<PAGE> 1
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 June 30, 1998
[ ] 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 in July 1996 of American Depositary Receipts ("ADRs") which
were listed on The Nasdaq Stock MarketSM (symbol: PSALY). Effective May 18, 1998
the ADRs are traded on the New York Stock Exchange (symbol: PSJ). Shareholders
and holders of American Depositary Shares are advised to refer to the filings of
Petsec Energy Ltd for the consolidated results.
1
<PAGE> 2
PETSEC ENERGY INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
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.
<S> <C> <C>
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...................................................................... 7-14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................................ 15
SIGNATURES............................................................................................ 16
</TABLE>
2
<PAGE> 3
PETSEC ENERGY INC.
A WHOLLY OWNED SUBSIDIARY OF PETSEC ENERGY LTD
BALANCE SHEETS
(Dollars in thousands, except share amounts)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
(UNAUDITED)
------------ -----------
<S> <C> <C>
Current Assets:
Cash $ 2,552 $ 7,431
Accounts receivable 8,703 13,978
Other receivables 70 80
Inventories of crude oil 48 43
Prepaid expenses 621 258
------------ ------------
Total Current Assets 11,994 21,790
Property, plant and equipment - at cost under the successful
efforts method of accounting for oil and gas properties
Proved oil and gas properties 262,564 227,049
Unproved oil and gas properties 43,225 20,759
Production facilities 73,448 66,956
Other 1,945 1,527
------------ ------------
381,182 316,291
Less accumulated depletion, depreciation and amortization (143,762) (106,977)
------------ ------------
Net property, plant and equipment 237,420 209,314
Other Assets 2,841 3,000
------------ ------------
Total Assets $ 252,255 $ 234,104
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Trade accounts payable 28,639 15,107
Interest payable 1,811 1,720
Other accrued liabilities 12,724 11,967
------------ ------------
Total Current Liabilities 43,174 28,794
Senior subordinated notes 99,642 99,630
Bank credit facility 35,000 --
Subordinated shareholder loan 36,738 37,298
Provision for dismantlement 3,936 3,289
Deferred income taxes 4,763 16,458
------------ ------------
Total Liabilities $ 223,253 $ 185,469
------------ ------------
Shareholder's Equity:
Common stock, $1 par value; authorized
1,000,000 shares; issued and outstanding 1 share -- --
Additional paid-in-capital 21,383 20,981
Retained earnings 7,619 27,654
------------ ------------
Total Shareholder's Equity 29,002 48,635
------------ ------------
Total Liabilities and Shareholder's Equity $ 252,255 $ 234,104
============ ============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Oil and gas sales $ 23,596 $ 28,381 $ 51,582 $ 59,302
------------ ------------ ------------ ------------
Operating Expenses:
Lease operating expenses 3,392 2,294 7,480 4,375
Production taxes 186 177 334 388
Exploration expenditures 3,046 1,136 4,870 2,429
Dry hole costs and impairments 17,105 2,259 34,056 2,259
General and administrative 1,742 1,202 3,293 2,606
Stock compensation 227 209 402 418
Depletion, depreciation and amortization 13,837 15,330 28,932 29,425
------------ ------------ ------------ ------------
Total operating expenses: 39,535 22,607 79,367 41,900
------------ ------------ ------------ ------------
Income (loss) from operations (15,939) 5,774 (27,785) 17,402
------------ ------------ ------------ ------------
Other income (expenses):
Interest expense (2,478) (1,372) (4,690) (2,099)
Interest income 67 149 169 203
Other, principally foreign exchange gain 714 194 576 194
------------ ------------ ------------ ------------
(1,697) (1,029) (3,945) (1,702)
------------ ------------ ------------ ------------
Income (loss) before income taxes (17,636) 4,745 (31,730) 15,700
Income tax benefit (expense) 6,622 (1,709) 11,695 (5,134)
------------ ------------ ------------ ------------
Net income (loss) (11,014) 3,036 (20,035) 10,566
Retained earnings at beginning of period 18,633 22,084 27,654 14,554
------------ ------------ ------------ ------------
Retained earnings at end of period $ 7,619 $ 25,120 $ 7,619 $ 25,120
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
PETSEC ENERGY INC.
A WHOLLY OWNED SUBSIDIARY OF PETSEC ENERGY LTD
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (20,035) $ 10,566
Adjustments to reconcile income (loss) to net
cash provided by operating activities:
Depletion, depreciation and amortization 28,932 29,425
Deferred income taxes (11,695) 5,134
Dry hole costs and impairments 34,056 2,272
Other 678 227
Changes in operating assets and liabilities:
Decrease in receivables 5,275 664
Decrease (increase) in inventories (5) 4
Increase in prepayments (363) (464)
Decrease in other receivables 10 5
Decrease in trade accounts payable (538) (1,054)
Increase (decrease) in other accrued liabilities (452) 159
Increase in interest payable 91 388
------------ ------------
Net cash provided by operating activities 35,954 47,326
------------ ------------
Cash flows from investing activities:
Lease acquisitions (3,048) (5,496)
Exploration and development expenditures (72,339) (64,119)
Other asset additions (446) (266)
------------ ------------
Net cash used in investing activities (75,833) (69,881)
------------ ------------
Cash flows from financing activities:
Proceeds from senior subordinated notes _ 96,697
Proceeds from bank credit facility 35,000 21,000
Repayment of bank credit facility _ (58,000)
Proceeds from shareholder loans _ 1,500
Repayment of shareholder loans _ (215)
------------ ------------
Net cash provided by financing activities 35,000 60,982
------------ ------------
Net increase (decrease) in cash (4,879) 38,427
Cash at beginning of period 7,431 342
------------ ------------
Cash at end of period $ 2,552 $ 38,769
============ ============
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
PETSEC ENERGY INC.
A WHOLLY-OWNED SUBSIDIARY OF PETSEC ENERGY LTD
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - 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. The financial statements and footnotes should
be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 and Management's Discussion and Analysis
of Financial Condition and Results of Operations.
The financial information for the three and six-month periods ended
June 30, 1998 and 1997 has not been audited. However, 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 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 - The Parent is considering a number of alternatives, including joint
ventures or strategic alliances, property and/or company
acquisitions, a merger or sale of the Parent, property swaps, and
continuing to exploit its inventory of drilling prospects.
NOTE 3 - 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.
6
<PAGE> 7
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 six-month periods ended June 30, 1998 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 Depositary Receipts ("ADRs") listed on the New York Stock Exchange
(symbol: PSJ). Prior to May 18, 1998, the ADRs were listed on The Nasdaq Stock
MarketSM (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.
Oil and 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 commodity 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. Costs to drill exploratory wells that do not
find proved reserves are expensed. Seismic, geological and geophysical, and
delay rental expenditures are expensed as incurred.
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."
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.
7
<PAGE> 8
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 SIX MONTHS ENDED JUNE
JUNE 30 30
------------------------- --------------------------
1998 1997 1998 1997
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
NET PRODUCTION:
Gas (MMcf) 6,672 6,216 14,254 12,084
Oil (MBls) 537 802 1,220 1,549
Total (MMcfe) 9,894 11,028 21,574 21,378
NET SALES DATA (IN THOUSANDS):
Gas $ 14,632 $ 13,062 $ 31,665 $ 27,992
Oil $ 8,964 $ 15,319 $ 19,917 $ 31,310
Total $ 23,596 $ 28,381 $ 51,582 $ 59,302
AVERAGE SALES PRICE (1):
Gas (per Mcf) $ 2.19 $ 2.10 $ 2.22 $ 2.32
Oil (per Bbl) $ 16.69 $ 19.10 $ 16.33 $ 20.21
Total (per Mcfe) $ 2.38 $ 2.57 $ 2.39 $ 2.77
AVERAGE COSTS (PER MCFE):
Lease operating expenses $ 0.36 $ 0.22 $ 0.36 $ 0.22
Depletion, depreciation, and amortization $ 1.40 $ 1.39 $ 1.34 $ 1.38
General, administrative and other expenses $ 0.18 $ 0.11 $ 0.15 $ 0.12
</TABLE>
(1) Includes effects of hedging activities
GENERAL. The Company sidetracked two wells during the three-month
period ended June 30, 1998. The Ship Shoal 192 sidetrack well was suspended
following mechanical problems in the wellbore and the West Cameron 237 sidetrack
well was completed as a gas producer.
The High Island 308 exploration well which commenced drilling in the
first quarter was plugged and abandoned.
The Ship Shoal 193 A-6 sidetrack well which also commenced drilling in
the first quarter was deepened before being completed as a dual zone oil
producer. Production began late July 1998.
During the six months to June 30, 1998, the Company drilled and/or
sidetracked seven wells, of which three were oil and gas discoveries, two are
suspended pending further work for future production and two were plugged and
abandoned.
OIL AND GAS REVENUES. Oil and gas revenues for the three months ended
June 30, 1998 were $23.6 million, a decrease of $4.8 million, or 17% below $28.4
million for the comparable period in 1997. A 33% decrease in oil production
coupled with a 13% decrease in oil prices resulted in a $6.4 million decrease in
oil revenues. A 7% increase in gas production coupled with a 4% increase in gas
prices resulted in a $1.6 million increase in gas revenues.
Oil and gas revenues for the six-month period to June 1998 were $51.6
million, a decrease of $7.7 million, or 13% below $59.3 million for the
comparable period in 1997. Oil production in the first half of 1998 decreased
21% and gas production increased 18% over the comparable 1997 period. The
average realized prices of oil and gas decreased by 19% and 4% respectively.
8
<PAGE> 9
Production in the June quarter was adversely affected by the
mechanical failure of the Ship Shoal A-5ST well and by the high line pressures
at the Main Pass 6/7/91 gas field, which restricted gas production rates.
For the three months ended June 30, 1998, the average realized gas
price was $2.19 per Mcf, or 2% below the $2.24 per Mcf average gas price that
would otherwise have been received if no hedging had taken place. Over the same
period, the average realized oil price was $16.69 per Bbl, or 20% above the
$13.94 per Bbl average oil price that would otherwise have been received if no
hedging had taken place. Hedging activities resulted in a $1.2 million increase
in oil and gas revenues. For the comparable period in 1997 the average realized
gas price was $2.10 per Mcf, or 1% below the $2.13 per Mcf average gas price
that would otherwise have been received if no hedging had taken place. In the
same period the average realized oil price was $19.10, or 4% above the $18.45
per Bbl average oil price that would otherwise been received if no hedging had
taken place. Hedging activities resulted in a $0.3 million increase in oil and
gas revenues for the three-month period ended June 30, 1997.
In the six-month period to June 30, 1998 the average realized gas price
was $2.22 per Mcf, or 1% above the $2.20 per Mcf average gas price that would
otherwise have been received if no hedging had taken place. Over the same
period, the average realized oil price was $16.33 per Bbl, or 16% above the
$14.05 per Bbl average oil price that would otherwise have been received if no
hedging had taken place. Hedging activities resulted in a $3.0 million increase
in oil and gas revenues. In the six-month period to June 30, 1997, the average
realized gas price was $2.32 per Mcf, or 6% below the $2.46 per Mcf average gas
price that would otherwise have been received if no hedging had taken place.
Over the same period the average realized oil price was $20.21 per Bbl, or 2%
above the $19.88 per Bbl average oil price that would otherwise have been
received if no hedging had taken place. Hedging activities resulted in a $1.2
million decrease in oil and gas revenues.
LEASE OPERATING EXPENSES. Lease operating expenses increased $1.1
million, or 44% to $3.6 million for the three months ended June 30, 1998, from
$2.5 million for the three months ended June 30, 1997. Lease operating expenses
per Mcfe increased from $0.22 for the comparable period in 1997 to $0.36 for the
three months ended June 30, 1998.
Lease operating expenses for the six month period to June 1998 were
$7.8 million, an increase of 63% over the corresponding period in 1997. Lease
operating expenses per Mcfe increased from $0.22 for the comparable period in
1997 to $0.36 for the first half of 1998.
While lease operating costs on a per Mcfe basis were in line with the
previous quarter, they have increased from a year ago primarily due to an
increase in well remedial work and lower production volumes.
DEPLETION, DEPRECIATION AND AMORTIZATION ("DD&A"). DD&A expense
decreased $1.5 million, or 10%, to $13.8 million for the three months ended June
30, 1998, from $15.3 million for the same period in 1997 due to a decrease in
production. The depletion rate per unit of $1.40 per Mcfe for the second quarter
of 1998 increased slightly from $1.39 per Mcfe for the same quarter in 1997.
9
<PAGE> 10
DD&A expense for the six-month period to June 1998 decreased to $28.9
million from $29.4 million for the corresponding period in 1997. The depletion
rate per unit of $1.34 per Mcfe for the six-month period to June 1998 decreased
from $1.38 per Mcfe for the corresponding period in 1997.
EXPLORATION EXPENDITURES. Seismic, geological and geophysical
expenditures of $3.0 million were expensed during the three-month period ended
June 30, 1998, an increase of $1.9 million over the comparable period in 1997.
Exploration expenditures for the six months to June 30, 1998 totaled
$4.9 million, an increase of $2.5 million over the comparable period in 1997.
DRY HOLE COSTS AND IMPAIRMENTS. During the quarter ended June 30, 1998,
$17.1 million was expensed for dry hole costs incurred on the High Island 308 #1
and South Marsh Island 189 #1 wells.
For the six months ended June 30, 1998, $34.1 million was expensed for
dry hole and impairment costs incurred primarily on the South Marsh Island 189
#1, High Island 308 #1 and West Cameron 480 #2 wells.
GENERAL, ADMINISTRATIVE AND STOCK COMPENSATION EXPENSE. General,
administrative and stock compensation expense increased $0.6 million, or 43%, to
$2.0 million for the three months ended June 30, 1998 from $1.4 million for the
comparable period in 1997.
For the six-month period to June 30, 1998, the expense increased $0.7
million to $3.7 million from $3.0 million for the comparable period in 1997.
On a per mcfe basis, the rate increased from $0.11/Mcfe and
$0.12/Mcfe for the three and six-month periods ended June 30, 1997 to $0.18/Mcfe
and $0.15/Mcfe for the respective periods in 1998.
NET INCOME. As a result of the dry hole and impairment costs discussed
above, a net loss for the three months ended June 30, 1998 of $11.0 million was
recorded, a decrease of $14.0 million, over the earnings of $3.0 million for the
three months ended June 30, 1997. The net loss for the six months ended June 30,
1998 was $20.0 million, a decrease of $30.6 million over the earnings of $10.6
million for the comparable period in 1997.
10
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
The following table represents cash flow data for the Company for the
periods indicated.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
( in Thousands)
1998 1997
------- -------
<S> <C> <C>
Cash flow data:
Net cash provided by operating activities $35,954 $47,326
Net cash used in investing activities 75,833 69,881
Net cash provided by financing activities 35,000 60,982
</TABLE>
The decrease in cash provided by operating activities during the
six-month period ended June 30, 1998 compared to the same period in 1997, was
primarily due to decreased oil production coupled with lower prices for both
commodities.
The increase in cash used in investing activities in 1998 over 1997 was
due to expenditures on exploration and development activities.
The cash provided by financing activities in 1998 consisted solely of
borrowings under the bank credit facility. The cash provided by financing
activities in 1997 consisted primarily of net proceeds from a Senior
Subordinated Note issue after repayment of borrowings under the bank facility.
Since 1990 the Company has financed its working capital needs,
operations and growth primarily with advances from the Parent, cash flow from
operations, a Senior Subordinated debt offering 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 ADRs in July 1996.
Funds advanced by the Parent have historically been provided in the
form of subordinated loans. These loans are subordinated to the bank credit
facility and Senior Subordinated Notes. At June 30, 1998, the US dollar loans
bear interest at 7.34% and in the case of Australian dollar borrowings, 6.50%.
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. Payments or distributions made by the Company to its Parent have been
made 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 $75 million, with a sublimit
of $15 million for letter of credit purposes to support the bonding requirements
of the MMS and commodity swap transactions. At June 30, 1998, borrowings
outstanding under the bank credit facility were $35 million. The bank credit
facility is a two-year revolving credit facility followed by a two-year term
period requiring equal quarterly amortization payments. The bank credit facility
was amended in 1997 to mature 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
4.0 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
11
<PAGE> 12
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 1.75% per annum, depending upon the total amount borrowed.
The Company is obligated to pay a fee equal to .30% 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.
In June of 1997, the Company issued $100 million of 9 1/2% Senior
Subordinated Notes due in 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 $96.7 million. The Company used a
portion of the net proceeds to repay borrowings under the bank credit facility.
The remainder of the net proceeds was 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 1998, the Company originally budgeted capital expenditures of $160
million for exploration and development. Capital expenditure is continually
re-evaluated based on drilling results, commodity prices, cash flow from
operations and property acquisitions. The Company expects capital expenditures
for 1998 to be below that budgeted. During the three-month period ended June 30,
1998, the Company spent $43.5 million on capital and exploration expenditures
and in the six months ended June 30, 1998 spent $75.8 million. On July 8, 1998,
the Company was awarded the last of seven leases it successfully bid for at the
OCS Louisiana Offshore Sale held on March 18, 1998. The Company intends to
finance expenditures for the remainder of 1998 with cash flow from operations
and bank borrowings.
At June 30, 1998, the Company had a working capital deficit of $31.2
million due to activity in the drilling program and lease acquisitions. In July,
the Company drew $18 million under the bank credit facility in order to reduce
the working capital deficit.
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 may 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.
Energy Swaps:
The Company enters into forward swap contracts with major financial
institutions to reduce the price volatility on the sale of oil and gas
production. In swap agreements, the Company receives the difference between a
fixed price per unit of production and a floating price issued by a third party.
If the floating price is higher than the fixed price, the Company pays the
difference.
12
<PAGE> 13
As of June 30, 1998, for the remainder of 1998, the Company had entered
into commodity swaps effectively fixing the price of 8.3 million MMbtu of gas at
a volume-weighted average New York Mercantile Exchange ("NYMEX") price of $2.19
per MMbtu. The Company had also entered into commodity swap contracts for 12.8
million MMbtu and 760,000 MMbtu at volume-weighted average NYMEX prices of $2.26
per MMbtu and $2.15 per MMbtu for calendar years 1999 and 2000, respectively.
As of June 30, 1998, for the remainder of 1998, the Company had entered
into commodity swap contracts for 552,000 barrels of oil at a volume-weighted
average NYMEX price of $20.10 per barrel. The Company had also entered into
commodity swap contracts for 365,000 Bbls and 152,000 Bbls at volume-weighted
average NYMEX prices of $19.70 per Bbl and $19.70 per Bbl for calendar years
1999 and 2000, respectively.
The fair value at June 30, 1998, represented by the estimated amount
that would be required to terminate these contracts, was a net cost of $4.5
million for the gas contracts and a net benefit of $3.9 million for the oil
contracts.
Collars:
The Company also enters into collar agreements with third parties. A
collar agreement is similar to a swap agreement except that the Company receives
the difference between the floor price and the floating price if the floating
price is below the floor. The Company pays the difference between the ceiling
price and the floating price if the floating price is above the ceiling. As of
June 30, 1998, the Company had 920,000 MMbtu of gas hedged through December 1998
in a costless collar with a floor price of $2.00 per MMbtu and a ceiling price
of $3.70 per MMbtu. The effect to the Company to terminate this contract at June
30, 1998 was estimated to be a net cost of $2,000.
The Company has proved reserves sufficient to cover all of these
contracts and does not trade in derivatives without underlying forecasted
production and proved reserves.
13
<PAGE> 14
YEAR 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The Company is using
internal resources to identify, correct or reprogram, and test the systems for
the year 2000 compliance. It is anticipated that all reprogramming efforts will
be complete by December 31, 1998, allowing adequate time for testing. Management
can not yet estimate the year 2000 compliance expense and related potential
effect on the Company's financial position, results of operations or liquidity.
In addition, while the Company is addressing the Year 2000 problem with various
third parties such as vendors and customers, no assurances can be made that
such external sources will be Year 2000 compliant.
NEW ACCOUNTING PRONOUNCEMENTS
In June of 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities". Statement 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. Statement
133 requires that all derivatives be recognized as either assets or liabilities
in the balance sheet and measured at fair value. The accounting for changes in
the fair value of a derivative (that is, gains and losses) depends on the
intended use of the derivative and resulting designation. If certain conditions
are met, a derivative may be specifically designated as a "fair value hedge",
cash flow hedge", or a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, or other
specified foreign currency transactions. Statement 133 amends and supersedes a
number of existing Statements of Financial Accounting Standards, and nullifies
or modifies the consensuses reached in a number of issues addressed by the
Emerging Issues Task Force. Statement 133 is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. The Company is assessing the
impact of adoption of Statement 133, and at the present time, has not quantified
the effect of adoption or continuing impact of such adoption.
14
<PAGE> 15
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.
<TABLE>
<CAPTION>
Exhibit No. Exhibit
<S> <C>
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
</TABLE>
There were no reports on Form 8-K filed during the quarter covered by this
report.
15
<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.
Petsec Energy Inc.
August 14 , 1998 By: /s/ Ross A. Keogh
------------------------
Ross A. Keogh
Vice President Finance and
Administration
(principal financial officer)
August 14, 1998 By: /s/ James E. Slatten, III
------------------------
James E. Slatten, III
Secretary
(duly authorized officer)
16
<PAGE> 17
<TABLE>
<CAPTION>
Exhibit No. Exhibit
<S> <C>
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 referende (File No. 333-31625))
4.3 Indenture dated as of June 13, 1997 among the Company, as
the Bank of New York, as trustee (filed as Exhibit 4.3-to the
Registrstion 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 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 Registrstion 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
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,552
<SECURITIES> 0
<RECEIVABLES> 8,773
<ALLOWANCES> 0
<INVENTORY> 48
<CURRENT-ASSETS> 11,994
<PP&E> 381,182
<DEPRECIATION> 143,762
<TOTAL-ASSETS> 252,255
<CURRENT-LIABILITIES> 43,174
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 29,002
<TOTAL-LIABILITY-AND-EQUITY> 252,255
<SALES> 23,596
<TOTAL-REVENUES> 23,596
<CGS> 0
<TOTAL-COSTS> 39,535
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,478
<INCOME-PRETAX> (17,636)
<INCOME-TAX> (6,622)
<INCOME-CONTINUING> (11,014)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,014)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
