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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
----------------------
[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: 000-23185
PETROGLYPH ENERGY, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 74-2826234
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
1302 NORTH GRAND STREET
HUTCHINSON, KANSAS 67501
(Address of principal executive offices) (Zip Code)
</TABLE>
(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 X No
--- ---
As of July 31, 1998, 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
<TABLE>
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Page
----
<S> <C>
Forward Looking Information and Risk Factors.................................................................... 1
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997.................................. 2
Consolidated Statements of Operations for the Three Months and Six Months Ended
June 30, 1998 and 1997.......................................................................... 3
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1998 and 1997.......................................................................... 4
Notes to Consolidated Financial Statements............................................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 8
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................................................... 13
Signatures............................................................................................. 14
</TABLE>
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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.
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
ASSETS JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,901 $ 16,679
Accounts receivable:
Oil and natural gas sales 298 665
Other 597 608
Inventory 1,587 1,377
Prepaid expenses 399 246
-------- --------
Total Current Assets 9,782 19,575
-------- --------
Property and equipment, successful efforts method at cost:
Proved properties 31,269 23,318
Unproved properties 3,357 2,958
Pipelines, gas gathering and other 7,944 6,901
-------- --------
42,570 33,177
Less---Accumulated depletion, depreciation, and amortization (7,445) (6,607)
-------- --------
Property and equipment, net 35,125 26,570
Other assets, net of accumulated amortization 563 569
-------- --------
$ 45,470 $ 46,714
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities:
Trade $ 3,132 $ 3,608
Oil and natural gas sales 393 735
Current portion of long-term debt -- 37
Other 407 322
-------- --------
Total Current Liabilities 3,932 4,702
-------- --------
Long-term debt -- --
Deferred tax liability 2,329 2,514
Stockholders' equity
Common stock, par value $.01 per share; 25,000,000 shares
authorized; 5,458,333 shares issued and outstanding 55 55
Paid-in capital 43,659 43,659
Retained earnings (deficit) (4,505) (4,216)
-------- --------
Total Stockholders' Equity 39,209 39,498
-------- --------
$ 45,470 $ 46,714
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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PETROGLYPH ENERGY, INC.
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating Revenues:
Oil sales $ 700 $ 832 $ 1,493 $ 1,725
Natural gas sales 287 231 600 513
Other 38 40 73 69
----------- ----------- ----------- -----------
Total operating revenues 1,025 1,103 2,166 2,307
Operating Expenses:
Lease operating 441 374 1,036 841
Production taxes 40 34 100 98
Exploration costs
Depletion, depreciation, and amortization 441 461 891 1,020
General and administrative 516 333 1,011 546
----------- ----------- ----------- -----------
Total operating expenses 1,438 1,202 3,038 2,505
----------- ----------- ----------- -----------
Operating loss (413) (99) (872) (198)
----------- ----------- ----------- -----------
Other income:
Interest income, net 138 (6) 342 19
Gain on sales of property and equipment, net 28 (87) 56 6
----------- ----------- ----------- -----------
Net loss before income taxes (247) (192) (474) (173)
Income tax benefit:
Deferred (97) (185)
Current
----------- ----------- ----------- -----------
Total income tax benefit (97) (185)
----------- ----------- ----------- -----------
Net loss $ (150) $ (192) $ (289) $ (173)
=========== =========== =========== ===========
Net loss per share $ (.03) $ (.06) $ (.05) $ (.05)
=========== =========== =========== ===========
Weighted average common shares outstanding
Actual 5,458,333 5,458,333
Pro forma 3,263,441 3,263,441
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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PETROGLYPH ENERGY, INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Operating Activities:
Net loss before income taxes $ (289) $ (173)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depletion, depreciation and amortization 893 1,020
Gain on sales of property and equipment, net (56) (6)
Amortization of deferred revenue -- (46)
Exploration costs -- --
Deferred Taxes (185) --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 378 (1,249)
Increase in inventory (210) (678)
Increase in prepaid expenses (153) (87)
Increase (decrease) in accounts payable and accrued
liabilities (733) 1,306
-------- --------
Net cash provided by (used in) operating activities (355) 87
-------- --------
Investing Activities:
Proceeds from sales of property and equipment 82 740
Additions to oil and natural gas properties, including
exploration costs (5,830) (4,574)
Additions to pipelines, natural gas gathering and other (3,612) (1,793)
-------- --------
Net cash used in investing activities (9,360) (5,627)
-------- --------
Financing Activities:
Proceeds from issuance of, and draws on, notes payable -- 5,000
Payments on notes payable (37) (13)
Payments for organization and financing costs (26) (652)
-------- --------
Net cash provided by (used in) financing activities (63) 4,335
-------- --------
Net decrease in cash and cash equivalents (9,778) (1,205)
Cash and cash equivalents, beginning of period 16,679 1,578
-------- --------
Cash and cash equivalents, end of period $ 6,901 $ 373
======== ========
</TABLE>
See accompanying notes to Consolidated financial statements.
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PETROGLYPH ENERGY, INC.
Notes to Consolidated 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 was 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 was Petroglyph Energy, Inc., a Kansas
corporation ("PEI"). Petroglyph Gas Partners II, L.P. ("PGP II") was 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 was PEI (1% interest) and the limited partner was 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 resulted in no change in
carrying values of these assets and liabilities.
On June 30, 1998, all properties owned by PGP, PGP II, and PEI were
transferred into the Company and the three entities (PGP, PGP II, and PEI) were
dissolved.
The accompanying consolidated financial statements of Petroglyph include
the assets, liabilities and results of its wholly owned subsidiary, Petroglyph
Operating Company, Inc. ("POCI"). POCI is a subchapter C corporation. POCI is
the designated operator of all wells for which the Company 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
consolidated financial statements.
The Company's operations are primarily focused in the Uinta Basin of
Utah and the Raton Basin of Colorado with additional operations in DeWitt and
Victoria Counties in South Texas.
The accompanying consolidated financial statements of Petroglyph, with
the exception of the consolidated balance sheet at December 31, 1997, have not
been audited by independent public accountants. In the opinion of the Company's
management, the accompanying consolidated financial statements reflect all
adjustments necessary to present fairly the financial position at June 30, 1998,
the results of operations for the six month and three month periods ended June
30, 1998 and 1997, and cash flows of the Company for the six month periods ended
June 30, 1998 and 1997. All such adjustments are of a normal recurring nature.
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 September 1997, the Company entered into a credit agreement with The
Chase Manhattan Bank ("Chase") (the "Credit Agreement"). 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. The borrowing base was redetermined as of
May 1998 to be $10.0 million. Additionally, the Credit Agreement contained a
separate revolving facility of $2.5 million ("Tranche B"), which was set to
expire on March 15, 1999. The Company utilized a portion of the proceeds from
the Offering to eliminate all outstanding amounts under the Credit Agreement in
October 1997. With the repayment of the Tranche
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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 June 30, 1998, which is a
crude oil collar on 234,000 Bbls of oil with a floor price per Bbl and a ceiling
price per Bbl indexed to the NYMEX light crude future settlement price. This
contract covers 234,000 Bbls of oil over the next 18 months as follows:
<TABLE>
<CAPTION>
YEAR BBLS FLOOR PRICE CEILING PRICE
---- ---------- ----------- -------------
<S> <C> <C> <C>
1998 .......... 75,000 $17.00/Bbl $20.75/Bbl
1999 .......... 159,000 $17.00/Bbl $22.00/Bbl
-------
Total ...... 234,000
</TABLE>
The Company has entered into a natural gas sales contract for
substantially all of its current Utah production, effectively fixing its price
through September 1998 at an average price of $1.865 per MMBtu. The Company's
current Mcf conversion factor would result in an equivalent price of
approximately $2.06 per Mcf. The Company has also contracted its Utah production
for 12 months beginning October 1998. The realized price under this new contract
should be no less than $2.00 per MMBtu or $2.24 per Mcf. 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.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the balance
sheet as either an asset or liability measured at its fair market value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting. Statement 133 is effective for
fiscal years beginning after June 15, 1999.
With its current hedge contracts management believes Statement 133 will have no
impact on the financial statements of the Company.
(4) INITIAL PUBLIC OFFERING
In November 1997, Petroglyph completed its initial public offering (the
"Offering") of 2,625,000 shares of common stock at $12.50 per share, resulting
in net proceeds to the Company of approximately $30.5 million. Approximately
$10.0 million of the net proceeds were used to eliminate all outstanding amounts
under the Credit Agreement, with the balance of the proceeds expected to be
utilized to develop production and reserves in the Company's Uinta Basin , Raton
Basin and South Texas development properties and for other working capital
needs.
(5) COMMON SHARES OUTSTANDING AND EARNINGS PER COMMON SHARE
Outstanding shares of 3,263,441 for 1997 is presented for pro forma
comparison and assumes the following: the sale of 430,108 shares as of January
1, 1997, out of the 2,625,000 shares of common stock sold in the Offering, and
the conversion of partnership interest into 2,833,333 shares of common stock,
which occurred in October 1997, was effective at the beginning of the year and.
This compares to the 5,458,333 common shares outstanding after the offering,
reflected in the 1998 calculation.
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 the same as
earnings per share disclosed for the six months and three months ended June 30,
1998 and 1997.
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In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, Reporting Comprehensive Income, which establishes the method of reporting
and display of comprehensive income and its components. The Company has
determined that there are no other items of comprehensive income items in the
periods presented.
(6) 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.
Upon the Conversion, the Company became taxable as a corporation. Prior
to the conversion, the results of operations of the Company were included in the
tax returns of its owners. As a result, no income tax amounts are reflected for
the three and six month periods ended June 30, 1997.
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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 drill site 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.
OPERATING DATA
The following table sets forth certain operating data of the Company for
the periods presented.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Production Data:
Oil (Bbls) ................... 67,050 57,102 134,513 117,770
Natural gas (Mcf) ............ 139,182 139,278 292,668 243,096
Total (BOE) .................. 90,247 80,315 183,291 158,286
Average Daily Production:
Oil (Bbls) ................... 737 627 743 651
Natural gas (Mcf) ............ 1,529 1,531 1,617 1,343
Total (BOE) .................. 992 883 1,013 875
Average Sales Price Per Unit (1):
Oil (per Bbl) (2) ............ $ 10.44 $ 14.57 $ 11.10 $ 14.65
Natural gas (per Mcf) ........ $ 2.06 $ 1.66 $ 2.05 $ 2.11
Costs Per BOE:
Lease operating expenses ..... $ 4.89 $ 4.65 $ 5.65 $ 5.31
Production and property taxes $ 0.45 $ 0.43 $ 0.55 $ 0.62
Depletion, depreciation, and
amortization ............... $ 4.88 $ 5.74 $ 4.86 $ 6.45
General and administrative ... $ 5.72 $ 4.14 $ 5.51 $ 3.45
</TABLE>
(1) Before deduction of production taxes.
(2) Excluding the effects of crude oil hedging transactions and amortization
of deferred revenue, the weighted average sales price per Bbl of oil was
$10.16 and $15.96 for the six months, and $9.14 and $16.63 for the three
months ended June 30, 1998 and 1997, respectively.
Bbl - Barrel
Mcf - Thousand cubic feet
BOE - Barrels of oil equivalent (six Mcf equal one Bbl)
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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 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 three months ended June 30, 1998, the Company drilled 18
gross (9 net) wells and completed 16 gross (8 net) wells with 100% success. This
compares with 18 gross (10 net) wells drilled and 13 gross (6.5 net) wells
completed during the three months ended June 30, 1997. Currently injected water
volumes are approximately 11,000 barrels per day.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30,
1997
OPERATING REVENUES
Oil revenues decreased 16% to $700,000 for the quarter ended March 31,
1998, as compared to $832,000 for the same period in 1997, primarily as a result
of a decrease in realized oil prices of 28%. The decrease was partially offset
by a production volume increase of 17%, or 109 barrels per day, compared to the
quarter ended March 31, 1997. This increase was primarily due to continued
successful drilling and development of the Company's acreage in the Uinta Basin.
Natural gas revenues increased by 24% to $287,000 for the quarter ended
March 31, 1998, as compared to $231,000 for the same period in 1997. Gas
production volumes were flat compared to the 1997 period but the average gas
price rose $.40 to $2.06 per Mcf
OPERATING EXPENSES
Lease operating expenses increased to $441,000 for the quarter ended
June 30, 1998, as compared to $374,000 for the same 1997 period. This is a
result of a significant increase in the number of producing wells and injector
wells in which the Company has an interest due to the aggressive drilling
program on the Company's Utah properties. The Company's lease operating expenses
increased to $4.89 per BOE during the 1998 period as compared to $4.65 per BOE
for the 1997 period. During the first quarter of 1998, 15 oil and gas wells in
the Antelope Creek Field were converted to water injection wells. These 15 wells
could have otherwise contributed significantly to production. The loss of
production and sustained operating expenses for these wells caused an increase
in costs per BOE.
Depreciation, depletion and amortization expense decreased by 4% to
$441,000 for the quarter ended June 30, 1998, as compared to $461,000 for the
same period in 1997. This decrease is primarily the result of an increase in
proved reserves in the Company's year-end reserve report for 1997 resulting from
the Company's successful drilling program, partially offset by increased
production between periods.
General and administrative expenses increased by 55% to $516,000 for the
quarter ended June 30, 1998, as compared to $333,000 for the quarter ended June
30, 1997. From June 1997 to June 1998, 11 field personnel were added as Utah
development increased and Raton Basin drilling was initiated. For the same
period, five administrative personnel were added to manage increased oil and gas
operations and the reporting requirements of a public company. Additional
engineering, geological and administrative staff was required as a result of
increased development activity.
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<PAGE> 12
OTHER INCOME (EXPENSES)
Interest income, net, for the quarter ended June 30, 1998 increased to
$138,000, as compared to $6,000 net expense in Second Quarter 1997 primarily as
a result of interest earned on proceeds from the Offering in October, 1997.
Gain on sales of property and equipment increased to $28,000 for the
quarter ended June 30, 1998, as compared to $87,000 loss for the same 1997
period. The Company recognized the loss in Second Quarter 1997 from sales of
certain non-strategic oil and natural gas properties.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30,
1997
OPERATING REVENUES
Oil revenues of $1,493,000 for the first six months of 1998 were 13%
below oil revenues for the first half of 1997. The volume of oil sold increased
16,743 barrels (14%) compared to the same period in 1997 due primarily to
development activity in the Antelope Creek Field. However, the Company's average
realized oil price decreased 24% from $14.65 per barrel in the first half of
1997 to $11.10 for the same period in 1998.
Gas volumes in the first half of 1998 increased 20% to 292,668 Mcf
compared to 243,096 Mcf for the same period in 1997. However, the average sales
price slipped 3% to $2.05 compared to $2.11 for the respective 1997 period. The
slight price reduction was due to a historically strong first quarter 1997 price
of $2.72 per Mcf. The net result of the sales volume increase and price
reduction was a 17% increase in gas revenues to $600,000 in the first half of
1998.
Operating Expenses
Lease operating expenses through June 30, 1998 were $1,036,000, or 23%
greater than for the first six months of 1997. This increase is directly related
to increased production as a result of the Company's development program in the
Antelope Creek Field. Lease operating expense increased to $5.65 per BOE for the
first half of 1998 from $5.31 for the first half of 1997. During the first
quarter of 1998 15 oil and gas wells in the Antelope Creek Field were converted
from producers to water injection wells. The loss of production and sustained
operating expenses for the wells were primarily responsible for the increase in
costs per BOE.
Depreciation, depletion, and amortization expense for the first half of
1998 decreased 13% to $891,000 compared to $1,020,000 for the first half of
1997. This decrease is primarily due to an increase in the reserve base used to
calculate the depreciation, depletion, and amortization charge. DD&A charges
fell from $6.45 in 1997 to $4.86 per BOE for the same six months in 1998.
General and administrative expense increased 85% in the first half of
1998 to $1,011,000 compared to $546,000 for the 1997 period. The first quarter
1997 to first quarter 1998 increase of 131% was averaged down for the half year
comparisons. Geologic, engineering, and administrative costs increased as a
result of increased development activity. Additional accounting personnel,
outside accounting, and legal costs were incurred as a part of becoming a public
company.
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<PAGE> 13
OTHER INCOME (EXPENSES)
Net interest income for the first half of 1998 was $342,000 compared to
$19,000 for the same period in 1997, primarily as a result of interest earned on
proceeds from the Offering in late 1997.
Gain on sales of property increased $50,000 to $56,000 for the first
half of 1998 compared to the first six months of 1997. Several sales of
non-strategic oil and gas properties occurred during the 1997 period. The net
effect of these transactions was sales at approximately book value.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW AND WORKING CAPITAL
Cash provided by operating activities was $1,416,000 for the quarter
ended June 30, 1998, as the Company used inventory in drilling and development
operations and accounts receivables decreased. The Company used cash on hand,
proceeds from sales of property and equipment of $49,000, and a portion of the
Offering proceeds to finance $5,297,000 of capital spending. A total 18 gross (9
net) wells were drilled and 16 gross (8 net) wells were completed and put to
production.
For the first six months of 1998, $355,000 was used in operating
activities. Increases in inventories and prepaid expenses were offset by
reductions in accounts receivable. Accounts payable and accrued liabilities
decreased $733,000. In 1998, 34 gross (19 net) wells were drilled with 100%
success. 26 gross (13 net) wells were completed and 29 gross (14.5 net) wells
were put to production. In the Antelope Creek Field 15 gross (7.5 net) wells
were converted to water injection.
The Company expects to utilize future cash flow from operations, cash on
hand and its available borrowing base to continue to develop production and
reserves in the Company's Uinta Basin, Raton Basin, and South Texas development
properties and for other working capital needs.
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.
CAPITAL EXPENDITURES
During the remainder of 1998, due to low oil prices, the Company plans
to continue developing gas reserves in favor of oil. The Company has completed
its Antelope Creek Field oil drilling for 1998 of 26 gross (13 net) wells. Well
completions and infrastructure costs for water flood and gas gathering will
continue in the latter half of 1998. The Company expects Antelope Creek Field
water flood response to continue to improve as water injection continues over
the last half of the year.
Capital investment dollars not spent on oil development will be deployed
in the Company's gas development prospects in the Natural Buttes Extension Area,
the Raton Basin (Colorado) coalbed methane project and the Helen Gohlke Field in
Texas. In total, the Company expects to invest between $10 million and $14
million in oil and gas development during the remainder of 1998.
The first of two Natural Buttes wells drilled in January 1998 began
flowing in late July at the rate of 750 Mcf per day. The Company plans to
complete the second well in the same formation and continue development with 8
gross (5 net) wells for the year.
-11-
<PAGE> 14
The Company has reached an agreement with Colorado Interstate Gas
Company (CIG) whereby CIG will install approximately 37 miles of 10 inch steel
pipeline to transport gas from the Company's (Raton Basin) coalbed methane
project near Walsenburg, Colorado. Up to 32 additional wells are planned for the
project in 1998. The Company expects first sales as early as December 1998.
The Company has drilled and completed 2 gross (1 net) well based on its
3-D seismic survey in the Helen Gohlke Field, located in the Wilcox Trend on the
border of Victoria and Dewitt Counties, Texas. The two wells are currently
flowing approximately 1.3 MMcf per day from the Vicksburg zone. The Company
plans to continue developing the shallow gas potential of its 5,000 acre
leasehold in the Helen Gohlke Field.
FINANCING
In September 1997, the Company entered into a credit agreement with The
Chase Manhattan Bank ("Chase") (the "Credit Agreement"). 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. The borrowing base was redetermined as of
May 1998 to be $10.0 million . Additionally, the Credit Agreement contained a
separate revolving facility of $2.5 million ("Tranche B"), which expires on
March 15, 1999. The Company utilized a portion of the proceeds from the Offering
to eliminate all outstanding amounts under the Credit Agreement in October 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
The following describes developments in an ongoing litigation matter in
which the Company is not a party and its properties are not involved but which
may ultimately effect the Company's properties and operations.
The Company's planned operations in the Raton Basin of Colorado will
involve the extraction of coalbed methane from properties in which the Company
owns or leases oil and gas rights. The Company's right to produce coalbed
methane from certain of these properties based upon its gas rights are subject
to uncertainty in light of an opinion of the Court of Appeals for the Tenth
Circuit (the "Court of Appeals") in Southern Ute Indian Tribe v. Amoco
Production Company (the "Southern Ute Litigation") holding that coalbed methane
rights for certain lands derive from coal rights rather than oil and gas
rights. The Court of Appeals has held that the coal rights on certain lands
which were reserved to the United States by statute also included the rights to
the coalbed methane gas related to such coal deposits. The federal coal rights
so reserved were in some cases later transferred to third parties such as the
Southern Ute Indian Tribe (the "Tribe"). In the Southern Ute Litigation, the
Tribe, as beneficial owners of the coal resource, has alleged that coalbed
methane gas from the coal strata is being and has been wrongfully extracted by
various gas producers and certain other parties (the "Defendant Class")
including Amoco Production Company ("Amoco"). Amoco, as class representative
for the Defendant Class, has indicated that it may petition the United States
Supreme Court (the "Supreme Court") for review of the Court for Appeals'
decision. However, there can be no assurance that the Supreme Court would grant
review if such petition is filed or that Amoco would prevail on its appeal even
if review were granted.
The primary issue in the Southern Ute Litigation as it may concern the
Company is whether the right to produce coalbed methane gas from certain
properties lies in the owner of the oil and gas rights or the owner of the
rights to the coal resource. Although the Company has not commenced coalbed
methane production, the Company has obtained gas leases and initiated drilling
operations in the Raton Basin in anticipation of coalbed methane production.
Pending the ultimate resolution of the coalbed methane ownership question, the
Company may face uncertainty as to its right to produce coalbed methane gas
from its affected Raton Basin properties. Though no adverse claims concerning
ownership of coalbed methane on the Company's properties have been asserted, if
the holding in the Southern Ute Litigation stands, the holders of the coal
rights in certain properties may claim to hold the coalbed methane rights to
these properties rather than the Company as holder of the gas rights. Thus, the
Company may have to negotiate to purchase or lease rights to the coalbed
methane from the federal government or another party to whom the government
subsequently conveyed the coal resource at some cost to the Company. The
additional cost of purchasing or leasing such rights could have a material
adverse impact on the Company's financial condition and results of operations.
The Company is not a party to the Southern Ute Litigation, and none of
the Company's properties are subject to the litigation. Any holding in the suit
will not automatically change the Company's property rights with respect to its
Raton Basin properties. The Company can make no prediction as to the ultimate
resolution of the Southern Ute Litigation or as to the likely effect, if any,
that such resolution would have on the Company.
-12-
<PAGE> 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Financial Data Schedule
(b) Reports Submitted on Form 8-K:
None
-13-
<PAGE> 16
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.
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: August 13, 1998
-14-
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <C>
Ex 27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,901
<SECURITIES> 0
<RECEIVABLES> 895
<ALLOWANCES> 0
<INVENTORY> 1,587
<CURRENT-ASSETS> 9,782
<PP&E> 42,570
<DEPRECIATION> 7,445
<TOTAL-ASSETS> 45,470
<CURRENT-LIABILITIES> 3,932
<BONDS> 0
0
0
<COMMON> 55
<OTHER-SE> 39,154
<TOTAL-LIABILITY-AND-EQUITY> 45,470
<SALES> 2,093
<TOTAL-REVENUES> 2,166
<CGS> 0
<TOTAL-COSTS> 3,038
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (342)
<INCOME-PRETAX> (474)
<INCOME-TAX> (185)
<INCOME-CONTINUING> (289)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (289)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
