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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 June 30, 1999
[ ] 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.
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PETSEC ENERGY INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
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
Balance Sheets.................................................................................... 3
Statements of Operations and Retained Earnings (Deficit).......................................... 4
Statements of Cash Flows.......................................................................... 5
Notes to Financial Statements..................................................................... 6-7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................................ 7-14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk................................................................................ 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................................................... 15
SIGNATURES...................................................................................................... 16
Exhibit Index................................................................................................... 17
</TABLE>
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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,
1999 1998
(unaudited)
----------- ------------
<S> <C> <C>
Current Assets
Cash $ 4,457 $ 1,024
Accounts receivable 4,181 8,279
Other receivables 1,166 4,626
Inventories of crude oil 45 45
Prepaid expenses 932 274
Assets held for sale -- 68,300
--------- ---------
Total Current Assets 10,781 82,548
--------- ---------
Property, plant and equipment - at cost under the successful
efforts method of accounting for oil and gas properties
Proved oil and gas properties 152,296 156,265
Unproved oil and gas properties 17,505 31,984
Production facilities 44,276 43,321
Other 1,932 1,970
--------- ---------
216,009 233,540
Less accumulated depletion, depreciation and amortization (125,480) (133,738)
--------- ---------
Net property, plant and equipment 90,529 99,802
--------- ---------
Other Assets 2,524 2,682
--------- ---------
Total Assets $ 103,834 $ 185,032
========= =========
</TABLE>
LIABILITIES AND SHAREHOLDER'S DEFICIT
<TABLE>
<S> <C> <C>
Current Liabilities:
Trade accounts payable 2,925 8,572
Interest payable 1,644 2,214
Other accrued liabilities 3,131 3,381
Bank credit facility 6,575 67,250
--------- ---------
Total Current Liabilities 14,275 81,417
Senior Subordinated notes 99,669 99,656
Bank credit facility 2,425 6,750
Subordinated shareholder loan 37,377 36,792
Provision for dismantlement 2,701 2,488
--------- ---------
Total Liabilities $ 156,447 $ 227,103
--------- ---------
Shareholder's Deficit:
Common stock, $1 par value; authorized 1,000,000 shares;
issued and outstanding 1 share -- --
Additional paid-in-capital 21,720 21,572
Accumulated deficit (74,333) (63,643)
--------- ---------
Total Shareholder's Deficit (52,613) (42,071)
--------- ---------
$ 103,834 $ 185,032
========= =========
</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 (DEFICIT)
(unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Oil and gas sales $ 8,031 $ 23,596 $ 17,346 $ 51,582
Operating expenses:
Lease operating expenses 1,739 3,392 3,415 7,480
Production taxes 62 186 126 334
Exploration expenditures 268 3,046 1,913 4,870
Abandonments -- -- 888 --
Dry hole costs and impairments -- 17,105 -- 34,056
General and administrative 1,340 1,742 2,627 3,293
Stock compensation 83 227 147 402
Depletion, depreciation and amortization 5,289 13,837 11,764 28,932
-------- -------- -------- --------
Total operating expenses 8,781 39,535 20,880 79,367
-------- -------- -------- --------
Loss from operations (750) (15,939) (3,534) (27,785)
Other income (expenses):
Interest expense (3,284) (2,478) (6,947) (4,690)
Interest income 95 67 160 169
Other, principally foreign exchange gain (loss) (181) 714 (369) 576
-------- -------- -------- --------
(3,370) (1,697) (7,156) (3,945)
Loss before income taxes (4,120) (17,636) (10,690) (31,730)
Income taxes -- 6,622 -- 11,695
-------- -------- -------- --------
Net loss (4,120) (11,014) (10,690) (20,035)
Retained earnings (deficit) at beginning of period (70,213) 18,633 (63,643) 27,654
-------- -------- -------- --------
Retained earnings (deficit) at end of period $(74,333) $ 7,619 $(74,333) $ 7,619
======== ======== ======== ========
</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>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(10,690) $(20,035)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depletion, depreciation and amortization 11,764 28,932
Deferred income taxes -- (11,695)
Dry hole costs and impairments -- 34,056
Abandonments 888 --
Other 670 678
Changes in operating assets and liabilities:
Decrease in receivables 4,098 5,275
Increase in inventories -- (5)
Decrease (increase) in prepayments 141 (363)
Decrease in other receivables 3,460 10
Decrease in trade accounts payable (2,231) (538)
Decrease in other accrued liabilities (466) (452)
(Decrease) increase in interest payable (570) 91
-------- --------
Net cash provided by operating activities 7,064 35,954
-------- --------
Cash flows from investing activities:
Proceeds from sale of oil and gas properties 70,045 --
Lease acquisitions (1,985) (3,048)
Exploration and development expenditures (6,691) (72,339)
Other asset additions -- (446)
-------- --------
Net cash provided by (used in) investing activities 61,369 (75,833)
-------- --------
Cash flows from financing activities:
Proceeds from bank credit facility -- 35,000
Repayment of bank credit facility (65,000) --
-------- --------
Net cash (used in) provided by financing activities (65,000) 35,000
-------- --------
Net increase (decrease) in cash 3,433 (4,879)
Cash at beginning of period 1,024 7,431
-------- --------
Cash at end of period $ 4,457 $ 2,552
======== ========
</TABLE>
See accompanying notes to financial statements.
5
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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, 1998 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, 1999 and 1998 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 - On February 1, 1999, the Company completed the sale of a 50% working
interest in certain of its oil and gas properties to Apache
Corporation (Apache) for $68.3 million (the Asset Sale). The
transaction was effective January 1, 1999. The proceeds from the
Asset Sale were used to repay $65 million of outstanding borrowings
under the Company's credit facility, reducing outstanding borrowings
under the credit facility to $9 million. The borrowing base on the
credit facility was reduced to $10 million as a result of the Asset
Sale. Revenue for the three-month and six-month periods ended June
30, 1998 attributed to the 50% working interest that was sold was
$10.4 million and $22.9 million, respectively.
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.
NOTE 4 - In June of 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 (Statement 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. 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, as
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amended, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. 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.
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, 1999 and
1998. 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). 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 (annually). 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 has acquired substantially all of its 44 leases in the
Gulf of Mexico at federal or state lease sales. A disappointing drilling
program in 1998 compounded by low oil and gas prices caused the Company's
outstanding debt to reach unacceptable levels. In December 1998, the Company
agreed to sell to Apache a 50% working interest in 17 developed leases and 6
exploration leases. In addition, Apache assumed operatorship of the assets. The
$68.3 million sale was effective January 1, 1999 and completed on February 1,
1999, reducing bank debt to $9 million and total debt, including the
subordinated shareholder loan, to $145.4 million. The $100 million of senior
subordinated notes are due for repayment in 2007.
The Company markets its oil and gas production through contracts that
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, the Company capitalizes lease acquisition costs, costs to drill
and complete exploration wells in which proved reserves are discovered and
costs to drill and complete development wells. 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.
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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. Notwithstanding the recent increase in oil and
gas prices, a substantial or extended decline in 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 SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET PRODUCTION:
Gas (MMcf) 2,140 6,672 4,761 14,254
Oil (MBls) 202 537 451 1,220
Total (MMcfe) 3,352 9,894 7,467 21,574
NET SALES DATA (IN THOUSANDS):
Gas $ 4,780 $ 14,632 $ 10,963 $ 31,665
Oil $ 3,251 $ 8,964 $ 6,383 $ 19,917
Total $ 8,031 $ 23,596 $ 17,346 $ 51,582
AVERAGE SALES PRICE (1):
Gas (per Mcf) $ 2.23 $ 2.19 $ 2.30 $ 2.22
Oil (per Bbl) $ 16.09 $ 16.69 $ 14.15 $ 16.33
Total (per Mcfe) $ 2.40 $ 2.38 $ 2.32 $ 2.39
AVERAGE COSTS (PER MCFE):
Lease operating expenses $ 0.54 $ 0.36 $ 0.47 $ 0.36
Depletion, depreciation, and amortization $ 1.58 $ 1.40 $ 1.58 $ 1.34
General, administrative and other expenses $ 0.40 $ 0.18 $ 0.35 $ 0.15
</TABLE>
(1) Includes effects of hedging activities
GENERAL. During the three months ended June 30, 1999 three wells were
drilled. The Ship Shoal 193 B-2 well and the Main Pass 105 #1 sidetrack well are
being completed for oil and gas production. The Company has a 50% working
interest in the wells. Apache is the operator. The West Cameron 515 #1 well, in
which the Company holds a 25% working interest, discovered hydrocarbon bearing
sands and has been suspended pending the installation of facilities. Coastal Oil
& Gas USA, L.P. (Coastal) is the operator.
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OIL AND GAS REVENUES. Oil and gas revenues for the three months ended
June 30, 1999 were $8.0 million, a decrease of $15.6 million, or 66%, from
$23.6 million for the comparable period in 1998. A 68% decrease in gas
production (26% related to the Asset Sale, 42% due to natural decline)
partially offset by a 2% increase in gas prices, resulted in a $9.9 million
decrease in gas revenues. A 62% decrease in oil production (37% related to the
Asset Sale, 25% due to natural decline) coupled with a 4% decrease in oil
prices resulted in a $5.7 million decrease in oil revenues.
Oil and gas revenues for the six-month period ended June 30, 1999 were
$17.3 million, a decrease of $34.3 million, or 66% below $51.6 million for the
comparable period in 1998. Oil production in the first half of 1999 decreased
63% (37% related to the Asset Sale, 26% due to natural decline) and gas
production decreased 67% (27% related to the Asset Sale, 40% due to natural
decline) over the comparable 1998 period. The average realized price of oil
decreased by 13% and gas increased by 4%.
For the three months ended June 30, 1999, the average realized gas
price was $2.23 per Mcf, or 12% above the $2.00 per Mcf average gas price
before hedging. Over the same period, the average realized oil price was $16.09
per Bbl, or 3% below the $16.64 per Bbl average oil price before hedging.
Hedging activities resulted in a $0.4 million increase in oil and gas revenues.
For the comparable period in 1998 the average realized gas price was $2.19 per
Mcf, or 2% below the $2.24 per Mcf average gas price before hedging. In the
same period the average realized oil price was $16.69, or 20% above the $13.94
per Bbl average oil price before hedging. Hedging activities resulted in a $1.2
million increase in oil and gas revenues for the three-month period ended June
30, 1998.
For the six months ended June 30, 1999, the average realized gas price
was $2.30 per Mcf, or 26% above the $1.82 per Mcf average gas price before
hedging. Over the same period, the average realized oil price was $14.15 per
Bbl, or 8% above the $13.08 per Bbl average oil price before hedging. Hedging
activities resulted in a $2.8 million increase in oil and gas revenues. For the
comparable period in 1998, the average realized gas price was $2.22 per Mcf, or
1% above the $2.20 per Mcf average gas price before hedging. 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 before hedging. Hedging activities resulted in
a $3.0 million increase in oil and gas revenues for the six-month period ended
June 30, 1998.
LEASE OPERATING EXPENSES (including production taxes). Lease operating
expenses decreased $1.8 million, or 50% to $1.8 million for the three months
ended June 30, 1999, from $3.6 million for the three months ended June 30,
1998. Lease operating expenses per Mcfe increased from $0.36 for the comparable
period in 1998 to $0.54 for the three months ended June 30, 1999 as a result of
the production decline.
Lease operating expenses for the six-month period ended June 30, 1999
were $3.5 million, a decrease of 55% over the corresponding period in 1998.
Lease operating expenses per Mcfe increased from $0.36 for the comparable
period in 1998 to $0.47 for the first half of 1999 due to production decline.
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DEPLETION, DEPRECIATION AND AMORTIZATION (DD&A). DD&A expense decreased
$8.5 million, or 62% to $5.3 million for the three months ended June 30, 1999,
from $13.8 million for the same period in 1998. Due to downward reserve
revisions by the Company's independent reserve engineers at December 31, 1998,
the unit rate increased to $1.58 per Mcfe for the three months ended June 30,
1999 from $1.40 per Mcfe for the same period in 1998.
DD&A expense for the six-month period ended June 30, 1999 decreased
59% to $11.8 million from $28.9 million for the corresponding period in 1998.
The depletion rate per unit of $1.58 per Mcfe for the six-month period ended
June 30, 1999 increased from $1.34 per Mcfe for the corresponding period in
1998 due to the downward reserve revisions as noted above.
EXPLORATION EXPENDITURES AND ABANDONMENTS. Seismic, geological and
geophysical expenditures of $0.3 million were expensed during the quarter, a
decrease of $2.8 million from the comparable period in 1998.
Exploration expenditures for the six months ended June 30, 1999 were
$1.9 million, a decrease of $3.0 million over the comparable period in 1998. An
abandonment charge of $0.9 million was recorded in the first quarter of 1999
for the write-off of the West Cameron 480 and 462 leases.
DRY HOLE COSTS AND IMPAIRMENTS. No dry hole cost and impairment
charges were incurred during the quarter ended June 30, 1999. 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.
No dry hole and impairment costs were incurred in the six months ended
June 30, 1999. 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.
INTEREST EXPENSE. Interest expense for the three months ended June 30,
1999 was $3.3 million, an increase of $0.8 million over the comparable period
in 1998. No interest was capitalized in the second quarter of 1999 while $0.9
million was capitalized in the same quarter in 1998.
For the six months ended June 30, 1999, interest expense was $6.9
million with no capitalized interest. For the same period in 1998, interest
expense was $4.7 million with $1.8 million in capitalized interest. Interest
expense was comparable due to the timing of borrowings and repayments on the
bank credit facility.
GENERAL, ADMINISTRATIVE AND STOCK COMPENSATION EXPENSE. General,
administrative and stock compensation expense decreased $0.5 million, or 30%,
to $1.4 million for the three months ended June 30, 1999 from $2.0 million for
the comparable period in 1998. On a per Mcfe basis, the rate increased from
$0.18 per Mcfe for the three-month period ended June 30, 1998 to $0.40 per Mcfe
for the comparable period in 1999 due to production decline.
For the six-month period ended June 30, 1999, the general,
administrative and stock compensation expense decreased $0.9 million to $2.8
million from $3.7 million for the comparable period in 1998. On a per Mcfe
basis, the rate increased from $0.15 per Mcfe for the six-month period ended
June 30, 1998 to $0.35 per Mcfe for the comparable period in 1999 due to
production decline.
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NET LOSS. As a result of the conditions noted above, a net loss of
$4.1 million was recorded for the three months ended June 30, 1999, an
improvement of $6.9 million over the net loss of $11.0 million for the
comparable period in 1998. The net loss for the six months ended June 30, 1999
was $10.7 million, an improvement of $9.3 million over the comparable 1998
period.
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)
1999 1998
-------- ---------
<S> <C> <C>
Cash flow data
Net cash provided by operating activities $ 7,064 $ 35,954
Net cash provided by (used in) investing activities 61,369 (75,833)
Net cash (used in) provided by financing activities (65,000) 35,000
</TABLE>
The decrease in cash provided by operating activities from 1998 to
1999 was due primarily to the sale to Apache of a 50% working interest in
certain oil and gas properties coupled with natural decline in production.
The cash provided by investing activities in 1999 was due primarily to
the receipt of proceeds from the sale of a 50% working interest in certain
assets to Apache. The cash used in investing activities in 1998 represented oil
and gas exploration activities.
The cash movements in financing activities in 1999 and 1998 consisted
of repayments and borrowings 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, long term debt and bank borrowings under a revolving credit
facility.
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 the net proceeds from a U.S. offering of ADRs in July
1996.
Funds advanced by the Parent historically have been provided in the
form of subordinated loans. These loans are subordinated to the payment of all
senior indebtedness and have been subordinated to the Notes (defined herein).
At June 30, 1999, the US dollar loans bear interest at 6.25% and in the case of
Australian dollar borrowings, 6.56%. The loans from the Parent do not have
mandatory principal payments due until December 31, 2007. 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.
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In April 1996, the Company entered into a $75 million bank credit
facility, under which the borrowing base at June 30, 1999 was $10 million. At
June 30, 1999, borrowings outstanding under the bank credit facility were $9
million with a letter of credit outstanding of $0.2 million. 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, amortization and exploration costs (EBITDAX) of not more than 4.0
to 1.0 and a coverage ratio of EBITDAX to total interest of not less than 2.0
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.
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) and the lenders under the bank credit
facility. 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. Borrowing base repayments, if
required, are expected to be met from estimated future net operating cash flow.
Chase notified the Company on July 30, 1999 of a reduction in the borrowing base
to $6 million. The Company will make the required repayment by October 29, 1999.
In June 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 $96.4 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.
In response to changing market conditions and restricted capital
availability, the Company is taking a more risk averse approach to its
exploration and development program which is resulting in a much lower capital
budget than previous years. In the quarter ended June 30, 1999, the Company
signed participation agreements over West Cameron 515/516 and Vermilion 47 with
Coastal, and over Mustang Island 749, 797 and 883 with LLOG Exploration Offshore
Inc. (LLOG). Under the terms of the participation agreements the Company
recovered $1.7 million in leasehold costs from Coastal and LLOG. In addition,
Coastal and LLOG are required to satisfy certain contractual obligations in
order to earn working interests of 75% and 66.67%, respectively.
During the three-month period ended June 30, 1999 the Company spent
$4.5 million in capital and exploration expenditures, and in the six months
ended June 30, 1999 spent $8.7 million. In the comparable periods in 1998 the
Company spent $43.5 million and $75.8 million, respectively. During the June
1999 quarter, the Company was awarded two leases from the March 1999 OCS Central
Gulf of Mexico lease sale. The Company paid US$1.7 million for a 100% working
interest in Vermilion block 258 and US$0.2 million for a 50% working interest in
West Delta 113.
The Company intends to finance its 1999 drilling program with cash on
hand, cash flow from operations and proceeds from farm-outs of certain oil and
gas properties. The success of the drilling program will determine the amount of
funds required for development expenditures and, accordingly, additional capital
may have to be raised at that time. The capital expenditure budget is
continually re-evaluated based on drilling results, commodity prices, cash flow
from operations and opportunities for property acquisitions.
12
<PAGE> 13
HEDGING TRANSACTIONS
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 the Company's 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.
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.
As of June 30, 1999, for the remainder of 1999, the Company had
entered into commodity swaps effectively fixing the price of 3.7 million MMbtu
of gas at a volume-weighted average New York Mercantile Exchange (NYMEX) price
of $2.30 per MMbtu. The Company had also entered into commodity swap contracts
for 4.6 million MMbtu at a volume-weighted average NYMEX price of $2.29 per
MMbtu for calendar year 2000.
As of June 30, 1999, for the remainder of 1999, the Company had
entered into commodity swap contracts for 276,000 barrels of oil at a
volume-weighted average NYMEX price of $18.15 per barrel. The Company had also
entered into commodity swap contracts for 152,000 Bbls at a volume-weighted
average NYMEX price of $19.70 per Bbl for calendar year 2000.
The fair value at June 30, 1999, represented by the estimated amount
that would be required to terminate these contracts, was a net cost of $1.3
million for the gas contracts and a net cost of $38,000 for the oil contracts.
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.
On February 1, 1999, the Company completed the sale of a 50% working
interest in most of the Company's producing oil and gas properties to Apache
including the responsibilities associated with the operation of these assets.
As a result, Apache is primarily responsible for Y2K compliance issues
concerning these oil and gas operating assets. Apache has informed the Company
that it has a plan in place that addresses Y2K compliance issues relating to
Apache's material business systems. The plan is expected to be completed by
September 30, 1999. Apache believes that all material systems relating
specifically to the operation of the co-owned properties are Y2K compliant.
Prior to the Apache transaction, the Company had identified all
material IT and non-IT systems it uses directly in its operations that could be
affected by Y2K issues. The Company has
13
<PAGE> 14
assessed the Y2K readiness of these systems and has found no material instances
of Y2K compliance problems. In addition, the licensor of the Company's primary
financial software has certified that this software is Y2K compliant. Surveys
have been received from a substantial number of the Company's principal
suppliers, customers and business associates. The Company will continue to seek
Y2K compliance assurances from its principal suppliers, customers and business
associates who have not already done so. 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.
The Company has formulated 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 has 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 during the year. To date, the Company has not
incurred any significant costs on its Y2K project and estimates a total cost of
less than $50,000 related to the assessment and remediation of Year 2000
issues.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Except as described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Hedging Transactions," there has
been no material change to the information disclosed in the Company's most
recent Annual Report on Form 10-K.
14
<PAGE> 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the quarter covered by this
report.
Exhibits
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>
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 13, 1999 By: /s/ Ross A. Keogh
---------------------------
Ross A. Keogh
Director and Vice President
(Principal Financial
and Accounting officer)
August 13, 1999 By: /s/ James E. Slatten, III
---------------------------
James E. Slatten, III
Director and Vice President
(Duly Authorized Officer)
16
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,457
<SECURITIES> 0
<RECEIVABLES> 5,347
<ALLOWANCES> 0
<INVENTORY> 45
<CURRENT-ASSETS> 10,781
<PP&E> 216,009
<DEPRECIATION> 125,480
<TOTAL-ASSETS> 103,834
<CURRENT-LIABILITIES> 14,275
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (52,613)
<TOTAL-LIABILITY-AND-EQUITY> 103,834
<SALES> 8,031
<TOTAL-REVENUES> 8,031
<CGS> 0
<TOTAL-COSTS> 8,781
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,284
<INCOME-PRETAX> (4,120)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,120)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,120)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
