<PAGE> 1
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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, 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 of (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
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.
<PAGE> 2
PETSEC ENERGY INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
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.................................................... 7-14
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>
SEPTEMBER 30,
1998 DECEMBER 31,
(UNAUDITED) 1997
------------- ------------
<S> <C> <C>
Current Assets:
Cash $ 916 $ 7,431
Accounts receivable 5,297 13,978
Other receivables 261 80
Inventories of crude oil 21 43
Prepaid expenses 480 258
----------- -----------
Total Current Assets 6,975 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 290,516 227,049
Unproved oil and gas properties 34,078 20,759
Production facilities 76,467 66,956
Other 1,950 1,527
----------- -----------
403,011 316,291
Less accumulated depletion, depreciation and amortization (156,217) (106,977)
----------- -----------
Net property, plant and equipment 246,794 209,314
----------- -----------
Other Assets 2,761 3,000
----------- -----------
Total Assets $ 256,530 $ 234,104
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Trade accounts payable 11,806 15,107
Interest payable 3,901 1,720
Other accrued liabilities 4,339 11,967
Bank credit facility 8,250 --
----------- -----------
Total Current Liabilities 28,296 28,794
Senior subordinated notes 99,649 99,630
Bank credit facility 57,750 --
Subordinated shareholder loan 36,624 37,298
Provision for dismantlement 4,183 3,289
Deferred income taxes 3,379 16,458
----------- -----------
Total Liabilities $ 229,881 $ 185,469
----------- -----------
Shareholder's Equity:
Common stock, $1 par value; authorized
1,000,000 shares; issued and outstanding 1 share -- --
Additional paid-in-capital 21,489 20,981
Retained earnings 5,160 27,654
----------- -----------
Total Shareholder's Equity 26,649 48,635
----------- -----------
Total Liabilities and Shareholder's Equity $ 256,530 $ 234,104
=========== ===========
</TABLE>
See accompanying notes to financial statements.
3
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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,
----------------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Oil and gas sales $ 20,589 $ 32,668 $ 72,171 $ 91,970
--------- --------- -------- ---------
Operating Expenses:
Lease operating expenses 2,997 2,741 10,477 7,116
Production taxes 145 162 479 550
Exploration expenditures 1,645 2,784 6,515 5,213
Dry hole costs and impairments 2,169 5,352 36,225 7,611
General and administrative 1,492 1,508 4,785 4,111
Stock compensation 106 209 508 627
Depletion, depreciation and amortization 12,702 19,103 41,634 48,528
--------- --------- -------- ---------
Total operating expenses: 21,256 31,859 100,623 73,756
--------- --------- -------- ---------
Income (loss) from operations (667) 809 (28,452) 18,214
--------- --------- -------- ---------
Other income (expenses):
Interest expense (3,355) (3,251) (8,045) (5,350)
Interest income 69 412 238 615
Other, principally foreign exchange gain 110 356 686 547
--------- --------- -------- ---------
(3,176) (2,483) (7,121) (4,188)
--------- --------- -------- ---------
Income (loss) before income taxes (3,843) (1,674) (35,573) 14,026
Income tax benefit (expense) 1,384 603 13,079 (4,531)
--------- --------- -------- ---------
Net income (loss) (2,459) (1,071) (22,494) 9,495
Retained earnings at beginning of period 7,619 25,120 27,654 14,554
--------- --------- -------- ---------
Retained earnings at end of period $ 5,160 $ 24,049 $ 5,160 $ 24,049
========= ========= ======== ==========
</TABLE>
See accompanying notes to financial statements.
4
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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,
-----------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (22,494) $ 9,495
Adjustments to reconcile income (loss) to net
cash provided by operating activities:
Depletion, depreciation and amortization 41,634 48,528
Deferred income taxes (13,079) 4,531
Dry hole costs and impairments 36,225 7,611
Other 774 193
Changes in operating assets and liabilities:
Decrease (increase) in receivables 8,681 (2,478)
Decrease in inventories 22 5
Increase in prepayments (222) (414)
Decrease (increase) in other receivables (181) 46
Decrease in trade accounts payable (2,156) (249)
Decrease in other accrued liabilities (873) (638)
Increase in interest payable 2,181 3,236
----------- --------
Net cash provided by operating activities 50,512 69,866
----------- --------
Cash flows from investing activities:
Lease acquisitions (8,147) (7,189)
Exploration and development expenditures (114,428) (100,601)
Other asset additions (452) (1,924)
----------- --------
Net cash used in investing activities (123,027) (109,714)
----------- --------
Cash flows from financing activities:
Proceeds from senior subordinated notes _ 96,532
Proceeds from bank credit facility 66,000 21,000
Repayment of bank credit facility _ (58,000)
Proceeds from shareholder loans _ 1,500
Repayment of shareholder loans _ (1,165)
----------- --------
Net cash provided by financing activities 66,000 59,867
----------- --------
Net increase (decrease) in cash (6,515) 20,019
Cash at beginning of period 7,431 342
Cash at end of period $ 916 $ 20,361
=========== ========
</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
(UNAUDITED)
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 nine-month periods ended
September 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 announced on June 22, 1998 that it had retained a US
investment banking firm to assist in identifying and considering
strategic opportunities available to it. These may include joint
ventures or strategic alliances, property and/or company
acquisitions, a merger or sale of the Parent, property swaps, and
continuing to exploit the Company's inventory of drilling prospects.
It was noted in the announcement that there can be no assurance that
a transaction of any kind will result from this process.
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 nine-month periods ended September 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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------ ------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET PRODUCTION:
Gas (MMcf) 5,802 8,134 20,056 20,218
Oil (MBls) 549 775 1,769 2,324
Total (MMcfe) 9,096 12,784 30,670 34,162
NET SALES DATA (IN THOUSANDS):
Gas $11,998 $18,209 $43,663 $46,201
Oil $8,591 $14,459 $28,508 $45,769
Total $20,589 $32,668 $72,171 $91,970
AVERAGE SALES PRICE (1):
Gas (per Mcf) $2.07 $2.24 $2.18 $2.29
Oil (per Bbl) $15.65 $18.66 $16.12 $19.69
Total (per Mcfe) $2.26 $2.56 $2.35 $2.69
AVERAGE COSTS (PER MCFE):
Lease operating expenses $0.35 $0.23 $0.36 $0.22
Depletion, depreciation, and amortization $1.40 $ 1.49 $1.36 $1.42
General, administrative and other expenses $0.16 $0.12 $0.16 $0.12
</TABLE>
(1) Includes effects of hedging activities
GENERAL. The Company drilled one exploratory well, Main Pass 91 East
#1, during the three-month period ended September 30, 1998. The well was plugged
and abandoned in October 1998.
Production in the September 1998 quarter was adversely affected by a
succession of hurricanes and tropical storms during September which caused
evacuation of facilities and deferral of approximately 0.9 Bcfe (gross) of
production. Hurricane Georges caused physical damage to several platforms and
facilities and to the drilling rig and surface equipment on the Main Pass 91
East #1 well. The total estimated cost of repairs is $3.0 million, which is
expected to be covered by insurance policies subject to a $0.2 million
deductible.
During the nine months to September 30, 1998, the Company has drilled
and/or sidetracked eight wells, three of which were oil and gas discoveries, two
of which are suspended pending further work for future production and three of
which were plugged and abandoned.
OIL AND GAS REVENUES. Oil and gas revenues for the three months ended
September 30, 1998 were $20.6 million, a decrease of $12.1 million, or 37% below
$32.7 million for the comparable period in 1997. A 29% decrease in oil
production coupled with a 16% decrease in oil prices resulted in a $5.9 million
decrease in oil revenues. A 29% decrease in gas production coupled with an 8%
decrease in gas prices resulted in a $6.2 million decrease in gas revenues.
Oil and gas revenues for the nine-month period to September 30, 1998
were $72.2 million, a decrease of $19.8 million, or 22% below $92.0 million for
the comparable period in 1997. Oil production in the nine months to September
30, 1998 decreased 24% while gas production was in line with the comparable 1997
period. The average realized prices of oil and gas decreased by 18% and 5%,
respectively.
8
<PAGE> 9
For the three months ended September 30, 1998, the average realized gas
price was $2.07 per Mcf, or 6% above the $1.96 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 $15.65 per Bbl, or 24% above
the $12.65 per Bbl average oil price that would otherwise have been received
if no hedging had taken place. Hedging activities resulted in a $2.3 million
increase in oil and gas revenues. For the comparable period in 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
taken place. In the same period, the average realized oil price was $18.66, 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 three-month period ended
September 30, 1997.
In the nine-month period to September 30, 1998, the average realized
gas price was $2.18 per Mcf, or 2% above 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 $16.12 per Bbl, or 18% above
the $13.62 per Bbl average oil price that would otherwise have been received
if no hedging had taken place. Hedging activities resulted in a $5.3 million
increase in oil and gas revenues. 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 taken place. In 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.
LEASE OPERATING EXPENSES (including production taxes). Lease operating
expenses increased $0.2 million, or 7%, to $3.1 million for the three months
ended September 30, 1998, from $2.9 million for the three months ended September
30, 1997. Lease operating expenses per Mcfe increased from $0.23 for the
comparable period in 1997 to $0.35 for the three months ended September 30,
1998.
Lease operating expenses for the nine-month period to September 1998
were $11.0 million, an increase of 43% 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 nine-month period to September 1998.
Lease operating costs on a per Mcfe basis have increased from a year
ago primarily due to increased expenses and lower production volumes that
resulted, in part, from the adverse weather conditions in the third quarter of
1998.
DEPLETION, DEPRECIATION AND AMORTIZATION ("DD&A"). DD&A expense
decreased $6.4 million, or 34%, to $12.7 million for the three months ended
September 30, 1998, from $19.1 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
third quarter of 1998 decreased 6% from $1.49 per Mcfe for the same quarter in
1997.
DD&A expense for the nine-month period to September 1998 decreased to
$41.6 million, from $48.5 million for the corresponding period in 1997 due to
decreased production volumes. The depletion rate per unit of $1.36 per Mcfe
decreased for the nine-month period to September 1998 from $1.42 per Mcfe for
the corresponding period in 1997.
EXPLORATION EXPENDITURES. Seismic, geological and geophysical
expenditures of $1.6 million were expensed during the three-month period ended
September 30, 1998, a decrease of $1.2 million over the comparable period in
1997.
9
<PAGE> 10
Exploration expenditures for the nine months to September 30, 1998
totaled $6.5 million, an increase of $1.3 million over the comparable
period in 1997.
DRY HOLE COSTS AND IMPAIRMENTS. During the quarter ended September 30,
1998, $2.2 million was expensed for the costs incurred on the Main Pass 91 East
#1 well through September 30, 1998.
For the nine months ended September 30, 1998, $36.2 million was
expensed for dry hole and impairment costs incurred primarily on the South Marsh
Island 189 #1, High Island 308 #1, West Cameron 480 #2 and Main Pass 91 East #1
wells.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
for the three months ended September 30, 1998 was in line with the comparable
period in 1997.
For the nine-month period to September 30, 1998, general and
administrative expense increased $0.7 million to $4.8 million from $4.1 million
for the comparable period in 1997.
On a per Mcfe basis, the rate for general and administrative expense
increased from $0.12 per Mcfe each for the three and nine-month periods ended
September 30, 1997 to $0.16 per Mcfe for the respective periods in 1998. The
increase in unit rate is largely due to lower production.
STOCK COMPENSATION EXPENSE. Stock compensation expense for the
three-month and nine-month periods ended September 30, 1998 was in line with the
comparable 1997 periods. Stock compensation expense is a non-cash item.
NET INCOME (LOSS). Primarily as a result of the dry hole costs and
lower revenues discussed above, a net loss for the three months ended September
30, 1998 of $2.5 million was recorded, an inecrease of $1.4 million over the net
loss of $1.1 million for the three months ended September 30, 1997. The net loss
for the nine months ended September 30, 1998 was $22.5 million, a decrease of
$32.0 million over the earnings of $9.5 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.
Nine Months Ended
September 30,
----------------------
(in Thousands)
1998 1997
---- ----
Cash flow data:
Net cash provided by operating activities $ 50,512 $ 69,866
Net cash used in investing activities 123,027 109,714
Net cash provided by financing activities 66,000 59,867
The decrease in cash provided by operating activities during the
nine-month period ended September 30, 1998, compared to the same period in 1997,
was primarily due to decreased oil production coupled with lower prices for both
oil and gas.
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 debt offering 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 the Notes (as defined below). At September 30, 1998, the US dollar
loans bear interest at 7.25% and in the case of Australian dollar borrowings,
6.83%. The loans from the Parent have no 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 September 30, 1998, borrowings
outstanding under the bank credit facility were $66 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 less than or
equal to 4.0 to 1.0 for the period June 30, 1998 through and including December
31, 1998 and less than or equal to 3.5 to 1.0 thereafter, 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 1.75% per annum, depending upon the total amount
borrowed. The Company is obligated to pay a fee equal to .30% to .375% per annum
based on the unused portion of the borrowing base under the facility.
11
<PAGE> 12
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 expenditures are 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
September 30, 1998, the Company spent $47.2 million on capital and exploration
expenditures, and in the nine months ended September 30, 1998, spent $123.0
million. On October 6, 1998, the Company was the successful high bidder on two
leases at the Texas State Waters Lease Sale ($0.5 million). The Company intends
to finance expenditures for the remainder of 1998 and into 1999 with cash flow
from operations and bank borrowings.
As a result of activity in the drilling program and lease acquisitions,
the Company had a working capital deficit at September 30, 1998 of $21.3
million, an improvement of $9.9 million over the $31.2 million working capital
deficit at June 30, 1998.
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 creditworthiness 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 September 30, 1998, for the remainder of 1998, 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 $2.21 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 $2.28 per MMbtu and $2.15 per MMbtu for calendar years 1999 and 2000,
respectively.
As of September 30, 1998, for the remainder of 1998, the Company had
entered into commodity swap contracts for 276,000 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 a
volume-weighted average NYMEX price of $19.70 per Bbl for calendar years 1999
and 2000, respectively.
The fair value at September 30, 1998, represented by the estimated
amount that would be required to terminate these contracts, was a net cost of
$1.0 million for the gas contracts and a net benefit of $2.3 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
September 30, 1998, the Company had 460,000 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 September 30, 1998 was estimated to be a net cost of $3,878.
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.
YEAR 2000
The Company has a plan in place to address Year 2000 ("Y2K") issues.
The plan requires the Company to assess its information technology ("IT")
systems and non-information technology ("non-IT") systems (primarily embedded
technology in process control equipment containing microprocessors or other
similar circuitry) and those of its principal suppliers, customers and business
associates whose Y2K readiness could reasonably be expected to have a material
effect on the Company's business, results of operations or financial condition.
The Company has identified all material IT and non-IT systems it uses directly
in its operations that could be affected by Y2K issues. Of these identified
systems, the Company has verified the Y2K readiness of 95% of the systems, with
10% having been found to have Y2K compliance problems. All presently identified
compliance problems can be remedied without the expenditure of any material
sums. In addition, the licensor of the Company's primary financial software has
certified that this software is Y2K compliant. Surveys are expected back from
the Company's principal suppliers, customers and business associates by the end
of November, and are expected to be assessed by the Company's management before
January 1, 1999. There can be no guarantee, however, that the systems of other
companies on which the Company's operations rely will be timely converted, or
that a failure to convert by another company, or a conversion that is
incompatible with the Company's systems would not have a material adverse effect
on the Company.
13
<PAGE> 14
The Company has begun to formulate contingency plans to address Y2K
risks. These contingency plans presently consist of identifying suppliers,
hydrocarbon purchasers and other business associates that have developed systems
that are Y2K compliant. In addition, the Company is working on plans to conduct
its operations manually in the event an unexpected Y2K problem would shut down
significant systems. There can be no assurance that the Company's contingency
plans will be effective to mitigate an anticipated Y2K compliance problem or
that the Company has anticipated all Y2K compliance problems that could arise.
The Company has and will utilize both internal and external resources
to complete tasks and perform testing necessary to address the Y2K issue. The
Company expects to continue to assess its Y2K risks and develop contingency
plans to minimize those risks over the next twelve months. To date, the Company
has not incurred any significant costs on its Y2K project and estimates a total
cost of less than $80,000 related to the assessment and remediation of Year 2000
issues.
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 consensus 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.
November 13, 1998 By: /s/ Ross A. Keogh
---------------------------
Ross A. Keogh
Vice President Finance and
Administration
(principal financial officer)
November 13, 1998 By: /s/ James E. Slatten, III
--------------------------
James E. Slatten, III
Secretary
(duly authorized officer)
<PAGE> 17
EXHIBIT INDEX
27 -- Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 916
<SECURITIES> 0
<RECEIVABLES> 5,558
<ALLOWANCES> 0
<INVENTORY> 21
<CURRENT-ASSETS> 6,975
<PP&E> 403,011
<DEPRECIATION> 156,217
<TOTAL-ASSETS> 256,530
<CURRENT-LIABILITIES> 28,296
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 26,649
<TOTAL-LIABILITY-AND-EQUITY> 256,530
<SALES> 20,589
<TOTAL-REVENUES> 20,589
<CGS> 0
<TOTAL-COSTS> 21,256
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,355
<INCOME-PRETAX> (3,843)
<INCOME-TAX> (1,384)
<INCOME-CONTINUING> (2,459)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,459)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
