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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] 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 333-31625*
PETSEC ENERGY INC.
(Exact name of Registrant as specified in its charter)*
NEVADA 84-1157209
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
143 RIDGEWAY DRIVE, SUITE 113
LAFAYETTE, LOUISIANA 70503
(Address of principal executive offices) (Zip Code)
(318) 989-1942
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 [ ]
*Petsec Energy Inc. is a wholly owned operating subsidiary of Petsec Energy Ltd,
a listed Australian public company registered with the Commission as a result of
its public offering of American Depository Receipts ("ADRs") listed on the
Nasdaq National Market System (symbol: PSALY). Shareholders and holders of
American Depository Receipts are advised to refer to the filings of Petsec
Energy Ltd for the consolidated results.
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PETSEC ENERGY INC.
INDEX TO FORM 10-Q
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Page
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PART I. FINANCIAL INFORMATION
IMPORTANT NOTE: The financial information in this Quarterly Report refers to Petsec
Energy Inc, a wholly owned subsidiary of Petsec Energy Ltd. The publicly listed Petsec
Energy Ltd files its annual consolidated financial statements separately under form 20-F
and a summary of its quarterly consolidated financial statements under form 6-K.
Item 1. Financial Statements........................................................................... 3
Balance Sheets.............................................................................. 3
Statements of Operations and Retained Earnings.............................................. 4
Statements of Cash Flows.................................................................... 5
Notes to Financial Statements............................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................................... 7-12
PART II. OTHER INFORMATION
Item 5. Other Information.............................................................................. 13
Item 6. Exhibits and Reports on Form 8-K............................................................... 14
SIGNATURES................................................................................................ 15
</TABLE>
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PETSEC ENERGY INC.
A WHOLLY OWNED SUBSIDIARY OF PETSEC ENERGY LTD
BALANCE SHEETS
(UNAUDITED)
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30, DECEMBER 31,
1997 1996
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<S> <C> <C>
Current Assets:
Cash $ 20,361 $ 342
Accounts receivable 14,333 11,855
Other receivables 55 101
Inventories of crude oil 40 45
Prepaid expenses 582 168
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Total Current Assets 35,371 12,511
--------- ---------
Property, plant and equipment - at cost under the successful
efforts method of accounting for oil and gas properties
Proved oil and gas properties 204,335 131,933
Unproved oil and gas properties 19,269 7,276
Production facilities 60,313 38,049
Other 1,428 1,040
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285,345 178,298
Less accumulated depletion, depreciation and amortization (92,018) (44,664)
--------- ---------
Net property, plant and equipment 193,327 133,634
--------- ---------
Other Assets 2,994 --
--------- ---------
Total Assets $ 231,692 $ 146,145
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable 19,711 18,364
Interest payable 3,438 202
Other accrued liabilities 8,726 6,003
--------- ---------
Total Current Liabilities 31,875 24,569
Senior subordinated notes 99,624 --
Bank credit facility -- 37,000
Subordinated shareholder loan 38,150 57,954
Provision for dismantlement 2,912 1,738
Deferred income taxes 14,379 9,848
--------- ---------
Total Liabilities 186,940 131,109
--------- ---------
Shareholders' Equity:
Common stock, $1 par value. Authorized
1,000,000 shares; Issued and outstanding 1 share -- --
Additional paid in capital 20,703 482
Retained earnings 24,049 14,554
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Total Shareholders' Equity 44,752 15,036
--------- ---------
Total Liabilities and Shareholders' Equity $ 231,692 $ 146,145
========= =========
</TABLE>
See accompanying notes to financial statements.
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PETSEC ENERGY INC.
A WHOLLY OWNED SUBSIDIARY OF PETSEC ENERGY LTD
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Revenue:
Oil and gas sales $ 32,668 $ 16,853 $ 91,970 $ 46,359
-------- -------- -------- --------
Operating Expenses:
Lease operating expenses 2,741 1,127 7,116 3,735
Production taxes 162 129 550 403
Exploration expenditures including dry hole costs 8,136 1,328 12,824 3,140
General and administrative 1,508 1,192 4,111 3,992
Stock compensation 209 -- 627 --
Depletion, depreciation and amortization 19,103 7,008 48,528 21,218
-------- -------- -------- --------
Total operating expenses: 31,859 10,784 73,756 32,488
-------- -------- -------- --------
Income from operations 809 6,069 18,214 13,871
-------- -------- -------- --------
Other income (expenses):
Interest expense (3,251) (844) (5,350) (2,714)
Interest income 412 39 615 75
Foreign exchange gain 356 -- 547 --
Gain on sale of property, plant & equipment -- 6 -- 6
-------- -------- -------- --------
(2,483) (799) (4,188) (2,633)
-------- -------- -------- --------
Income (loss) before income taxes (1,674) 5,270 14,026 11,238
Income tax benefit (expense) 603 (2,003) (4,531) (4,791)
-------- -------- -------- --------
Net income (loss) (1,071) 3,267 9,495 6,447
Retained earnings at beginning of period 25,120 8,810 14,554 5,630
-------- -------- -------- --------
Retained earnings at end of period $ 24,049 $ 12,077 $ 24,049 $ 12,077
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
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PETSEC ENERGY INC.
A WHOLLY OWNED SUBSIDIARY OF PETSEC ENERGY LTD
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,495 $ 6,447
Adjustments to reconcile income to net
cash provided by operating activities:
Depletion, depreciation and amortization 48,628 21,218
Deferred income taxes 4,531 4,791
Dry hole costs and abandonments 7,624 2
Stock compensation expense 627 --
Unrealized foreign exchange gain (547) --
Changes in operating assets and liabilities:
Decrease (increase) in receivables (2,478) 1,202
Decrease in inventories 5 33
Increase in prepayments (414) (177)
Decrease (increase) in other receivables 46 (1,237)
Decrease in other assets -- 1,937
Increase (decrease) in trade accounts payable 1,347 (8,257)
Increase in other accrued liabilities 2,723 4,082
Increase (decrease) in interest payable 3,236 (53)
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Net cash provided by operating activities 74,823 29,988
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Cash flows from investing activities:
Lease acquisitions (7,189) (6,432)
Exploration and development expenditures (105,543) (50,324)
Other asset additions (1,939) (501)
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Net cash used in investing activities (114,671) (57,257)
--------- --------
Cash flows from financing activities:
Proceeds from senior subordinated notes 96,532 --
Proceeds from bank credit facility 21,000 58,540
Repayment of bank credit facility (58,000) (48,890)
Proceeds from shareholder loans 1,500 17,000
Repayment of shareholder loans (1,165) (191)
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Net cash provided by financing activities 59,867 26,459
--------- --------
Net increase in cash 20,019 (810)
Cash at beginning of period 342 1,418
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$ 20,361 $ 608
========= ========
</TABLE>
See accompanying notes to financial statements.
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PETSEC ENERGY INC.
A WHOLLY OWNED SUBSIDIARY OF PETSEC ENERGY LTD
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Basis of Presentation
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation have been included. Certain reclassifications have been
made to the prior period to conform to the current period's
presentations.
The interim financial information has been prepared without audit. The
results of operations for interim periods are not necessarily
indicative of the operating results that may be expected for the full
fiscal year.
NOTE 2 - Litigation
The Company is involved in certain lawsuits arising in the ordinary
course of business. While the outcome of any of these lawsuits cannot
be predicted with certainty, management expects these matters to have
no material adverse effect on the financial position, results of
operations or liquidity of the company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion is intended to assist in the understanding of
Petsec Energy Inc.'s (the "Company's") historical financial position and results
of operations for the three month and nine month periods ended September 30,
1996 and 1997. The Company's unaudited financial statements and notes thereto
should be referred to in conjunction with the following discussion.
OVERVIEW
The Company is the wholly owned principal operating subsidiary of Petsec
Energy Ltd, (the "Parent"). The Parent is an Australian public company with
ordinary shares listed on the Australian Stock Exchange (symbol: PSA) and
American Depository Receipts ("ADR's") listed on the Nasdaq National Market
System (symbol: PSALY). The results discussed in this report refer only to the
Company. The Parent's results are filed with the Securities and Exchange
Commission separately under forms 6-K (quarterly) and 20-F (annual) and
shareholders and ADR holders are advised to refer to these filings.
The Company was incorporated in March 1990 to evaluate oil and gas
exploration opportunities in the United States. In 1990, the Company
participated in an oil discovery in the Paradox Basin in Colorado. In addition
the Company acquired oil and gas lease interests in northern California. The
Company also established an office in Lafayette, Louisiana, hired several former
employees of Tenneco Oil Company and acquired leases in the Gulf of Mexico,
offshore Louisiana. The Company subsequently made a strategic decision to focus
its efforts entirely in the Gulf of Mexico and disposed of its interests in the
Paradox Basin in January 1995.
The Company markets its oil through spot price contracts and typically
receives a premium above the price posted. Gas production is sold under
contracts which generally reflect spot market conditions in the central Gulf of
Mexico. The Company has historically entered into crude oil and natural gas
price swaps to reduce its exposure to price fluctuations. The results of
operations described herein reflect any hedging transactions undertaken.
The Company follows the successful efforts method of accounting. Under this
method, lease acquisition costs, costs to drill and complete exploration wells
in which proven reserves are discovered and costs to drill and complete
development wells are capitalized. Seismic, geological and geophysical, and
delay rental expenditures are expensed as incurred.
The Company is allocated stock compensation expense in respect to options
in the Parent which are granted to the Company's employees and certain
consultants. In 1996, the Parent adopted SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION under which it recognizes as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
The Company reimburses the Parent for direct expenses incurred in
connection with its operations. In addition, the Company has received
subordinated loans from the Parent to finance its operations. See "---Liquidity
and Capital Resources."
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The Company's revenues, profitability and future rate of growth are
substantially dependent upon prevailing prices for oil and gas, which are in
turn dependent upon numerous factors that are beyond the Company's control, such
as economic, political and regulatory developments and competition from other
sources of energy. The energy markets have historically been volatile, and there
can be no assurance that oil and gas prices will not be subject to wide
fluctuations in the future. A substantial or extended decline in oil and gas
prices could have a material adverse effect on the Company's financial position,
results of operations and access to capital, as well as the quantities of oil
and gas reserves that may be economically produced.
RESULTS OF OPERATIONS
The following table sets forth certain operating information with respect
to the oil and gas operations of the Company.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
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1997 1996 1997 1996
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<S> <C> <C> <C> <C>
NET PRODUCTION:
Oil (Mbbls) 775 591 2,324 1,596
Gas (Mmcf) 8,134 2,553 20,218 8,201
Total (Mmcfe) 12,784 6,099 34,162 17,777
NET SALES DATA (IN THOUSANDS):
Oil $ 14,459 $ 12,210 $ 45,769 $ 31,276
Gas $ 18,209 $ 4,643 $ 46,201 $ 15,083
Total $ 32,668 $ 16,853 $ 91,970 $ 46,359
AVERAGE SALES PRICE (1):
Oil (per Bbl) $ 18.66 $ 20.66 $ 19.69 $ 19.60
Gas (per Mcf) $ 2.24 $ 1.82 $ 2.29 $ 1.84
Total (per Mcfe) $ 2.56 $ 2.76 $ 2.69 $ 2.61
AVERAGE COSTS (PER MCFE):
Lease operating expenses $ 0.23 $ 0.21 $ 0.22 $ 0.23
Depletion, depreciation, and amortization $ 1.49 $ 1.15 $ 1.42 $ 1.19
General and administrative expenses $ 0.12 $ 0.20 $ 0.12 $ 0.22
</TABLE>
(1) Includes effects of hedging activities
GENERAL. The Company drilled two exploration wells and one development
during the three month period ended September 30, 1997. Two wells discovered oil
and gas and one well was suspended pending evaluation of future sidetrack
options.
During the nine months to September 30, 1997, the Company has drilled 14
wells, of which ten were oil and gas discoveries which have been or are being
completed for production, three have been suspended awaiting further evaluation
and one was plugged and abandoned.
OIL AND GAS REVENUES. Oil and gas revenues for the three months ended
September 30, 1997 were $32.7 million, an increase of $15.8 million, or 93%
above $16.9 million for the comparable period in 1996. A 31% increase in oil
production offset by a 10% decrease in oil prices combined to account for $2.2
million of the increase. A 219% increase in gas production and a 23% increase in
gas prices accounted for the remaining $13.6 million of the increase.
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Oil and gas revenues for the nine month period to September 1997 were $92.0
million, an increase of $45.6 million, or 98% above $46.4 million for the
comparable period in 1996. Oil and gas production in the nine months ended
September 1997 increased 46% and 147% respectively over the comparable 1996
period. The average realized price of oil was marginally higher while the
average realized gas price was 24% higher.
The increased oil production follows the successful drilling and
development of the Ship Shoal 194 field and the Ship Shoal 193 B-1 well, while
the increased gas production stems from successful drilling at the Main Pass 6/7
and 91, West Cameron 543/544, West Cameron 461 and South Marsh Island 7 fields.
For the three months ended September 30, 1997, the average realized gas
price was $2.24 per Mcf, or 3% below the $2.30 per Mcf average gas price that
would otherwise have been received if no hedging had been undertaken. Over the
same period, the average realized oil price was $18.66 per Bbl, or 4% above the
$17.95 per Bbl average oil price that would otherwise have been received if no
hedging had taken place. Hedging activities resulted in a $0.1 million increase
in oil and gas revenues. For the comparable period in 1996 the average realized
gas price was $1.82 per Mcf, or 5% below the $1.91 per Mcf average gas price
that would otherwise have been received if no hedging had been undertaken. In
the same period the average realized oil price was $20.66, or 9% below the
$22.59 per Bbl average oil price that would otherwise been received if no
hedging had taken place. Hedging activities resulted in a $1.4 million decrease
in oil and gas revenues for the three month period ended September 30, 1996.
In the nine month period to September 30, 1997 the average realized gas
price was $2.29 per Mcf, or 4% below the $2.39 per Mcf average gas price that
would otherwise have been received if no hedging had been undertaken. Over the
same period, the average realized oil price was $19.69 per Bbl, or 2% above the
$19.23 per Bbl average oil price that would otherwise have been received if no
hedging had taken place. Hedging activities resulted in a $1.1 million decrease
in oil and gas revenues. In the nine month period to September 30, 1996, the
average realized gas price was $1.84 per Mcf, or 22% below the $2.37 per Mcf
average gas price that would otherwise have been received if no hedging had been
undertaken. Over the same period the average realized oil price was $19.60 per
Bbl, or 6% below the $20.76 per Bbl average oil price that would otherwise have
been received without hedging. Hedging activities resulted in a $6.2 million
decrease in oil and gas revenues for the nine month period to September 30,
1996.
LEASE OPERATING EXPENSES (including production taxes). Lease operating
expenses increased $1.6 million, or 123% to $2.9 million for the three months
ended September 30, 1997, from $1.3 million for the three months ended September
30, 1996. The increase is attributable to increased production. Lease operating
expenses per Mcfe increased slightly from $0.21 for the comparable period in
1996 to $0.23 for the three months ended September 30, 1997 due to the costs
associated with bringing new fields into production.
Lease operating expenses for the nine month period to September 1997 were
$7.7 million, an increase of 88% over the corresponding period in 1996. The
increase is attributable to increased production. Lease operating expenses per
Mcfe decreased from $0.23 in 1996 to $0.22 for the nine months ended September
30, 1997.
DEPLETION, DEPRECIATION AND AMORTIZATION ("DD&A"). DD&A expense increased
$12.1 million, or 173%, to $19.1 million for the three months ended September
30, 1997, from $7.0 million for the same period in 1996. Production increases
accounted for $7.7 million of the increase while an increase in the unit rate
from $1.15 to $1.49 per Mcfe accounted for the balance.
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DD&A expense for the nine month period to September 1997 increased to $48.5
million from $21.2 million, for the corresponding period in 1996. The depletion
rate per unit of $1.42 per Mcfe for the nine month period to September 1997
increased from $1.19 per Mcfe for the corresponding period in 1996.
The increase in the unit rate in both periods was due to increased capital
expenditures from the Company's exploration and development activities coupled
with increased costs of drilling goods and services, platform and facilities
construction and transportation services in the industry.
EXPLORATION EXPENDITURES INCLUDING DRY HOLE COSTS. During the three month
period ended September 30, 1997, $5.1 million was expensed as exploration
expense as a result of the mechanical problems experienced in the lower zone of
the Main Pass 84 #1 well. In addition, $0.2 million was expensed for dry hole
costs incurred to date on the Main Pass 104 #3 well. Seismic, geological and
geophysical expenditures of $2.8 million were expensed during the three month
period ended September 30, 1997, an increase of $1.5 million over the comparable
period in 1996. Exploration expenditures for the nine months to September 30,
1997 totaled $12.8 million, including the $5.3 million expense noted above and
$2.3 million expensed in the three month period ended June 30, 1997 as dry hole
cost for the West Cameron 480 #1 well. Thus, dry hole costs of $7.6 million
accounted for most of the increase of $9.7 million in exploration expenditures
over the comparable period in 1996.
GENERAL, ADMINISTRATIVE AND STOCK COMPENSATION EXPENSE. General,
administrative and stock compensation expense increased $0.5 million, or 42%, to
$1.7 million for the three months ended September 30, 1997 from $1.2 million for
the comparable period in 1996. For the nine month period to September 30, 1997,
the expense increased $0.7 million to $4.7 million from $4.0 million for the
comparable period in 1996. On a per mcfe basis, the rate decreased dramatically
from $0.20/mcfe and $0.22/mcfe for the three and nine month periods ended
September 30, 1996 to $0.12/mcfe each for the respective periods in 1997.
NET INCOME. Primarily as a result of the exploration expense discussed
above, a net loss for the three months ended September 30, 1997 of $1.1 million
was recorded. This compares to earnings of $3.3 million for the three months
ended September 30, 1996. Net income for the nine months ended September 30,
1997 was $9.5 million, an increase of $3.1 million, or 48% over the earnings of
$6.4 million for the comparable period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The following table represents cash flow data for the Company for the
periods indicated.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
(in Thousands)
1997 1996
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Cash flow data:
Net cash provided by operating activities $ 74,823 $29,988
Net cash used in investing activities 114,671 57,257
Net cash provided by financing activities 59,867 26,459
</TABLE>
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The fluctuation in cash provided by operating activities from 1996 to 1997
was primarily due to increased oil and gas production coupled with higher prices
for both commodities.
The increase in cash used in investing activities in 1997 over 1996 was due
to expenditures on exploration and development.
The cash provided by financing activities in 1996 consisted primarily of
borrowings under the bank credit facility. The cash provided by financing
activities in 1997 consisted primarily of proceeds from a June 1997 Senior
Subordinated Note issue (described below) a portion of which were used to repay
outstandings under the bank credit facility.
Since 1990 the Company has financed its working capital needs, operations
and growth primarily with advances from the Parent, cash flow from operations
and bank borrowings.
Petsec Energy Ltd made an initial cash investment of $11.4 million in the
Company and, subsequently, increased this investment with advances of $18.5
million from an Australian offering of Ordinary Shares in September 1995 and
$31.0 million out of net proceeds from a U.S. offering of ADSs in July 1996.
Funds advanced by the Parent have historically been provided in the form of
subordinated loans in both US dollars and Australian dollars. These loans are
subordinated to the bank credit facility and the Senior Subordinated Notes.
Effective as of July 3, 1997, the US dollar loans bear interest at 7.18% and in
the case of Australian dollar borrowings, 6.83%. The loans from the Parent do
not have mandatory principal payments due until December 31, 2007. No interest
was paid or accrued on these loans prior to June 1, 1997. Any payments or
distributions made by the Company to its Parent have been principally for
reimbursement of direct expenses incurred in connection with the Company's
operations.
In April 1996, the Company entered into a $75 million bank credit facility,
under which the current borrowing base is $50 million. In addition, a sublimit
of $15 million exists for letter of credit purposes to support the bonding
requirements of the MMS and commodity swap transactions. At September 30, 1997,
borrowings outstanding under the bank credit facility were nil. The bank credit
facility is a two-year revolving credit facility followed by a two-year term
period with equal quarterly amortization payments. The facility matures in April
2001. The bank credit facility is secured by the Company's Gulf of Mexico
producing properties and contains financial covenants that require the Company
to maintain a ratio of senior debt to earnings before interest, taxes,
depreciation and amortization of not more than 2.75 to 1.0 and a coverage ratio
of earnings before interest and taxes to total interest of not less than 3.0 to
1.0. The Company is currently in compliance with all financial covenants under
the bank credit facility. Outstanding borrowings accrue interest at the rate of
LIBOR plus a margin of 1.25% to 1.50% per annum, depending upon the total amount
borrowed. The Company is obligated to pay a fee equal to .3% to .35% per annum
based on the unused portion of the borrowing base under the facility.
The Company's ability to borrow under the bank credit facility is dependent
upon the reserve value of its oil and gas properties, as determined by the Chase
Manhattan Bank ("Chase"). If the reserve value of the Company's borrowing base
declines, the amount available to the Company under the bank credit facility
will be reduced and to the extent that the borrowing base is less than the
amount then outstanding (including letters of credit) under the bank credit
facility, the Company will be obligated to repay such excess amount upon ninety
days' notice from Chase or to provide additional collateral.
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In June of 1997, the Company issued $100 million of 9 1/2% Senior
Subordinated Notes due 2007 (the "Notes"). The Notes were issued at a discount
with a yield to maturity of 9.56% per annum. The net proceeds from the offering
of the Notes were approximately $96.5 million. The Company used a portion of the
net proceeds to repay borrowings under the bank credit facility. The remainder
of the net proceeds is being used to provide working capital for the Company to
fund further exploration and development of its oil and gas properties, the
acquisition of lease blocks and other general corporate purposes.
For 1997, the Company has budgeted capital expenditures of approximately
$140 million on exploration and development drilling and other capital projects.
In the nine months ended September 30, 1997, $114.7 million was incurred on
capital expenditures. The Company intends to finance expenditures for the
remainder of 1997 and for 1998 with cash on hand, cash flow from operations and
bank borrowings. The capital expenditure budget is continually re-evaluated
based on drilling results, commodity prices, cash flow from operations and
property acquisitions.
HEDGING TRANSACTIONS
From time to time, the Company has utilized hedging transactions with
respect to a portion of its oil and gas production to achieve a more predictable
cash flow and to reduce its exposure to oil and gas price fluctuations. While
these hedging arrangements limit the downside risk of adverse price movements,
they also limit future revenues from favorable price movements. The use of
hedging transactions also involves the risk that the counterparties will be
unable to meet the financial terms of such transactions. The credit worthiness
of counterparties is subject to continuing review and full performance is
anticipated. The Company limits the duration of the transactions and the
percentage of its expected aggregate oil and gas production that may be hedged.
The Company accounts for these transactions as hedging activities and,
accordingly, gains or losses are included in oil and gas revenues when the
hedged production is delivered.
As of September 30, 1997, for the remainder of 1997, the Company had entered
into commodity swaps effectively fixing the price of 3.8 million Mmbtu of gas at
a volume-weighted average New York Mercantile Exchange ("NYMEX") price of $2.20
per Mmbtu. The Company had also entered into commodity swap contracts for 11.4
million Mmbtu, 5.5 million Mmbtu and 760,000 Mmbtu at volume-weighted average
NYMEX prices of $2.11 per Mmbtu, 2.20 per Mmbtu and 2.15 per Mmbtu for calendar
years 1998, 1999 and 2000 respectively.
As of September 30, 1997, for the remainder of 1997, the Company had entered
into commodity swap contracts for 368,000 barrels of oil at a volume-weighted
average NYMEX price of $21.29 per barrel. The Company had also entered into
commodity swap contracts for 1,126,000 Bbls, 365,000 Bbls and 152,000 Bbls at
volume-weighted average NYMEX prices of $20.17 per Bbl, $19.70 per Bbl and
$19.70 per Bbl for calendar years 1998, 1999 and 2000 respectively.
The fair value at September 30, 1997, represented by the estimated amount
that would be required to terminate these contracts, was a net cost of $7.8
million for the gas contracts and $0.7 million for the oil contracts.
For any particular swap transaction, the counterparty is required to make a
payment to the Company in the event that the average NYMEX reference prices for
any settlement period are less than the swap prices for such hedge, and the
Company is required to make a payment to the counterparty in the event that the
average NYMEX reference prices for any settlement period is greater than the
swap price for such hedge. The Company has proved reserves sufficient to cover
all of these contracts and does not enter into derivatives without underlying
forecasted production and proved reserves.
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ITEM 5. OTHER INFORMATION
The Company filed its Form S-4 Registration Statement with the Commission on
July 18, 1997. The Company seeks to exchange its 9 1/2% Series A Senior
Subordinated Note due 2007 for its 9 1/2% Series B Senior Subordinated Notes due
2007. Such Registration Statement was declared effective on October 10, 1997.
13
<PAGE> 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following instruments and documents are included as Exhibits to this Form
10-Q. Exhibits incorporated by reference are so indicated by parenthetical
information.
Exhibit No. Exhibit
4.1 Articles of Incorporation of the Company (filed as Exhibit 4.1 to
the Registration Statement on Form S-4 filed on July 18, 1997 and
is included herein by reference (File No. 333-31625))
4.2 By-Laws of the Company (filed as Exhibit 4.2- to the Registration
Statement on Form S-4 filed on July 18, 1997 and is included herein
by reference (File No. 333-31625))
4.3 Indenture dated as of June 13, 1997 among the Company, as issuer,
and the Bank of New York, as trustee (filed as Exhibit 4.3- to the
Registration Statement on Form S-4 filed on July 18, 1997 and is
included herein by reference (File No. 333-31625))
4.4 Registration Rights Agreement dated June 13, 1997 by and among the
Company and Merrill, Lynch, Pierce, Fenner & Smith Incorporated,
Donaldson, Lufkin & Jenrette Securities Corporation and Salomon
Brothers Inc (filed as Exhibit 4.4 to the Registration Statement on
Form S-4 filed on July 18, 1997 and is included herein by reference
(File No. 333-31625))
10.1 Credit Agreement by and among Petsec Energy Inc. and Chase
Manhattan Bank and certain financial institutions named therein as
Lenders (filed as Exhibit 10.1 to the Registration Statement on
Form S-4 filed on July 18, 1997 and is included herein by reference
(File No. 333-31625))
27 Financial Data Schedule
14
<PAGE> 15
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.
Petsec Energy Inc.
November 7, 1997 By: /s/ Alan H. Stevens
-------------------------
Alan H. Stevens
President and
Chief Operating Officer
(duly authorized officer)
November 7, 1997 By: /s/ Ross A. Keogh
-------------------------
Ross A. Keogh
Treasurer
(principal financial
officer)
15
<PAGE> 16
EXHIBIT INDEX
27 -- Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 20,361
<SECURITIES> 0
<RECEIVABLES> 14,388
<ALLOWANCES> 0
<INVENTORY> 40
<CURRENT-ASSETS> 35,371
<PP&E> 285,345
<DEPRECIATION> 92,018
<TOTAL-ASSETS> 231,692
<CURRENT-LIABILITIES> 31,875
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 44,752
<TOTAL-LIABILITY-AND-EQUITY> 231,692
<SALES> 91,970
<TOTAL-REVENUES> 91,970
<CGS> 0
<TOTAL-COSTS> 73,756
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,350
<INCOME-PRETAX> 14,026
<INCOME-TAX> 4,531
<INCOME-CONTINUING> 9,495
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,495
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
