$1,469,000 for the nine months ended September 30, 1997, as compared to
$2,040,000 for the same period in 1996 primarily as a result of the sale of the
50% interest in the Company's Utah properties in June 1996, an increase in
proved reserves in 1997 as a result of the Company's aggressive drilling program
which began in the second half of 1996 and the sale of certain other non-
strategic oil and natural gas properties during the third quarter of 1996
through the first quarter of 1997, partially offset by increased production from
the Company's remaining interest in the Utah properties.
Exploration costs declined by $42,000 to zero for the nine months ended
September 30, 1997, as compared to the same period in 1996, as the Company's
exploration drilling activities were all successful during the period and no
geological and geophysical work was performed.
General and administrative expenses increased by 26% to $913,000 for the
nine months ended September 30, 1997, as compared to $722,000 for the same 1996
period. This increase was due to an increase in engineering, geological and
administrative staff as a result of increased development activity and increased
accounting staff as a result of increased financial reporting requirements
associated with being a public company.
OTHER INCOME (EXPENSES)
Interest income (expense) net, for the nine months ended September 30, 1997
increased to ($54,000) as compared to ($8,000) in 1996 primarily as a result of
an increase in average outstanding debt.
Gain on sales of property and equipment declined to $6,000 for the nine
months ended September 30, 1997, as compared to $1,378,000 for the same 1996
period primarily due to a gain of $1,314,000 recognized on the sale of the 50%
interest in the Utah properties in June 1996.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW AND WORKING CAPITAL
Cash provided by operating activities was $3,648,000 for the first nine
months of 1997 including an increase in accounts payable and accrued expenses of
$2,698,000. Subsequent to September 30, 1997, accounts payable was reduced by
approximately $1,500,000 as a result of payments to vendors on normal payment
terms. The Company used these cash sources, proceeds from sales of property and
equipment of $740,000 and $9,000,000 of its revolving line of credit to finance
$12,339,000 of capital spending to drill and complete 24 net wells, acquire the
Raton Basin acreage and pipeline mentioned above and complete the water
distribution system in the Company's Antelope Creek Field. Additionally, the
Company incurred $1,131,000 in organization and financing costs associated with
the initial public offering and renewing the Credit Agreement. Subsequent to
September 30, 1997, the Company completed its initial public offering of
2,625,000 shares of common stock at $12.50 per share, including 125,000 shares
of the underwriters' over-allotment option, resulting in net proceeds to the
Company of $30,516,000. Approximately $10,000,000 of the net proceeds were used
to eliminate all outstanding amounts under the Credit Agreement. The balance of
the proceeds are expected to be utilized to develop production and reserves in
the Company's core Uinta Basin and Raton Basin development properties and for
other working capital needs.
The Company's net working capital at September 30, 1997 decreased $2,468,000
to a balance of ($3,008,000) compared to ($540,000) at December 31, 1996. The
decrease is the result of the utilization of cash flows from operations to fund
the capital spending described above.
The Company believes that cash flow from operations, availability under the
Credit Agreement and the remaining proceeds from the Offering will be adequate
to support its budgeted working capital and capital expenditure requirements for
at least the next 12 months.
-11-
<PAGE>
CAPITAL EXPENDITURES
During the remainder of 1997 and all of 1998, the Company plans to focus its
efforts on the continued development of its improved recovery projects in the
Uinta Basin in Utah and the Raton Basin in Colorado.
The Company plans to drill and complete approximately 57 net wells in the
Uinta Basin through 1998 at a projected cost of $22 million. Additionally, in
the Company's Raton Basin, Colorado coalbed methane development project, the
Company plans to complete the initial 16 to 20 well pilot program during the
first quarter of 1998 at a projected cost of $300,000 per well.
FINANCING
In May 1995, the Company entered into a credit agreement with Texas Commerce
Bank National Association ("TCB") (the "Original Agreement"). The Original
Agreement was a combination credit facility with a one year revolving credit
agreement that originally expired on May 25, 1997, at which time all balances
outstanding under the revolving credit agreement were to convert to a term loan,
expiring on October 1, 1999. The borrowing base was redetermined at $7.5
million on July 2, 1997. This effectively allowed the Company to continue to
borrow on the facility in place until September 15, 1997, when the Company
amended the Original Agreement and entered into the Amended and Restated Loan
Agreement with The Chase Manhattan Bank ("Chase") (as amended, the "Credit
Agreement"). As part of the Credit Agreement, the agent was changed from TCB to
Chase; however, the group of lenders remains unchanged. The Credit Agreement
includes a $20.0 million combination credit facility with a two-year revolving
credit facility with an original borrowing base of $7.5 million to be
redetermined semi-annually ("Tranche A"), which expires on September 15, 1999,
at which time all balances outstanding under Tranche A will convert to a term
loan expiring on September 15, 2002. Additionally, the Credit Agreement
contains a separate revolving facility of $2.5 million ("Tranche B"), which
expires on March 15, 1999, at which time all balances outstanding become
immediately payable. Subsequent to September 30, 1997, the Company borrowed an
additional $1.0 million, for a total outstanding obligation under the Credit
Agreement of $10.0 million at October 24, 1997. The Company utilized a portion
of the proceeds from the Offering to eliminate all outstanding amounts under the
Credit Agreement on October 24, 1997. With the repayment of the Tranche B
indebtedness, the $2.5 million under that portion of the Credit Agreement is no
longer available to the Company. Interest on borrowings outstanding under
Tranche A is calculated, at the Company's option, at either Chase's prime rate
or the London interbank offer rate plus a margin determined by the amount
outstanding under the tranche.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
27 Financial Data Schedule
(b) Reports Submitted on Form 8-K:
None.
-12-
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PETROGLYPH ENERGY, INC.
By: /s/ Robert C. Murdock
----------------------------------------
Robert C. Murdock
President & Chief Executive Officer
By: /s/ Tim A. Lucas
----------------------------------------
Tim A. Lucas
Vice President & Chief Financial Officer
Date: December 4, 1997
-13-
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