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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, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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)
(337) 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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all reports required to
be filed by Section 12, 13 or 15 (d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court.
YES [X] NO [ ]
(There has been no plan confirmed by a court pursuant to
which securities were distributed.)
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
On November 14, 2000, Petsec Energy Inc. has one class of common stock, and one
share of common stock outstanding.
*Petsec Energy Inc. is a wholly owned operating subsidiary of Petsec Energy Ltd,
a listed Australian public company registered with the Securities and Exchange
Commission as a result of its public offering of American Depositary Receipts
(ADRs) traded under the ticker symbol PSJEE.OB. Effective April 13, 2000
and as a result of Petsec Energy Inc.'s Chapter 11 bankruptcy filing,
Petsec Energy Inc.'s financial results are no longer consolidated with the
results of Petsec Energy Ltd. Shareholders and holders of American Depositary
Receipts are advised to refer to the filings of Petsec Energy Ltd for the
consolidated results prior to April 13, 2000.
Forward Looking Statements
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than
statements of historical facts included in this Form 10-Q, including without
limitation statements regarding the projected cash flows, planned capital
expenditures, oil and gas production and reserve additions, the Company's
financial position, business strategy and other plans and objectives for future
operations, are forward-looking statements. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to have been correct.
There are numerous risks and uncertainties that can affect the outcome of
certain events including many factors beyond the control of the Company
including without limitation those described in the Company's latest Annual
Report filed on Form 10-K with the Securities and Exchange Commission for the
year ended December 31, 1999. All written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by such factors.
2
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PETSEC ENERGY INC.
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART 1. FINANCIAL INFORMATION* 4
ITEM 2. FINANCIAL STATEMENTS..................................................................................4
Balance Sheets........................................................................................4
Statements of Operations and Accumulated Deficit......................................................5
Statements of Cash Flows..............................................................................6
Notes To Financial Statements.........................................................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........................................18
PART II. OTHER INFORMATION...................................................................................18
ITEM 1. LEGAL PROCEEDINGS....................................................................................18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES......................................................................18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................................................19
SIGNATURES...................................................................................................20
</TABLE>
* 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. Effective April 13, 2000 and as a result of its Chapter 11
bankruptcy filing, Petsec Energy Inc. is no longer consolidated in
the results of Petsec Energy Ltd.
3
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PART 1. FINANCIAL INFORMATION
ITEM 2. FINANCIAL STATEMENTS
PETSEC ENERGY INC.
(DEBTOR-IN-POSSESSION AS OF APRIL 13, 2000)
A WHOLLY OWNED SUBSIDIARY OF PETSEC ENERGY LTD
BALANCE SHEETS
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000 DECEMBER 31,
(UNAUDITED) 1999
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<S> <C> <C>
ASSETS
Current Assets
Cash $ 12,289 $ 3,907
Accounts receivable 6,229 3,980
Other receivables 152 31
Inventories of crude oil 45 45
Prepaid expenses 3,677 1,363
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Total Current Assets 22,392 9,326
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Property, plant and equipment - at cost under the successful
efforts method of accounting for oil and gas properties
Proved oil and gas properties 161,385 163,398
Unproved oil and gas properties 8,660 14,036
Production facilities 45,956 44,483
Other 1,947 1,933
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217,948 223,850
Less accumulated depletion, depreciation and amortization (156,773) (142,263)
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Net property, plant and equipment 61,175 81,587
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Other Assets 3,886 2,595
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Total Assets $ 87,453 $ 93,508
============= ============
LIABILITIES AND SHAREHOLDER'S DEFICIT
Liabilities Not Subject to Compromise
Current liabilities:
Trade accounts payable 691 --
Interest payable 9 32
Secured credit facility -- 7,875
Accrued liabilities 4,033 --
Provision for dismantlement 3,221 2,893
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Total Current Liabilities not Subject to Compromise 7,954 10,800
Liabilities Subject to Compromise
Trade accounts payable 2,168 2,531
Interest payable 9,908 6,465
Unsecured debt:
Senior subordinated notes 99,692 99,684
Shareholder loans 36,595 37,330
Accrued liabilities 785 8,011
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149,148 154,021
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Total Liabilities 157,102 164,821
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Shareholder's Deficit:
Common stock, $1 par value; authorized 1,000,000 shares;
issued and outstanding 1 share -- --
Additional paid-in-capital 21,923 21,818
Accumulated deficit (91,572) (93,131)
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Total Shareholder's Deficit (69,649) (71,313)
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Total Liabilities and Shareholder's Deficit $ 87,453 $ 93,508
============= ============
</TABLE>
See accompanying notes to financial statements.
4
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PETSEC ENERGY INC.
(DEBTOR-IN-POSSESSION AS OF APRIL 13, 2000)
A WHOLLY OWNED SUBSIDIARY OF PETSEC ENERGY LTD
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Oil and gas sales $ 13,257 $ 6,914 $ 30,346 $ 24,260
Operating expenses:
Lease operating expenses 2,629 1,607 5,311 5,022
Production taxes 189 44 380 170
Exploration expenditures 42 522 562 2,435
Abandonments and impairments 2,516 71 3,187 959
General and administrative 1,011 902 3,249 3,529
Stock compensation 26 49 105 196
Advice on liquidity solutions -- -- 946 --
Depletion, depreciation and amortization 4,441 4,398 13,071 16,162
---------- ---------- ---------- ----------
Total operating expenses 10,854 7,593 26,811 28,473
---------- ---------- ---------- ----------
Income (loss) from operations 2,403 (679) 3,535 (4,213)
Other income (expenses):
Interest expense (contractual interest $3,785 and
$11,174 for the three and nine month periods ended
September 30, 2000, respectively) (613) (3,288) (5,266) (10,235)
Interest income -- 58 31 218
Other, primarily gain on sale of assets 3,570 63 4,913 (306)
---------- ---------- ---------- ----------
2,957 (3,167) (322) (10,323)
---------- ---------- ---------- ----------
Income (loss) before bankruptcy items and income taxes 5,360 (3,846) 3,213 (14,536)
Bankruptcy items:
Advice on liquidity solutions (912) -- (1,746) --
Interest earned on accumulated cash 30 -- 92 --
---------- ---------- ---------- ----------
(882) -- (1,654) --
Income (loss) before income taxes 4,478 (3,846) 1,559 (14,536)
Income taxes -- -- -- --
---------- ---------- ---------- ----------
Net income (loss) 4,478 (3,846) 1,559 (14,536)
Accumulated deficit at beginning of period (96,050) (74,333) (93,131) (63,643)
---------- ---------- ---------- ----------
Accumulated deficit at end of period $ (91,572) $ (78,179) $ (91,572) $ (78,179)
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
5
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PETSEC ENERGY INC.
(DEBTOR-IN-POSSESSION AS OF APRIL 13, 2000)
A WHOLLY OWNED SUBSIDIARY OF PETSEC ENERGY LTD
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Income (loss) before bankruptcy items $ 3,213 $ (14,536)
Adjustments to reconcile income (loss) before bankruptcy items to
net cash provided by operating activities:
Depletion, depreciation and amortization 13,071 16,162
Abandonments and impairments 3,187 959
Gain on the sale of assets (4,163) --
Other 379 685
Changes in operating assets and liabilities:
Decrease (increase) in receivables (2,249) 3,354
Increase in prepayments (2,314) (1,621)
Decrease (increase) in other receivables (121) 4,423
Increase (decrease) in trade accounts payable 747 (1,943)
Increase (decrease) in other accrued liabilities 663 (41)
Increase in interest payable 3,420 1,293
---------- ----------
Net cash provided by operating activities before bankruptcy items 15,833 8,735
Operating cash flows from bankruptcy items:
Interest received on accumulated cash 92 --
Payments for advice on liquidity solutions (1,235) --
---------- ----------
Net cash used by bankruptcy items (1,143) --
---------- ----------
Net cash provided by operating activities 14,690 8,735
Cash flows from investing activities:
Proceeds from sale of oil and gas properties 15,279 71,727
Lease acquisitions -- (2,144)
Exploration and development expenditures (11,384) (7,523)
Other asset additions (15) --
---------- ----------
Net cash provided by investing activities 3,880 62,060
---------- ----------
Cash flows from financing activities:
Proceeds from secured credit facilities (pre-petition) 19,330 --
Repayment of secured credit facilities (pre-petition) (21,515) (66,125)
Proceeds from secured credit facilities (post-petition) 37,456 --
Repayment of secured credit facilities (post-petition) (45,459) --
---------- ----------
Net cash used in financing activities (10,188) (66,125)
---------- ----------
Net increase in cash 8,382 4,670
Cash at beginning of period 3,907 1,024
---------- ----------
Cash at end of period $ 12,289 $ 5,694
========== ==========
</TABLE>
See accompanying notes to financial statements.
6
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PETSEC ENERGY INC.
(DEBTOR-IN-POSSESSION AS OF APRIL 13, 2000)
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 Petsec Energy Inc.'s (the "Company") Annual
Report on Form 10-K for the year ended December 31, 1999 and the
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" section in this Form 10-Q.
The financial information for the three and nine-month periods ended
September 30, 2000 and 1999 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 April 13, 2000, the Company filed a voluntary petition for relief
under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the
Western District of Louisiana, Opelousas Division (the "Bankruptcy
Court"). The Bankruptcy Court assumed jurisdiction on that day. The
case name is In Re Petsec Energy Inc., and the docket number is
00BK-50741 (the "Bankruptcy Case"). Subject to the supervision of the
Bankruptcy Court, the Company remains in possession of the Company's
assets and will manage the business for the benefit of the Company's
creditors and equity holder in accordance with Sections 1107 and 1108
of the Bankruptcy Code.
The Company did not make the $4.75 million interest payment due on
December 15, 1999 to the holders of its 9 1/2% senior subordinated
notes due June 2007 (the "9 1/2% Notes"). On January 18, 2000, after
asking the noteholders to organize, the Company met with an informal
subcommittee of the holders of the 9 1/2% Notes in an effort to reach
a solution to its financial situation. On June 16, 2000, an agreement
was reached among the Company, Petsec (USA) Inc., as equity owner
("PUSA"), certain senior management of the Company, the Official
Committee of Unsecured Creditors in the Bankruptcy Case (the
"Creditors' Committee) and certain holders of the 9 1/2% Notes. The
agreement provides for the sale of the Company or all of its assets
and for distribution of the sale proceeds to the Company's creditors,
PUSA and certain of the Company's senior management team in the USA.
Details of the June 16, 2000 agreement are described in the 8-K
current report filed by the Company with the Securities and Exchange
Commission on June 19, 2000.
On June 30, 2000, the Company filed a Plan of Reorganization (the
"Plan") and a Disclosure Statement (the Disclosure Statement, and
together with the Plan, collectively the "Plan Documents") that
incorporates the provisions of the June 16, 2000 agreement. The
7
<PAGE> 8
Bankruptcy Court approved the Disclosure Statement on October 13,
2000. The Bankruptcy Court hearing to confirm the Plan of
Reorganization is scheduled for November 21, 2000. While the Company
expects that the Plan of Reorganization will be confirmed at this
hearing, there can be no assurance that this will be the case.
Consistent with the Plan Documents and the June 16, 2000 agreement,
the Company commenced a marketing process to sell the Company or all
of its assets. Pursuant to this process the Company has entered into
agreements for the sale of substantially all of its assets for
approximately $56.8 million. In addition PUSA was the high bidder on
certain of the Company's assets, and under the Plan of
Reorganization, those assets will remain in the Company. The Plan
contemplates that the Company will emerge from Chapter 11 as a
reorganized entity, and PUSA will control the Company through the
ownership of all of the Company's common stock. PUSA will pay the
liquidating trust that will be under the control of the Company's
creditors $3.0 million for these assets. These transactions are
subject to approval of the Bankruptcy Court at the confirmation
hearing on November 21, 2000. An impairment charge of $2.5 million
has been recognized during the quarter ended September 30, 2000 on
the assets on which PUSA was the high bidder.
Liquidity Position
The Company has inadequate capital resources to service its debt and
meet anticipated capital requirements necessary to maintain and grow
its business over the long term. After filing for bankruptcy
protection, the Company entered into a post-petition revolving credit
facility with Foothill Capital Corporation ("Foothill"), the
Company's pre-petition lender, which was approved by the Bankruptcy
Court on June 20, 2000. The revolving facility is for $30 million,
subject to monthly borrowing base adjustments, and is expected to
provide the Company with sufficient liquidity throughout the
Bankruptcy Case although there can be no assurance of this. On
November 10, 2000, $20.2 million cash was on hand with no outstanding
borrowings under the Foothill facility.
Secured Credit Facility
On June 20, 2000, the Company entered into a $30 million revolving
credit facility with Foothill. Under the facility, outstanding
borrowings accrue interest at the reference rate most recently
announced by Wells Fargo Bank N.A., (9.5% per annum as of October 31,
2000) plus a margin of 2.5% per annum; the default rate is the
reference rate plus 6.5%. The Company is also required to pay an
unused line fee of 0.5% of the unused amount available for borrowing,
a $10,000 per month service charge and certain other fees and
expenses. The Company has paid all interest that is presently due.
Public Senior Subordinated Indebtedness
In June 1997 the Company issued $100 million of 9 1/2% Notes. The
principal is due in a lump sum in June 2007. The 9 1/2% Notes were
issued at a discount with a yield to maturity of 9.56% per annum.
Interest at the rate of 9.5% per annum is payable semiannually on
June 15 and December 15 of each year.
The Company did not make the interest payment due in the amount of
$4.75 million on the 9 1/2% Notes at December 15, 1999, and is in
default under the Indenture governing the 9 1/2% Notes. The Company
did not make the interest payment due in the amount of $4.75 million
on June 15, 2000. The 9 1/2% Notes and accrued interest are
classified as "liabilities subject to compromise" and the Company has
discontinued accruing interest effective April 13, 2000.
Subordinate Loans from PUSA
Petsec Energy Ltd ("PEL"), indirectly through PUSA, made an initial
cash investment of $11.4 million in the Company and subsequently
increased this investment with advances of
8
<PAGE> 9
$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 PUSA historically have been provided substantially
in the form of subordinated loans denominated in Australian and US
dollars. These loans are subordinated to the payment of both the
Foothill credit facility and the 9 1/2% Notes. The biannual interest
payments on these loans were not paid in January and July, 2000.
These loans and accrued interest are classified as "liabilities
subject to compromise" and the Company has discontinued accruing
interest effective April 13, 2000. The loans from PUSA do not have
mandatory principal payments due until December 31, 2007. Any
payments or distributions made by the Company to PEL and PUSA have
been for reimbursement of direct expenses incurred in connection with
the Company's operations and interest under the subordinated loans.
Neither PEL nor PUSA has any commitments to make any further advances
to the Company.
The Plan of Reorganization contemplates that the 9 1/2% Notes and
PUSA subordinated loans will be cancelled when the Plan becomes
effective. The holders of the 9 1/2% Notes will receive distributions
from the liquidating trust based on the proceeds available from the
sale of the Company's assets. PUSA will receive the distribution
provided for in the Plan--which begins at 3.375% of the amount
otherwise available for distribution to the holders of the 9 1/2%
Notes up to $60 million. The percentage available to PUSA increases
for recoveries to the holders of the 9 1/2% Notes in excess of $60
million.
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 - The Company has in the past entered 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.
On April 25, 2000, the Company had hedging arrangements in place with
The Chase Manhattan Bank, N.A., and Bank of America, N.A. The Company
was prohibited by bankruptcy law from paying certain pre-petition
debts falling due on April 25, 2000 with respect to these contracts.
On April 26, 2000, the counterparties drew on letters of credit the
Company had posted to secure its obligations to pay these
obligations. In addition, the counterparties terminated the hedging
arrangements with respect to future transactions, and closed out all
hedging arrangements. The cost to terminate these contracts was $3.0
million.
9
<PAGE> 10
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") historical financial position and results
of operations for the three-month and nine-month periods ended September 30,
2000 and 1999. The Company's unaudited financial statements and notes thereto
should be referred to in conjunction with the following discussion.
On April 13, 2000, the Company filed a voluntary petition for relief
under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in
the United States Bankruptcy Court for the Western District of Louisiana,
Opelousas Division (the "Bankruptcy Court"). The Bankruptcy Court assumed
jurisdiction on that day. The case name is In Re Petsec Energy Inc., and the
docket number is 00BK-50741 (the "Bankruptcy Case"). Subject to the supervision
of the Bankruptcy Court, the Company remains in possession of the Company's
assets and will manage the business for the benefit of the Company's creditors
and equity holder in accordance with Sections 1107 and 1108 of the Bankruptcy
Code.
The Company did not make the $4.75 million interest payment due on
December 15, 1999 to the holders of its 9 1/2% senior subordinated notes due
June 2007 (the "9 1/2% Notes"). On January 18, 2000, after asking the
noteholders to organize, the Company met with an informal subcommittee of the
holders of the 9 1/2% Notes in an effort to reach a solution to its financial
situation. On June 16, 2000, an agreement was reached among the Company, Petsec
(USA) Inc., as equity owner ("PUSA"), certain senior management of the Company,
the Creditors' Committee in the Bankruptcy Case and certain holders of the
9 1/2% Notes. The agreement provides for the sale of the Company or all of its
assets and for distribution of the sale proceeds to the Company's creditors,
PUSA and certain of the Company's senior management team in the USA. Details of
the June 16, 2000 agreement are described in the 8-K current report filed by the
Company with the Securities and Exchange Commission on June 19, 2000.
On June 30, 2000, the Company filed a Plan of Reorganization (the
"Plan") and a Disclosure Statement (the Disclosure Statement, and together with
the Plan, collectively the "Plan Documents") that incorporates the provisions of
the June 16, 2000 agreement. The Disclosure Statement was approved by the
Bankruptcy Court on October 13, 2000. A Bankruptcy Court hearing to confirm the
Plan of Reorganization is scheduled for November 21, 2000. While the Company
expects that the Plan of Reorganization will be confirmed at this hearing, there
can be no assurance that this will be the case.
Consistent with the Plan Documents and the June 16, 2000 agreement, the
Company commenced a marketing process to sell the Company or all of its assets.
Pursuant to this process the Company has either sold or entered into agreements
for the sale of substantially all of its assets, although these sales are
subject to approval of the Bankruptcy Court at the confirmation hearing on
November 21, 2000. These proposed sales are described below.
10
<PAGE> 11
SALE TRANSACTIONS
On August 3, 2000, the Company entered into a purchase and sale
agreement with LLOG Exploration Offshore, Inc. ("LLOG") to sell to LLOG
effective as of August 1, 2000 all of the Company's interest in six exploratory
leases and one producing lease in the Mustang Island area for a cash payment of
$6.4 million. Net proved reserves attributable to the Mustang Island 883S
producing lease, estimated by Ryder Scott Company, L.P. ("Ryder Scott"), the
Company's independent reserve engineering firm, were 0.1 million barrels of oil
and 3.2 Bcf of gas as of July 1, 2000. The sale was approved by the Bankruptcy
Court and completed on September 25, 2000. The leases subject to the sale cover
portions of Mustang Island blocks 748L, 749L, 795L, 797L, 883S, 940S and 941S.
A purchase and sale agreement was signed with Apache Corporation
("Apache") on October 2, 2000 for the sale of the Company's 50% working
interests in Main Pass leases 5, 6, 7, 84, 90, 91, 93, 104 and 105, Grand Isle
45, Ship Shoal leases 192, 193 and 194, South Marsh Island 7, and West Cameron
leases 237, 543, 544 and 653. Net proved reserves attributable to these leases,
estimated by Ryder Scott were 2.6 million barrels of oil and 22.6 Bcf of gas as
of July 1, 2000. The effective date of the sale is October 1, 2000. The sale
price is $51.2 million. This sale transaction is subject to approval of the
Bankruptcy Court.
Two purchase and sale agreements were signed with ATP Oil and Gas
Corporation on October 2, 2000 ("ATP") in respect of the Company's 100% working
interest in the West Cameron 461 lease, on the one hand, and the Company's 100%
working interests in the South Marsh Island 189 and 190 leases on the other
hand. The purchase prices are $1.6 million and $3.1 million, respectively, each
with an effective date of October 1, 2000. Net proved reserves attributable to
these leases, estimated by Ryder Scott were 0.6 million barrels of oil and 21.1
Bcf of gas as of July 1, 2000. These sale transactions are subject to approval
of the Bankruptcy Court.
On October 2, 2000, the Company entered into a purchase and sale
agreement with Stone Energy Corporation ("Stone") for the sale of the Company's
100% working interest in the South Pelto 22 lease for a purchase price of $0.8
million, with an effective date of June 1, 2000. Net proved reserves
attributable to this lease, estimated by Ryder Scott were 0.5 million barrels of
oil and 2.3 Bcf of gas as of July 1, 2000. This sale transaction is subject to
the approval of the Bankruptcy Court.
PUSA was the high bidder on certain of the Company's assets, and under
the Plan of Reorganization, these assets will remain in the Company. The Plan
contemplates that the Company will emerge from Chapter 11 as a reorganized
entity, and PUSA will control the Company through the ownership of all of the
Company's common stock. The assets that will be retained by the Company are
seven exploration leases in which the Company owns a 100% working interest (High
Island 33 (one Texas state and one federal lease), High Island 307, High Island
308, Ship Shoal 180, Vermilion 258, West Cameron 145), certain seismic and
geological licenses, certain contractual rights, the corporate books, records
and tax attributes, and furniture, fixtures and equipment located in Lafayette,
Louisiana. PUSA will pay the liquidating trust that will be under the control of
the Company's creditors $3,034,000 for these assets. This transaction is subject
to approval of the Bankruptcy Court.
The Apache, ATP, Stone and PUSA transactions will be incorporated into
the Plan of Reorganization and will be considered by the Bankruptcy Court at the
November 21, 2000 confirmation hearing.
At the request of the Company, Ryder Scott Company, L.P., issued a
mid-year reserve analysis on June 12, 2000, effective as of July 1, 2000. The
Company had this mid-year report prepared for use in connection with the sale
process. The report was not prepared in accordance with Securities and Exchange
Commission rules; it used pricing assumptions selected by the Company and was
prepared using a forward looking effective date. The pricing assumptions,
present value calculations and reserve estimates were disclosed by the Company
in an 8-K Current Report filed with the Securities and Exchange Commission on
June 19, 2000.
GENERAL INFORMATION
The Company is the wholly owned principal operating subsidiary of
Petsec Energy Ltd ("PEL") an Australian public company with ordinary shares
listed on the Australian Stock Exchange (symbol: PSA) and American Depositary
Receipts ("ADRs") traded under the ticker symbol PSJEE.OB. The results
discussed in this report refer only to the Company. PEL's results are
filed with the Securities and Exchange Commission separately under Forms 6-K
(quarterly) and 20-F (annually). PEL's shareholders and holders of ADRs are
advised to refer to these filings for information pertaining to PEL.
The Company explores for, develops and produces hydrocarbons primarily
in state and federal waters in the Gulf of Mexico. A discussion of the Company's
operating history is contained in the Company's most recent Annual Report on
Form 10-K. The Plan of Reorganization filed with the Bankruptcy Court
contemplates the sale to third parties of all of the Company's producing
properties and substantially all of the Company's exploration leases. All cash,
accounts receivable and the right to receive cash attributable to the period
prior to the effective date of the Plan of Reorganization (which is expected to
be December 15, 2000) will be transferred into a liquidating trust controlled by
the Company's creditors. PUSA participated in the sale process as a buyer, and
it is the high bidder on certain of the Company's non-producing assets. These
assets will be retained in the Company which, it is expected, will operate as a
reorganized entity. The Company has not formulated any business plans relating
to the period after the Plan of Reorganization becomes effective.
11
<PAGE> 12
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.
The Company reimburses PEL and PUSA for direct expenses incurred in
connection with its operations. In addition, the Company has received
subordinated loans from PUSA to finance its operations. See the discussion below
in the "Liquidity and Capital Resources" section of this Form 10-Q.
The Company's revenues, profitability and cash flow 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 existing 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.
12
<PAGE> 13
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET PRODUCTION:
Gas (MMcf) 2,147 1,749 5,510 6,510
Oil (MBls) 165 186 510 637
Total (Mmcfe) 3,137 2,865 8,570 10,332
NET SALES DATA (IN THOUSANDS):
Gas $ 8,161 $ 3,717 $ 16,708 $ 14,680
Oil $ 5,096 $ 3,197 $ 13,638 $ 9,580
Total $ 13,257 $ 6,914 $ 30,346 $ 24,260
AVERAGE SALES PRICE (1):
Gas (per Mcf) $ 3.80 $ 2.13 $ 3.03 $ 2.25
Oil (per Bbl) $ 30.88 $ 17.19 $ 26.74 $ 15.04
Total (per Mcfe) $ 4.23 $ 2.41 $ 3.54 $ 2.35
AVERAGE COSTS (PER MCFE):
Lease operating expenses $ 0.90 $ 0.58 $ 0.66 $ 0.50
Depletion, depreciation, and amortization $ 1.42 $ 1.54 $ 1.53 $ 1.56
General, administrative and other expenses $ 0.33 $ 0.33 $ 0.39 $ 0.36
</TABLE>
(1) Includes effects of hedging activities
GENERAL. During the three months ended September 30, 2000, the Company
sold all of its interests in the Mustang Island 748L, 749L, 795L, 797L, 883S,
940S, and 941S leases for $6.4 million effective August 1, 2000. The sale was
completed on September 25, 2000 and resulted in a gain of $3.2 million. In
addition to this sale, during the nine months ended September 30, 2000, the
Company sold all of its interests in West Delta 112/113, West Cameron
515/516/526 and Vermilion 34/47 for $8.9 million, net of closing adjustments,
effective February 1, 2000. The sale was completed on April 11, 2000 and
resulted in a gain of $0.6 million.
OIL AND GAS REVENUES. Oil and gas revenues for the three months ended
September 30, 2000 were $13.3 million, an increase of $6.4 million, or 93%, from
$6.9 million for the comparable period in 1999. A 23% increase in gas production
coupled with a 78% increase in gas prices, resulted in a $4.4 million increase
in gas revenues. An 11% decrease in oil production offset by an 80% increase in
oil prices resulted in a $1.9 million increase in oil revenues.
Oil and gas revenues for the nine-month period ended September 30, 2000
were $30.3 million, an increase of $6.0 million, or 25% over $24.3 million for
the comparable period in 1999. Oil production in the nine months to September
30, 2000 decreased 20% and gas production decreased 15% from the comparable 1999
period. The average realized price of oil increased by 78% and gas increased by
35%.
For the three months ended September 30, 2000, the average realized gas
price was $3.80 per Mcf, or 9% below the $4.16 per Mcf average gas price before
hedging. Hedging activities resulted in a $0.8 million decrease in gas revenues.
There were no oil hedging contracts in place during the quarter. For the
comparable period in 1999 the average realized gas price was $2.13 per Mcf, or
13% below the $2.44 per Mcf average gas price before hedging. In the same period
the average realized oil price was $17.19, or 13% below the $19.82 per Bbl
average oil price before hedging. Hedging activities resulted in a $1.0 million
decrease in oil and gas revenues for the three-month period ended September 30,
1999.
13
<PAGE> 14
For the nine months ended September 30, 2000, the average realized gas
price was $3.03 per Mcf, or 11% below the $3.42 per Mcf average gas price before
hedging. Over the same period, the average realized oil price was $26.74 per
Bbl, or 8% below the $29.08 per Bbl average oil price before hedging. Hedging
activities resulted in a $3.3 million decrease in oil and gas revenues for the
nine-month period ended September 30, 2000. For the comparable period in 1999,
the average realized gas price was $2.25 per Mcf, or 13% above the $1.99 per Mcf
average gas price before hedging. In the same period the average realized oil
price was $15.04, or $0.01 below the $15.05 per Bbl average oil price before
hedging. Hedging activities resulted in a $1.7 million increase in oil and gas
revenues for the nine-month period ended September 30, 1999.
LEASE OPERATING EXPENSES (including production taxes). Lease operating
expenses increased 65% to $2.8 million for the three months ended September 30,
2000, from $1.7 million for the three months ended September 30, 1999. Lease
operating expenses per Mcfe increased from $0.58 for the comparable period in
1999 to $0.90 for the three months ended September 30, 2000 as a result of
higher workover costs.
Lease operating expenses for the nine-month period ended September 30,
2000 were $5.7 million, an increase of 10% from the corresponding period in
1999. Lease operating expenses per Mcfe increased from $0.50 for the comparable
period in 1999 to $0.66 for the nine-month period to September 30, 2000 due to
higher workover costs and production decline.
DEPLETION, DEPRECIATION AND AMORTIZATION ("DD&A"). DD&A expense of $4.4
million for the three months ended September 30, 2000, was in line with the same
period in 1999. Consistent with an increase in production, the unit rate
decreased to $1.42 per Mcfe for the three months ended September 30, 2000 from
$1.54 per Mcfe for the same period in 1999.
DD&A expense for the nine-month period ended September 30, 2000
decreased 19% to $13 1 million from $16.2 million for the corresponding period
in 1999. The depletion rate per unit of $1.53 per Mcfe for the nine-month period
ended September 30, 2000 decreased slightly from $1.56 per Mcfe for the
corresponding period in 1999.
EXPLORATION EXPENDITURES. Seismic, geological and geophysical
expenditures of $42,000 were expensed during the quarter, a decrease of $0.5
million from the comparable period in 1999.
Exploration expenditures for the nine months ended September 30, 2000
were $0.6 million, a decrease of $1.9 million over the comparable period in
1999.
ABANDONMENTS AND IMPAIRMENTS. A $2.5 million impairment charge was
recorded in the third quarter of 2000 on five unproved leases. 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 and a charge of $0.1 million
was recorded in the third quarter of 1999 for the plugging and abandonment of
the West Cameron 542 B-1 well.
INTEREST EXPENSE. Interest expense decreased $2.7 million, or 81% to
$0.6 million for the three months ended September 30, 2000, from $3.3 million
for the same period in 1999.
For the nine months ended September 30, 2000, interest expense was $5.3
million compared to interest expense of $10.2 million during the same period in
1999 primarily due to the automatic stay as a result of the bankruptcy filing.
Contractual interest for the three and nine month periods ended September 30,
2000 would have been $3.8 million and $11.2 million, respectively.
14
<PAGE> 15
GENERAL, ADMINISTRATIVE AND STOCK COMPENSATION EXPENSE. General,
administrative and stock compensation expense increased $0.1 million, or 9%, to
$1.0 million for the three months ended September 30, 2000 from the comparable
period in 1999. On a per Mcfe basis, the rate was $0.33 per Mcfe for both
periods.
For the nine-month period ended September 30, 2000, the general,
administrative and stock compensation expense decreased $0.3 million to $3.4
million from $3.7 million for the comparable period in 1999. On a per Mcfe
basis, the rate increased from $0.36 per Mcfe for the nine-month period ended
September 30, 1999 to $0.39 per Mcfe for the comparable period in 2000 due to
production decline.
ADVICE ON LIQUIDITY SOLUTIONS. For the three-month period ended
September 30, 2000, professional services for advice on the Company's liquidity
problems were $0.9 million.
For the nine-month period ended September 30, 2000, professional
services for advice on the Company's liquidity problems was $2.7 million.
NET INCOME (LOSS). Net income of $4.5 million was recorded for the
three months ended September 30, 2000, an increase of $8.3 million from the net
loss of $3.8 million for the comparable period in 1999. Net income for the nine
months ended September 30, 2000 was $1.6 million, an improvement of $16.1
million over the comparable 1999 period.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Position
The Company has inadequate capital resources to service its debt and
meet anticipated capital requirements necessary to maintain and grow its
business over the long term. After filing for bankruptcy protection, the Company
entered into a post-petition revolving credit facility with Foothill Capital
Corporation ("Foothill"), the Company's pre-petition lender, to provide
liquidity during the pendency of the Bankruptcy Case. The revolving credit
facility is for $30 million, subject to monthly borrowing base adjustments. At
September 30, 2000, there were no borrowings outstanding on the facility. The
credit facility will terminate once the Plan of Reorganization is consummated.
The Company does not presently have adequate capital resources on hand
to fund future operations assuming that the Bankruptcy Court approves the PUSA
transactions at the confirmation hearing, and the Company continues in operation
as a reorganized entity. It is expected that the Company will be capitalized by
its ultimate parent, PEL, but the level of funding the Company will receive is
not known to the Company.
Cash Flow
The following table represents cash flow data for the Company for the
periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
(in thousands)
2000 1999
-------- --------
<S> <C> <C>
Cash flow data
Net cash provided by operating activities $ 14,690 $ 8,735
Net cash provided by investing activities 3,880 62,060
Net cash used in financing activities (10,188) (66,125)
</TABLE>
15
<PAGE> 16
The increase in cash provided by operating activities from 1999 to 2000
is due primarily to higher oil and gas prices and lower interest costs paid in
2000. Cash provided by operating activities in both years was impacted by
working capital changes. Cash provided by operating activities before working
capital changes in 2000 and 1999 was $15.7 million and $3.3 million,
respectively.
The cash provided by investing activities in 2000 resulted from the
receipt of net proceeds from the sales of certain oil and gas assets net of
expenditures on oil and gas exploration and development activities. 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
Corporation.
The cash movements in financing activities in 2000 and 1999 consisted
of repayments and borrowings under the secured credit facilities.
Capital Expenditures
During the three-month period ended September 30, 2000, the Company
spent $2.9 million in capital and exploration expenditures, and in the nine
months ended September 30, 2000 spent $11.4 million. In the comparable periods
in 1999, the Company spent $1.8 million and $9.7 million, respectively.
To meet anticipated capital requirements during the pendency of the
Bankruptcy Case, the Company has obtained post-petition credit from Foothill,
which was approved by the Bankruptcy Court on June 20, 2000. See the foregoing
discussion in this "Liquidity and Capital Resources" section of this Form 10-Q.
Secured Credit Facility
On June 20, 2000, the Company entered into a $30 million revolving
credit facility with Foothill. Under the facility, outstanding borrowings accrue
interest at the reference rate most recently announced by Wells Fargo Bank N.A.,
(9.5% per annum as of October 31, 2000) plus a margin of 2.5% per annum; the
default rate is the reference rate plus 6.5%. The Company is also required to
pay an unused line fee of 0.5% of the unused amount available for borrowing, a
$10,000 per month service charge and certain other fees and expenses. The
Company has paid all interest that is presently due. This credit facility will
terminate once the Plan of Reorganization is consummated.
Public Senior Subordinated Indebtedness
In June 1997 the Company issued $100 million of 9 1/2% Senior
Subordinated Notes. The principal is due in a lump sum in June 2007. The 9 1/2%
Notes were issued at a discount with a yield to maturity of 9.56% per annum.
Interest at the rate of 9.5% per annum is payable semiannually on June 15 and
December 15 of each year.
The Company did not make the interest payment due in the amount of
$4.75 million on the 9 1/2% Notes at December 15, 1999, and is in default under
the Indenture governing the 9 1/2% Notes. The Company did not make the interest
payment due in the amount of $4.75 million on June 15, 2000.
16
<PAGE> 17
The Plan of Reorganization contemplates that this indebtedness will be
cancelled when the Plan becomes effective. The bondholders will receive
distributions from the liquidating trust based on the proceeds available from
the sale of the Company's assets.
Subordinate Loans from PUSA
PEL, indirectly through PUSA, 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 PUSA historically have been provided substantially in
the form of subordinated loans denominated in Australian and US dollars. These
loans are subordinated to the payment of both the Foothill credit facility and
the 9 1/2% Notes. The biannual interest payments on these loans were not paid in
January and July, 2000, and as a result of the Chapter 11 filing, interest has
ceased to be accrued as of April 13, 2000. The loans from PUSA do not have
mandatory principal payments due until December 31, 2007. Any payments or
distributions made by the Company to PEL and PUSA have been for reimbursement of
direct expenses incurred in connection with the Company's operations and
interest under the subordinated loans. Neither PEL nor PUSA has any commitments
to make any further loan advances to the Company.
The Plan of Reorganization contemplates that this indebtedness will be
cancelled. PUSA will receive the distribution provided for in the Plan--which
begins at 3.375% of the amount otherwise available for distribution to the
holders of the 9 1/2% Notes up to $60 million. The percentage available to PUSA
increases for recoveries to the holders of the 9 1/2% Notes in excess of $60
million.
NEW ACCOUNTING PRONOUNCEMENT
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 amended, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. Adoption of Statement
133 on January 1, 2001 is not expected to have a material effect on the
Company's financial position or results of operations.
17
<PAGE> 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Except as described in Note 4 to the unaudited financial statements,
there has been no material change to the information disclosed in the Company's
most recent Annual Report on Form 10-K.
PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
As reported in the Form 10-Q filed by the Company on May 15, 2000, the
Company filed a voluntary petition for relief under Chapter 11 of the Bankruptcy
Code on April 13, 2000. Other than the filing of the Plan Documents with the
Bankruptcy Court (see discussion in the section of this Form 10-Q under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations"), there have not been any material developments in the Bankruptcy
Case during the period covered by this Form 10-Q.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
The Company is in default under the indenture governing the 9 1/2%
Notes. See discussion in the section of this Form 10-Q under "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
18
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
There were no reports on Form 8-K filed during the quarter covered by this
report.
The following instruments and documents are included as Exhibits to this Form
10-Q. Exhibits incorporated by reference are so indicated by parenthetical
information.
Exhibit No. Exhibit
27 Financial Data Schedule
19
<PAGE> 20
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 14, 2000 By: /s/ Ross A. Keogh
------------------------------------
Ross A. Keogh
Director, Vice President--Chief
Financial Officer, and Treasurer
(Principal Financial and Accounting
Officer)
November 14, 2000 By: /s/ James E. Slatten, III
------------------------------------
James E. Slatten, III
Director, Vice President--Land and
Legal, and Secretary
(Duly Authorized Officer)
20
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
