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 March 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
-----------------
Commission File No. 1-14754
-----------------
PENDARIES PETROLEUM LTD.
(Exact name of registrant as specified in its charter)
-----------------
PROVINCE OF NEW BRUNSWICK, CANADA
(State or other jurisdiction of incorporation)
Internal Revenue Service - Employer Identification No. 52-2051576
8 Greenway Plaza, Suite 910, Houston, Texas 77046
(713) 355-2900
-----------------
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[ ]
The total number of shares of the registrant's Common Shares, no par
value, outstanding on March 31, 2000, was 8,879,470.
1
<PAGE>
PENDARIES PETROLEUM LTD.
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2000
(Unaudited) and December 31, 2000.................................... 3
Consolidated Statements of Operations and Deficit for the
three months ended March 31, 2000 (Unaudited)
With Comparative Figures for the Preceding Year...................... 4
Consolidated Statements of Cash Flow for the
three months ended March 31, 2000 (Unaudited)
With Comparative Figures for the Preceding Year...................... 5
Notes to Consolidated Financial Statements (Unaudited)............... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ None
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. None
Item 2. Changes in Securities and Use of Proceeds......................... None
Item 3. Defaults Upon Senior Securities................................... None
Item 4. Submission of Matters to a Vote of Security Holders............... None
Item 5. Other Information................................................. None
Item 6. Exhibits and Reports of Form 8-K.................................. None
SIGNATURES................................................................... 13
2
<PAGE>
PART I:
<TABLE>
<CAPTION>
Item 1. FINANCIAL STATEMENTS
PENDARIES PETROLEUM LTD.
CONSOLIDATED BALANCE SHEETS
March 31, 2000 and December 31, 1999
(All figures are in U.S. dollars)
<S> <C> <C>
March 31, December 31,
2000 1999
----------- -----------
ASSETS (Unaudited)
------
CURRENT ASSETS
Cash and cash equivalents $ 5,027,638 $ 6,983,680
Accounts receivable 25,218 43,577
Prepaid expenses and other assets 167,450 231,651
----------------- --------------
5,220,306 7,258,908
PROPERTY AND EQUIPMENT
Oil and gas properties, recorded under the full cost method
Proved 19,315,481 17,761,478
Unproved 2,626,003 2,565,343
Furniture, fixtures and office equipment 221,895 172,517
Accumulated depreciation, depletion and amortization (85,379) (76,484)
------------------ --------------
Net property and equipment 22,078,000 20,422,854
----------------- --------------
Total Assets $ 27,298,306 $ 27,681,762
================== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ - $ 36,845
Accrued liabilities 23,433 40,962
----------------- --------------
Total current liabilities 23,433 77,807
----------------- --------------
SHAREHOLDERS' EQUITY
Common shares
Authorized, unlimited number of common shares
Issued 8,879,470 and 8,879,470 common shares, respectively 32,580,051 32,580,051
Retained Deficit (5,305,178) (4,976,096)
------------------ --------------
Total shareholders' equity 27,274,873 27,603,955
----------------- --------------
Total liabilities and shareholders' equity $ 27,298,306 $ 27,681,762
=============== ================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE>
PENDARIES PETROLEUM LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED DEFICIT
(Unaudited)
(All figures are in U.S. dollars)
For The For The
Three-Month Three-Month
Period Ended Period Ended
March 31, March 31,
2000 1999
---- ----
REVENUE
Oil and gas income $ - $ 100,791
------------ -------------
EXPENSES
Oil and gas operating expenses - 95,160
General and administrative expenses 391,768 376,097
Depreciation, depletion and amortization 8,895 47,751
Canadian Exchange (gain)/loss 6,715 (10,063)
------------ -------------
407,378 508,945
------------ -------------
OTHER INCOME
Interest income 78,296 88,774
------------ -------------
NET LOSS (329,082) (319,380)
RETAINED DEFICIT, beginning of period (4,976,096) (3,819,694)
------------- --------------
RETAINED DEFICIT, end of period $ (5,305,178) $ (4,139,074)
================= ==============
NET LOSS PER SHARE
Basic $ (.04) $ (.04)
================= ==============
Fully diluted $ (.04) $ (.04)
================= ==============
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE>
<TABLE>
<CAPTION>
PENDARIES PETROLEUM LTD.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
(All figures are in U.S. dollars)
<S> <C> <C>
For the For the
Three-Month Three-Month
Period Ended Period Ended
March 31, March 31,
2000 1999
---- ----
CASH FLOW FROM OPERATING ACTIVITIES
Net Loss $ (329,082) $ (319,380)
Items not affecting cash
Depreciation, depletion and amortization 8,895 47,751
Accounts receivable 18,359 (43,261)
Accounts payable (36,845) (2,198)
Accrued liabilities (17,529) 42,443
Prepaid expenses and other assets 64,201 (45,150)
---------------- ---------------
Net cash used in operating activities (292,001) (319,795)
----------- -----------
CASH FLOW USED IN INVESTING ACTIVITIES
Net additions to proved and unproved oil and gas
properties (1,614,663) (228,501)
Additions to furniture, fixtures and office equipment (49,378) 1,071
----------------- ---------------
Net cash used in investing activities (1,664,041) (227,430)
------------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (1,956,042) (547,225)
CASH AND CASH EQUIVALENTS, beginning of period 6,983,680 7,873,280
---------------- ---------------
CASH AND CASH EQUIVALENTS, end of period $ 5,027,638 $ 7,326,055
================ ===============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE>
PENDARIES PETROLEUM LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(Unaudited)
(All figures are in U.S. dollars)
1. Nature of Operations
Pendaries Petroleum Ltd. ("Pendaries" or "the Company"), a New Brunswick,
Canada corporation, is a holding company whose primary interests are in
exploration, development and production of oil and gas properties in the
People's Republic of China.
2. NATURE OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
------------------------------------------------------
The Company completed an initial public offering and became a public
company in Canada on December 12, 1996.
The consolidated interim financial statements included herein have been
prepared by Pendaries without audit and reflect all adjustments which are,
in the opinion of management, necessary to present a fair statement of the
results of the interim period pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). These statements are presented
on a basis consistent with annual audited consolidated financial
statements. Certain information, accounting policies and footnote
disclosures normally included in consolidated financial statements prepared
in accordance with generally accepted accounting principles have been
omitted, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These consolidated interim
financial statements should be read in conjunction with the consolidated
financial statements and the summary of significant accounting policies and
notes thereto included in the Company's latest annual report on Form 10-K
for the year ended December 31, 1999 filed with the SEC.
The consolidated financial statements include the accounts of Pendaries,
Pendaries Production, Inc., Sino-American Energy Corporation
(Sino-American) and Sino-American Overseas Energy Corporation. All
significant intercompany transactions and balances have been eliminated.
The Company's registration statement filed on Form 20-F was declared
effective by the U.S. Securities and Exchange Commission in June 1998. This
permitted the Company to list its common shares for trading on the American
Stock Exchange.
3. OIL AND GAS PROPERTIES - ALBERTA, CANADA
In November 1996, we purchased an interest in three producing oil and gas
properties located in Alberta, Canada for $1,966,088. In November 1999, we
sold all of our interest in the Alberta properties for approximately
$1,200,000, which approximated its book value. We will use the proceeds to
partially fund exploration and development activities in our two core Bohai
Bay blocks.
6
<PAGE>
4. OIL AND GAS PROPERTIES - CHINA
At the end of 1998, we owned an interest in five oil and gas exploration
petroleum contracts covering blocks in the Gulf of Bohai and the Pearl
River Mouth Basin of the South China Sea. A wholly-owned subsidiary of
Kerr-McGee serves as the operator of all five blocks. We, the operator, and
in one concession an additional partner, as owners of the working
interests, serve as the foreign contractors under these petroleum
contracts. In addition, a Chinese government company serves as the Chinese
counter party to each petroleum contract. For each block covered by a
petroleum contract, the foreign contractors maintain an operating agreement
among themselves for handling the operational issues. During 1999 we and
the operator decided to concentrate our resources and efforts on the two
primary blocks in the Bohai Bay which have exhibited the most potential for
success, Block 04/36 and Block 05/36. As a result, we relinquished the
other two smaller blocks in the Bohai Bay and the block in the South China
Sea.
In Block 04/36, originally three companies held interests in the block.
Effective September 1, 1999, Murphy Exploration & Petroleum Company, who
owned a 45% interest in Block 04/36, dropped out of the block. This allowed
us and Kerr-McGee, the two remaining foreign contractors, to pick up
Murphy's interest without cost, other than the obligation to pay our
increased proportional shares of prospect expenses. As a result, we elected
to increase our proportionate interest from 10% to 18.2%. The operator,
Kerr-McGee, elected to increase its proportionate interest from 45% to
81.8%. Thus, we and the operator are the only foreign contractors under the
petroleum contract for Block 04/36. The China National Offshore Oil
Corporation, or CNOOC, is the Chinese counter party under the contract.
In Block 05/36, we own a 15% interest, the operator owns a 50% interest,
and Newfield Exploration Company, another U.S. independent oil and gas
company, owns the remaining 35% interest. CNOOC is the Chinese counter
party under this petroleum contract as well.
Oil and gas exploration in our two Bohai Bay blocks are governed by
separate petroleum contracts. In addition, we are party to an operating
agreement for each block. The table below lists our interest in each of the
two remaining concessions, the acreage held, the concession dates and
exploration periods, as determined by the petroleum contracts.
Block Pendaries Original Current Concession End of
- ----- --------- -------- ------- ---------- ------
Interest Acreage Acreage Date Exploration
-------- ------- ------- ---- -----------
Period
------
04/36 Block 18.2% 560,000 420,000 August 1994 August 2001
05/36 Block 15.0% 416,000 312,000 January 1996 January 2003
In each block, CNOOC has the option to obtain as much as a 51% working
interest during the development and production periods by paying its
proportionate share of the development and operating costs and receiving
its proportionate share of oil and gas production. Although the foreign
contractors bear 100% of the exploration costs, they receive up to a 71%
share of the oil and gas produced, (rather than the 49% share that they
would otherwise be entitled to) until they have recovered these exploration
costs.
7
<PAGE>
5. RELINQUISHMENT
At the end of phase one of the exploration period, the foreign contractors
must relinquish 25% of the contract area, excluding the development and/or
production areas. At the end of phase two of the exploration period, the
foreign contractors must relinquish 25% of the remaining contract area,
excluding the development and/or production areas. At the end of phase
three of the exploration period, the foreign contractors must relinquish
all contract areas not under development or production. After completion of
all work and financial obligations, the foreign contractors may relinquish
their entire interest in any block at the end of its exploration period.
Due to the extensive exploration efforts expended on Block 04/36, at the
beginning of the second phase, CNOOC did not require relinquishment of 25%
of the contract area. The second phase continued until August 1999. Upon
entry into the third phase in September 1999, the foreign contractors
relinquished 25% of the contract area.
In March 1999, the foreign contractors entered into phase two on Block
05/36 and relinquished 25% of the contract area. We do not believe that the
potential for production on either block was harmed by the relinquishment
of the contract areas.
6. Murphy Agreement
On April 24, 1998, we entered into an agreement with Murphy Exploration &
Production Company to purchase its 45% interest in Block 04/36. We later
extended the purchase date from December 21, 1998 to March 22, 1999. The
Murphy Agreement provided that we would pay a total of $38 million for
Murphy's interest, with $35 million to be paid in cash and the remaining $3
million in our common shares. Due to the adverse change in the condition of
the oil and gas industry after our entering into the Murphy Agreement, we
elected on March 22, 1999 to let the agreement expire. In April of 1998 we
paid the non-refundable deposit of $1 million to Murphy and recorded it as
an additional investment in our opportunity to increase our interest in
Block 04/36.
When Murphy withdrew from this block in September 1999, we exercised our
right under the contract to acquire, without additional charge, our pro
rata share of Murphy's 45% interest in the block and its associated future
costs. By doing so, we increased our interest and our share of future costs
in Block 04/36 from 10% to 18.2%.
7. COMMON SHARES
Issuance of Stock Options
On March 9, 1999, certain outside directors of Pendaries were granted stock
options for a total of 84,500 common shares. The exercise price is U.S.
$0.59 per common share and the options expire on March 9, 2004. There were
no options issued in the first quarter of 2000.
Issuance of Common Shares
On March 9, 1999, certain outside directors of Pendaries were granted
47,500 common shares as compensation, the value which was U.S. $28,209.
There were no such shares issued in the first quarter of 2000.
8
<PAGE>
8. RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
Theseconsolidated financial statements are expressed in U.S. dollars, which is
the functional currency in all areas of operation, and are prepared in
accordance with generally accepted accounting principles in Canada
("Canadian GAAP") which conform in all material respects with those in the
United States ("U.S. GAAP") for the years presented, except as outlined
below.
Oil and Gas Properties
In Canada, if the net capitalized costs of oil and gas properties in a cost
center exceed an amount equal to the sum of estimated future net revenues
from proved oil and gas reserves in the cost center and the costs of
properties not being amortized, both adjusted for income tax effects, such
excess is charged to expense. Also, the total capitalized costs of all cost
centers are subject to a further recoverability test which includes, among
other things, provision for site development and restoration and future
general, administrative and financial costs. This is not consistent with
U.S. GAAP. For U.S. GAAP, if the net capitalized costs of oil and gas
properties in a cost center exceed an amount equal to the sum of estimated
discounted present value at 10% of future net revenues from proved oil and
gas reserves in the cost center and the costs of properties not being
amortized, both adjusted for income tax effects, such excess is charged to
expense. Included in the estimated future net cash flows are Canadian
provincial tax credits expected to be realized beyond the date at which the
legislation, under its provisions, could be repealed. To date, the Canadian
provincial government has not indicated an intention to repeal this
legislation.
If U.S. GAAP had been applied instead of Canadian GAAP, the Company would
have recognized an impairment of its oil and gas properties in China in
1998 in the amount of $2,195,799. As a result of increased oil and gas
prices during the quarter ended March 31, 2000 and consideration of the
impairment discussed in the preceding sentence, there were no material
differences between Canadian GAAP and U.S. GAAP during the quarters ended
March 31, 2000 and 1999.
9. SUBSEQUENT EVENTS - COMMON STOCK AND STOCK OPTIONS
--------------------------------------------------
On April 6, 2000, 25,000 Sino-American options were exercised for an
exercise price of $1.00 per share. Another 50,000 Sino-American options
were exercised on April 24, 2000 with an exercise price of $2.00 per share.
Total proceeds to the Company from both exercises were $125,000.
On April 25, 2000, 20,000 Sino-American options expired unexercised. After
the above-mentioned exercises and expirations, 216,000 Sino-American
options remain outstanding with exercise prices from $1.00 to $2.00 per
share. The remaining 216,000 will expire by August 30, 2000.
On April 20, 2000, 122,000 Pendaries options were issued to directors,
officers and employees of the Company under the Stock Option Plan, with an
exercise price of $2.00 per share and expiration date of April 20, 2005. On
the same date, 15,000 common shares were issued to certain outside
directors under the Company's Share Compensation Plan.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
unaudited consolidated financial statements included elsewhere and with the
Company's Annual Report filed on Form 10-K for the year ended December 31, 1999.
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended March 31, 2000 and 1999:
The Company incurred a net loss of $329,082 and $319,380 for the quarters ended
March 31, 2000 and 1999, respectively. The $9,702 increase in net loss was a
result of the following:
Oil and gas income from the Company's properties located in Alberta, Canada,
decreased from $100,791 in the first quarter ended March 31, 1999 to $0 for the
same period in 2000. There was no oil and gas income in the first quarter of
2000 due to the sale of the Company's oil and gas properties in November of
1999.
Interest income decreased by $10,478 from $88,774 in the first quarter of 1999
to $78,296 in the first quarter of 2000. The decrease was due to the reduction
of cash available for investment in 2000.
Oil and gas operating expenses decreased from $95,160 for the first quarter of
1999 to $0 for the same period in 2000. There were no operating expenses as of
March 31, 2000 due to the sale of the oil and gas properties in November 1999.
Depreciation, depletion and amortization decreased by $38,856 from $47,751 in
1999 to $8,895 in 2000. This decrease was due to the sale of the oil and gas
properties in November 1999.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
From inception (July 5, 1994) the Company's capital by year is shown below. Of
the total, $31,027,761 represents cash raised by issuance of common shares,
$1,325,000 represents oil and gas properties paid for by issuance of common
shares, and $227,290 represents services paid for by issuance of common shares.
Common
Share Exercise of Exercise of
Period Equity Warrants Options Total
Year - 1995 $ 3,287,500 $ - $ - $ 3,287,500
Year - 1996 22,812,658 - 20,000 22,832,658
Year - 1997 68,000 944,488 5,196,115 6,208,603
Year - 1998 131,081 - 42,000 173,081
Year - 1999 28,209 - 50,000 78,209
Year - 2000 - - - -
----------- ---------- ---------- -----------
Totals $26,327,448 $ 944,488 $5,308,115 $32,580,051
=========== ========= ========== ===========
10
<PAGE>
During the same periods, the Company incurred capital expenditures as follows:
Oil and Gas Oil and Gas Furniture,
Properties Properties Fixtures and
Period Canada China Equipment Total
------ ------ ----- --------- -----
Year - 1995 $ - $ 3,597,631 $ 59,758 $ 3,657,389
Year - 1996 1,966,088 2,981,853 62,613 5,010,554
Year - 1997 - 7,739,641 105,286 7,844,927
Year - 1998 - 4,843,827 (57,719) 4,786,108
Year - 1999 (1,966,088)(1) 1,163,869 (2,579) (804,798)
Year - 2000 - 1,614,663 54,536 1,669,199
--------- ----------- -------- -----------
Totals - $21,941,484 $221,895 $22,163,379
========= =========== ======== ===========
NOTE: (1) The Company received proceeds from the sale of its Canadian properties
of $1,200,000. The difference of $766,088 is due to accumulated depletion on the
properties.
After capital expenditures and funds used in operations, the Company had cash of
$5,027,638 at March 31, 2000. There is no credit facility with a financial
institution or any other outstanding debt.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Quarterly Report on Form 10-Q ("Quarterly
Report") that are not historical facts, including, but not limited to,
statements found in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, are forward-looking statements, as that
term is defined in Section 21E of the Securities and Exchange Act of 1934, as
amended, that involve a number of risks and uncertainties. Such forward-looking
statements may be or may concern, among other things, capital expenditures,
drilling activity, acquisition plans and proposals and dispositions, development
activities, cost savings, production efforts and volumes, hydrocarbon reserves,
hydrocarbon prices, liquidity, regulatory matters and competition. Such
forward-looking statements generally are accompanied by words such as "plan,"
"estimate," "expert, " "predict, " "anticipate, " "projected, " "should, "
"assume, " "believe, " or other words that convey the uncertainty of future
events or outcomes. Such forward-looking information is based upon management's
current plans, expectations, estimates and assumptions and is subject to a
number of risks and uncertainties that could significantly affect current plans,
anticipated actions, the timing of such actions and the Company's financial
condition and results of operations. As a consequence, actual results may differ
materially from expectations, estimates or assumptions expressed in or implied
by any forward-looking statements made by or on behalf of the Company. Among the
factors that could cause actual results to differ materially are: fluctuations
of the prices received or demand for the Company's oil and natural gas, the
uncertainty of drilling results and reserve estimates, operating hazards,
acquisition risks, requirements for capital, general economic conditions,
competition and government regulations, as well as the risks and uncertainties
discussed in this Quarterly Report, including, without limitation, the portions
referenced above, and the uncertainties set forth from time to time in the
Company's other public reports, filings and public statements.
11
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - N/A
Item 2. Changes in Securities - N/A
Item 3. Defaults Upon Senior Securities - N/A
Item 4. Submission of Matters to a Vote of Security Holders - N/A
Item 5. Other Information - N/A
Item 6. Exhibits and Reports on Form 8-K - N/A
12
<PAGE>
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.
PENDARIES PETROLEUM LTD.
Date: May 12, 2000 By: /s/Bobby J. Fogle
--------------------
Bobby J. Fogle
Vice President, Finance and
Chief Financial Officer
13
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
PENDARIES PETROLEUM LTD. CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD
ENDED March 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 5,028
<SECURITIES> 0
<RECEIVABLES> 25
<ALLOWANCES> 167
<INVENTORY> 0
<CURRENT-ASSETS> 5,220
<PP&E> 22,163
<DEPRECIATION> (85)
<TOTAL-ASSETS> 27,298
<CURRENT-LIABILITIES> 24
<BONDS> 0
0
0
<COMMON> 32,580
<OTHER-SE> (5,305)
<TOTAL-LIABILITY-AND-EQUITY> 27,298
<SALES> 0
<TOTAL-REVENUES> 78
<CGS> 0
<TOTAL-COSTS> 407
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (329)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (329)
<EPS-BASIC> (.04)
<EPS-DILUTED> (.04)
</TABLE>
