<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[u] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 333-52263*
MICHAEL PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
Texas 76-0510239
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
13101 Northwest Freeway
Suite 320
Houston, Texas 77040
(Address of principal executive offices including zip code)
(713) 895-0909
(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 [ ]
* The Commission File Number refers to a Form S-4 Registration Statement filed
by the Registrant under the Securities Act of 1933 which was declared effective
on July 22, 1998.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
As of May 14, 1999, there were 10,000 shares of the Registrant's Common Stock,
par value $0.10 per share, outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MICHAEL PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,183 $ 430
Accounts receivable 6,344 6,366
Note receivable 1,500 1,500
Prepaid expenses and other 691 655
---------- ----------
Total current assets 16,718 8,951
Oil and gas properties, (successful efforts method) at cost 166,818 155,867
Less: accumulated depreciation, depletion and amortization
(28,619) (24,989)
---------- ----------
138,199 130,878
Other assets 7,133 7,453
---------- ----------
TOTAL ASSETS $ 162,050 $ 147,282
========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 11,189 $ 8,925
Accrued liabilities 8,406 4,630
Current portion of long-term debt 23,159 41
---------- ----------
Total current liabilities 42,754 13,596
Long-term debt 132,890 144,842
---------- ----------
Total liabilities 175,644 158,438
Commitments and contingencies
Stockholder's deficit:
Preferred stock ($.10 par value, 50,000,000 shares authorized,
no shares issued and outstanding)
Common stock ($.10 par value, 100,000,000 shares
authorized, 10,000 shares issued and outstanding) 1 1
Additional paid-in capital 610 610
Accumulated deficit (14,205) (11,767)
---------- ----------
Total stockholder's deficit (13,594) (11,156)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT $ 162,050 $ 147,282
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
2
<PAGE>
MICHAEL PETROLEUM CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
------------------
1999 1998
------- ------
<S> <C> <C>
Revenues:
Oil and natural gas sales $ 7,019 $3,260
Operating expenses:
Production costs 1,353 475
Exploration 48 -
Depreciation, depletion and amortization 3,654 1,349
General and administrative 478 261
------- ------
5,533 2,085
------- ------
Operating income 1,486 1,175
------- ------
Other income (expense):
Interest income and other 73 16
Interest expense (3,997) (890)
------- ------
(3,924) (874)
------- ------
Income (loss) income before income taxes (2,438) 301
Income tax expense - 105
------- ------
Net (loss) income $(2,438) $ 196
======= ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
3
<PAGE>
MICHAEL PETROLEUM CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-------------------
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(2,438) $ 196
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation, depletion and amortization 3,654 1,349
Deferred income taxes - 105
Amortization of debt issuance costs 204 -
Amortization of deferred loss on early
termination of commodity swap agreement 175 -
Amortization of discount of debt 60 33
Changes in operating assets and liabilities:
Accounts and notes receivable 12 903
Prepaid expenses and other 64 (24)
Accounts payable (279) 571
Accrued liabilities 3,775 254
------- -------
Net cash provided by operating
Activities 5,227 3,387
------- -------
Cash flows from investing activities:
Additions to oil and natural gas properties (8,435) (2,093)
------- -------
Net cash used in investing activities (8,435) (2,093)
------- -------
Cash flows from financing activities:
Proceeds from long-term debt 11,000 967
Payments on long-term debt (39) (1,933)
Additions to deferred loan costs - (453)
------- -------
Net cash provided by (used in) financing activities 10,961 (1,419)
------- -------
Net increase (decrease) in cash and cash equivalents 7,753 (125)
Cash and cash equivalents, beginning of period 430 782
------- -------
Cash and cash equivalents, end of period $ 8,183 $ 657
======= =======
Non-cash transactions:
Changes in accounts payable related to capital
expenditures $ 2,543 -
Issuance of short-term notes payable for purchase
of oil and gas properties - $45,813
Issuance of short-term note payable for financing
of insurance costs 145 87
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
4
<PAGE>
MICHAEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Michael Petroleum Corporation, a Texas corporation (the "Company") is a
wholly owned subsidiary of Michael Holdings, Inc., a Texas corporation. The
consolidated financial statements included herein have been prepared by the
Company and are unaudited, condensed and do not contain all information
required by generally accepted accounting principles. In the opinion of
management, all material adjustments, consisting of normal recurring
adjustments, necessary to present fairly the results of operations have
been included. Due to seasonal fluctuations, the results of operations for
the interim periods are not necessarily indicative of operating results for
the entire fiscal year. The consolidated financial statements in this Form
10-Q should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.
2. LONG-TERM DEBT
In May 1998, the Company entered into a four-year credit facility (the
"Credit Facility") with Christiania Bank og KreditKasse ("Christiania")
which provides maximum loan amounts totaling $50.0 million, subject to
borrowing base limitations. The borrowing base was to be redetermined
semiannually by Christiania based on the Company's proved oil and natural
gas reserves. Although the initial borrowing base was $30 million, the new
borrowing base, effective April 1, 1999, was reduced to $23 million. The
stated maturity date of all indebtedness under the Credit Facility is May
28, 2002. The effective interest rate under the Credit Facility for the
year ended December 31, 1998 and the three months ended March 31, 1999 was
6.8% and 7.3%, respectively.
At December 31, 1998, the Company was in violation of the interest coverage
ratio under the Credit Facility. The Company and Christiania entered into
that certain First Amendment to the Credit Agreement dated effective as of
March 31, 1999, amending that financial covenant, and increasing the
interest rate charged under the Credit Facility by 0.5%. During March 1999,
the Company was in violation of two financial covenants (the minimum
current ratio and the interest coverage ratio) under the Credit Facility.
Consequently, the balance outstanding under the Credit Facility as of March
31, 1999 has been classified as a current liability. The Company is
currently negotiating the terms of an amended credit facility with
Christiania. However, no assurance can be given that the Company or
Christiania will enter into additional amendments or waivers with regard
to these financial covenants. Should the Company fail to secure an
amendment or waiver with regards to these financial covenants, Christiania
would have the right to declare all outstanding indebtedness under the
Credit Facility to be due and payable. Pursuant to the cross default
provisions contained in the indenture governing the Company's $135 million
Senior Notes, upon written notice by Christiania to the Company of the
acceleration of the Credit Facility, the Senior Notes would become due and
payable upon such event.
In addition, the current terms of the Credit Facility provide that
commencing on October 31, 1999, and continuing until its stated maturity,
the maximum amount available for borrowings and letters of credit under
the Credit Facility will be adjusted (increased or decreased, as
applicable) by the semi-annual borrowing base determination, and the
borrowing base also will be decreased by monthly mandatory reductions in
the borrowing base of $1.5 million per month and adjusted for significant
sales of collateral.
3. PRO FORMA RESULTS
In March and April 1998, the Company acquired oil and gas properties for
approximately $89.3 million. Accordingly, revenues and expenses from the
properties have been included in the Company's statement of operations from
the date of purchase. Assuming the properties were acquired January 1,
1998, the unaudited
5
<PAGE>
pro forma revenues and loss from continuing operations for the three months
ended March 31, 1998 were $7,155,000 (unaudited) and $468,000 (unaudited),
respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors that have affected certain aspects of the Company's
financial position and operating results during the periods included in the
accompanying unaudited condensed consolidated financial statements. For
supplemental information, it is suggested that this Item 2 be read in
conjunction with the corresponding section included in the Company's 1998 Annual
Report on Form 10-K for the year ended December 31, 1998 (the "1998 Form 10-K")
as filed with the Securities and Exchange Commission.
GENERAL
The Company is an independent energy company engaged in the
acquisition, development and production of oil and natural gas, principally in
the Lobo Trend of South Texas. The Company began operations in 1983, and, since
its inception, increased its reserve base and production as a result of
acquisitions and development of oil and natural gas properties. In March and
April 1998, the Company completed acquisitions adding approximately 51,000 gross
acres (48,400 net acres) in the Lobo Trend for an aggregate purchase price of
approximately $89.3 million. For the three months ended March 31, 1999, the
Company participated in the drilling of 8 gross (7 net) natural gas wells, 5
(5 net) of which were completed as productive wells.
From April 1, 1999 through May 14, 1999, the Company participated in
the drilling of 2 gross (2 net) natural gas wells of which one has been
completed and one is still drilling.
The Company utilizes the "successful efforts" method of accounting for
its oil and natural gas activities as described in Note 1 of the Notes to
Consolidated Financial Statements in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998.
RESULTS OF OPERATIONS
The following table summarizes production volumes, average sale prices
and operating revenues for the Company's oil and natural gas operations for the
three-month periods ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
--------------------------
1999 1998
------------ ----------
<S> <C> <C>
Production volumes:
Oil and condensate (MBbls) 25 12
Natural gas (Mmcf) 3,349 1,487
Average sales prices:
Oil and condensate (per Bbl) $10.92 $14.23
Natural gas (per Mcf) 2.01 2.07
Operating revenues ($ 000's):
Oil and condensate $ 278 $ 176
Natural gas 6,741 3,084
------------ ----------
Total $7,019 $3,260
============ ==========
</TABLE>
6
<PAGE>
COMPARISON OF THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
Oil and natural gas revenues for the three months ended March 31,
1999 increased 115% to $7.02 million from $3.26 million for the three months
ended March 31, 1998. Production volumes for oil and natural gas for the
first quarter ended March 31, 1999 increased 125% to 3,502 MMcfe from 1,559
MMcfe for the first quarter of 1998. Average oil and natural gas prices
decreased 4% to $2.00 per Mcfe for 1999 from $2.09 per Mcfe for 1998. The
increase in oil and natural gas production was a result of the Company's 1998
acquisitions and new wells brought on line resulting from the Company's
drilling program.
Oil and natural gas production costs for the three months ended
March 31, 1999 increased 185% to $1,353,000 from $475,000 for the three
months ended March 31, 1998, primarily due to the increase in production as a
result of the 1998 acquisitions and the Company's development program.
Production costs per equivalent unit increased to $0.38 per Mcfe for the
three months ended March 31, 1999 from $0.30 per Mcfe for the three months
ended March 31, 1998. The increase in the rate per equivalent unit was due to
increased maintenance and compression costs, plus higher ad valorem taxes.
Depreciation, depletion and amortization ("DD&A") expense for the
three months ended March 31, 1999 increased 170% to $3.65 million from $1.35
million for the same period in 1998. The increase in DD&A expense was due to
higher productive volumes and an increase in the depletion rate per Mcfe from
$.87 for the three months ended March 31, 1998 to $1.03 for the same period
in 1999. The increase in rate was primarily due to acquisitions completed in
1998. No impairment charges were recognized in either period.
General and administrative expenses for the three months ended March
31, 1999 increased 83% to $478,000 from $261,000 for the three months ended
March 31, 1998 due to salaries and related benefits for several new
employees, plus increases in legal and professional fees and office expenses.
General and administrative expenses per equivalent unit decreased to $0.14
per Mcfe for the three months ended March 31, 1999 from $0.17 per Mcfe for
the three months ended March 31, 1998. The decrease in the rate per
equivalent unit was due to the higher production.
Interest expense, net of capitalized interest, for the three months
ended March 31, 1999 increased 349% to $4.0 million from $890,000 for the
same period in 1998. The increase was due to the higher level of outstanding
debt for the three months ended March 31, 1999 compared to the same period of
1998.
There was no income tax benefit for the three months ended March 31,
1999 as a valuation allowance of $828,000 was recorded by the Company as
compared to an income tax expense of $105,000 for the same period in 1998.
The valuation allowance recorded by the Company is the sole reconciling item
between the expected tax benefit and the recorded tax amount. The Company has
a net operating loss carryforward of $19.5 million at December 31, 1998,
which was generated beginning in fiscal year 1997. The net operating loss
will begin to expire in 2017. Thus, future taxable income of at least $19.5
million will need to be generated by 2017 in order for the Company to realize
the net operating loss incurred through December 31, 1998. Management
believes it is more likely than not that the net operating loss carryforward
of $19.5 million will be fully utilized prior to expiration. Specific
differences between pre-tax loss and taxable income pertain to development
dry holes, intangible drilling costs, capitalized interest and depletion and
depreciation of oil and gas and other properties. Estimates of future taxable
income are significantly affected by changes in oil and natural gas prices,
estimates of future production, and estimated operating and capital costs.
The deferred tax asset could be reduced in the near term if management's
estimates of taxable income during the carryforward period are significantly
reduced, if alternative tax strategies are no longer viable, or if the
Company's drilling program is significantly curtailed due to a lack of
financing or capital resources. If the Company is not able to generate
sufficient taxable income in the future through operating results, a
valuation allowance will be recorded through a charge to expense for the net
operating loss.
The net loss for the three months ended March 31, 1999 was $2.44
million compared to net income of $196,000 for the three months ended March
31, 1998, primarily as a result of the factors discussed above.
7
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
In April 1998, the Company completed the Senior Notes offering of
$135 million. Approximately $28 million of the net proceeds from the sale of
the Series A Notes were used to repay indebtedness incurred under the
Company's prior financing. Approximately $89.3 million of the net proceeds
were used to fund acquisitions and the remaining balance to provide
additional working capital for general corporate purposes. In May 1998, the
Company entered into a credit facility with Christiania Bank og KreditKasse
as described under "Financing Arrangements" below. As of March 31, 1999 and
May 14, 1999, all of the $23 million available under the Credit Facility had
been drawn. See Note 2, "-Long-Term Debt" of Notes to Consolidated Financial
Statements. The majority of the Company's current indebtedness exists as a
result of the Senior Notes outstanding. These financing transactions have
significantly increased the Company's debt over historical levels. The
Company's increased level of indebtedness has had, and will have, several
important effects on the Company's operations, including (i) a substantial
portion of the Company's cash flows from operations has been and will be
dedicated to the payment of interest and principal on its indebtedness,
(ii) the Company's leveraged position has substantially increased its
vulnerability to adverse changes in general industry conditions, as well as
to competitive pressure, and (iii) the Company's ability to obtain additional
financing for working capital, capital expenditures and general corporate and
other purposes may be limited.
The Company had cash and cash equivalents at March 31, 1999 of $8.18
million, consisting primarily of short-term money market investments,
compared to $430,000 at December 31, 1998. The working capital deficit was
$26.04 million at March 31, 1999 compared to a working capital deficit of
$4.65 million at December 31, 1998 primarily due to the classification of
certain portions of the Credit Facility indebtedness as a current obligation.
The working capital deficit includes the entire $23 million balance
outstanding under the Credit Facility which was classified as a current
liability at March 31, 1999.
Cash flows provided by operating activities from the Company's
operations were approximately $5.23 million and $3.39 million for the three
months ended March 31, 1999 and 1998, respectively. The increase in operating
cash flows for the three months ended March 31, 1999 over the same period in
1998 was primarily due to increased production, revenue and operating income
as a result of 1998 acquisitions and the Company's drilling program,
primarily as a result of working capital expenditures.
Cash flows used in investing activities by the Company were $8.44
million and $2.09 million for the three months ended March 31, 1999 and 1998,
respectively. Property additions resulted primarily from the 1998
acquisitions and drilling and development activities described above.
Cash flows provided by (used in) financing activities were $10.96
million and $(1.42) million for the three months ended March 31, 1999 and
1998, respectively. The increase in the amount of cash flows provided by
financing activities for the three months ended March 31, 1999 was primarily
due to the proceeds borrowed under the credit facility to fund the Company's
drilling program and repay interest on the Senior Notes.
The Company believes that additional financing will be necessary in
order for the Company to continue to increase its reserve base in accordance
with its long-range development plan. In the event the Company is unable to
obtain third party financing, the Company does not believe its cash on hand
and current level of operations will be sufficient to fund its operations
through 1999. On April 22, 1999, the Company retained Wasserstein, Perella &
Company to act as its financial advisor in connection with restructuring its
balance sheet.
CAPITAL EXPENDITURES
Capital expenditures for the first three months of 1999 totaled
$10.98 million compared to $2.09 million in 1998.
The Company has experienced and expects to continue to experience
substantial working capital requirements due to the Company's development
program. Cash flows from operations and borrowings under the Credit Facility
will not currently allow the Company to implement its present development
drilling strategy. Therefore, additional financing will be required in the
future to fund the Company's development strategy. In addition, the terms of
the Company's Senior Notes indebtedness contain certain negative and other
financial covenants which may limit the Company's capital
8
<PAGE>
expenditures. See "Financing Arrangements". The Company will require capital
from sources in addition to the Credit Facility in order for the Company to
fully implement its development drilling strategy in 1999 and for the
foreseeable future. In the event that additional capital is not available,
capital expenditures are expected to be further reduced, which could
adversely affect the Company's future financial condition, cash flows and
results of operations.
FINANCING ARRANGEMENTS
CREDIT FACILITY
In May 1998, the Company entered into its Credit Facility with
Christiania as lender and administrative agent, pursuant to the terms of the
Credit Facility. The Credit Facility provided for loans in an outstanding
principal amount not to exceed $50.0 million at any one time, subject to a
borrowing base to be determined semi-annually (each April and October) by the
administrative agent (the initial borrowing base was $30.0 million), and the
issuance of letters of credit in an outstanding face amount not to exceed
$6.0 million at any one time with the face amount of all outstanding letters
of credit reducing, dollar-for-dollar, the availability of loans under the
Credit Facility. Although the initial borrowing base was $30 million, and
effective November 9, 1998, the borrowing base was increased by $5 million to
a total of $35 million, the new borrowing base effective April 1, 1999, was
reduced to $23 million. See "-Liquidity and Capital Resources" above.
Under the current terms of the Credit Facility, the principal
balance outstanding is due and payable on May 28, 2002, and each letter of
credit shall be reimbursable by the Company when drawn, or if not then
otherwise reimbursed, paid pursuant to a loan under the Credit Facility.
Commencing on October 31, 1999, and continuing until its stated maturity, the
maximum amount available for borrowings and letters of credit under the
Credit Facility will not only be adjusted (increased or decreased, as
applicable) by the semi-annual borrowing base determination, but also (i)
decreased by monthly mandatory reductions in the borrowing base of $1.5
million per month and (ii) adjusted for sales of collateral having an
aggregate value exceeding the lesser of $4.0 million per year or 5% of the
Company's total proved reserve values. At March 31, 1999, the Company had
drawn all of the $23 million then available under the Credit Facility. Both
the Company and Christiania may also initiate two unscheduled
redeterminations of the borrowing base during any consecutive twelve-month
period. If the sum of the outstanding principal balance and amount of
outstanding letters of credit (both drawn and undrawn) exceeds the borrowing
base, the Company shall, within 30 days, either repay such excess in full or
provide additional collateral acceptable to Christiania.
The interest rate for borrowings under the Credit Facility are
determined at either (i) the ABR rate, or (ii) the Eurodollar Rate plus
2.25%, at the election of the Company. The "ABR" rate is the higher of (i)
Christiania Bank's prime rate then in effect, (ii) the secondary market rate
for three-month certificates of deposit plus 1.5% or (iii) the federal funds
rate then in effect plus 1.0%. Interest will generally be due on a quarterly
basis. The Credit Facility is secured by substantially all of the oil and
natural gas assets of the Company, including accounts receivable, equipment
and gathering systems. The proceeds of the Credit Facility may be used to
finance working capital needs and for general corporate purposes of the
Company in the ordinary course of its business.
The Credit Facility contains certain covenants by the Company,
including (i) limitations on additional indebtedness and on guaranties by the
Company except as permitted under the Credit Facility, (ii) limitations on
additional investments except those permitted under the Credit Facility and
(iii) restrictions on dividends or distributions on or repurchases or
redemptions of capital stock by the Company except for those involving
repurchases of Michael Holdings, Inc. capital stock which may not exceed
$500,000 in any fiscal year. In addition, the Credit Facility requires the
Company to maintain and comply with certain financial covenants and ratios,
including a minimum interest coverage ratio, a minimum current ratio and a
covenant requiring that the Company's general and administrative expenses may
not exceed 12.5% of the Company's gross revenues in a calendar year. As of
May 14, 1999, the Company had no available borrowing capacity under the
Credit Facility.
At December 31, 1998, the Company was in violation of the interest
coverage ratio under the Credit Facility. The Company and Christiania entered
into that certain First Amendment to the Credit Agreement dated effective as
of March 31, 1999, amending that financial covenant, and increasing the
interest rate charged under the Credit Facility by 0.5%. During March 1999,
the Company was in violation of two financial covenants (the minimum current
ratio and the interest coverage ratio) under the Credit Facility.
Consequently, the balance outstanding under the Credit Facility as of March
31, 1999 has been classified as a current liability. The Company is currently
negotiating the terms of an amendment to the Credit Facility with
Christiania. However, no assurance can be given that the Company or
Christiania will
9
<PAGE>
enter into additional amendments or waivers with regard to theses financial
covenants. Should the Company fail to secure an amendment or waiver with
regards to these financial covenants, Christiania would have the right to
declare all outstanding indebtedness under the Credit Facility to be due and
payable. Pursuant to the cross default provisions contained in the indenture
governing the Company's $135 million Senior Notes, upon written notice by
Christiania to the Company of the acceleration of the Credit Facility, the
Senior Notes would become due and payable upon such event.
In addition, the present terms of the Credit Facility provide that
commencing on October 31, 1999, and continuing until its stated maturity, the
maximum amount available for borrowings and letters of credit under the
Credit Facility will be adjusted (increased or decreased, as applicable) by
the semi-annual borrowing base determination, and the borrowing base also
will be decreased by monthly mandatory reductions in the borrowing base of
$1.5 million per month and adjusted for significant sales of collateral.
SENIOR NOTES
The indenture governing the Senior Notes (the "Indenture") contains
certain covenants that, among other things, limit the ability of the Company
to incur additional indebtedness, pay dividends, repurchase equity interests
or make other Restricted Payments (as defined in the Indenture), create
liens, enter into transactions with affiliates, sell assets or enter into
certain mergers and consolidations. In the event of certain asset
dispositions, the Company is required under certain circumstances to use the
excess proceeds from such a disposition to offer to repurchase the Senior
Notes (and other Senior Indebtedness for which an offer to repurchase is
required to be concurrently made) having an aggregate principal amount equal
to the excess proceeds at a purchase price equal to 100% of the principal
amount of the New Notes, together with accrued and unpaid interest and
Liquidated Damages (as defined in the Indenture), if any, to the date of
repurchase (a "Net Proceeds Offer"). Pursuant to the cross default provisions
contained in the indenture governing the $135 million Senior Notes, upon
written notice by Christiania to the Company of the acceleration of the
Credit Facility resulting from an event of default, if uncured, the Senior
Notes would become due and payable.
HEDGING ACTIVITIES
In an effort to achieve more predictable revenues and reduce the
effects of volatility of the price of oil and natural gas on the Company's
operations, the Company has hedged in the past, and in the future expects to
hedge oil and natural gas prices through the use of swap contracts, put options
and costless collars. While the use of these hedging arrangements limits the
downside-risk of adverse price movements, it also limits future gains from
favorable movements. The Company accounts for these transactions as hedging
activities and, accordingly, gains and losses are included in oil and natural
gas revenues in the periods in which the related production occurs. The Company
does not engage in hedging arrangements in which the production amounts are in
excess of the Company's actual production.
The fair value of the put option and costless collars at March 31, 1999
was approximately $1.1 million. All prices are relative to the Houston Ship
Channel Index.
CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD LOOKING STATEMENTS
Item 2. "Management's Discussion and Analysis of Financial Condition
and Results of Operations" of this Quarterly Report on Form 10-Q contains
projections and other forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. These statements can be
identified by the use of forward-looking terminology, such as "believes,"
"expects," "may," "should" or "anticipates" or the negative thereof or
comparable terminology, or by discussions of strategy that involve risks and
uncertainties. In addition, all statements other than statements of
historical facts included in this Quarterly Report, including, without
limitation, statements regarding the Company's business strategy, achievement
of the Company's drilling and development program objectives, amendment of
the Company's credit facilities, availability of additional sources of
capital funding, future governmental regulation, oil and natural gas
reserves, future drilling and development opportunities and operations,
future acquisitions, future production of oil and natural gas (and the prices
thereof and the costs therefor), anticipated results of hedging activities,
the need for additional capital, future capital expenditures, Year 2000
compliance issues, and future net cash
10
<PAGE>
flows, are forward-looking statements and may contain certain information
concerning financial results, economic conditions, trends and known
uncertainties. Such statements reflect the Company's current views with
respect to future events and financial performance, and involve risks and
uncertainties. Actual results could differ materially from those projected in
the forward-looking statements as a result of these various risks and
uncertainties, including, without limitation, (i) factors such as natural gas
price fluctuations and markets, uncertainties of estimates of reserves and
future net revenues, competition in the oil and natural gas industry, risks
associated with oil and natural gas operations, risks associated with future
acquisitions, risks associated with the Company's future capital requirements
and the availability of sources of capital and regulatory and environmental
risks, (ii) adverse changes to the properties and leases acquired in 1998 or
the failure of the Company to achieve the anticipated benefits of such
acquisitions, (iii) the extent of "Year 2000" compliance by the Company's
suppliers and customers and the Company's information and embedded
technologies, and (iv) adverse changes in the market for the Company's oil
and natural gas production, and (v) risks associated with the Company's
substantial leverage, including risks that additional capital and cash flow
from operations will be insufficient to cover future interest payments. For a
more detailed description of these and certain other risks associated with
the Company's operations, see "Risk Factors" in the 1998 Form 10-K.
YEAR 2000 COMPLIANCE
Many computer systems have been designed using software that processes
transactions using two digits to represent the year. This type of software will
generally require modifications to function properly with dates after December
31, 1999. The same issue applies to microprocessors embedded in machinery and
equipment, such as gas compressors and pipeline meters. The impact of failing to
identify and correct this problem could be significant to the Company's ability
to operate and report results, as well as potentially exposing the Company to
third party liability.
The Company has begun making necessary modifications to its internal
information computer systems in preparation for the Year 2000. The Company
currently estimates that its Year 2000 project will be completed by September
1999, and believes that the total related costs will be approximately $30,000,
funded by cash from operations or short term borrowings. Actual costs to date
have been less than $10,000.
The Company began reviewing the Year 2000 compliance status of field
equipment, including compressor stations, gas control systems and data logging
equipment, during the fourth quarter of 1998 and expects to complete this review
by June 1999.
The Company has identified significant third parties whose Year 2000
compliance could affect the Company and is in the process of formally inquiring
about their Year 2000 status. The Company has received responses from
approximately 50% of its inquiries. Despite its efforts to assure that such
third parties are Year 2000 compliant, the Company cannot provide assurance that
all significant third parties will achieve compliance in a timely manner. A
third party's failure to achieve Year 2000 compliance could have a material
adverse effect on the Company's operations and cash flow. The potential effect
of Year 2000 on-compliance by third parties is currently unknown.
Project costs and the timetable for Year 2000 compliance are based on
management's best estimates. In developing these estimates, assumptions were
made regarding future events including, among other things, the availability of
certain resources and the continued cooperation of the Company's customers and
suppliers. Actual costs and timing may differ from management's estimates due to
unexpected difficulties in obtaining trained personnel, locating and correcting
relevant computer code and other factors. Management does not expect the costs
of the Company's Year 2000 project to have a material adverse effect on the
Company's financial position, results of operations or cash flows. Presently,
based on information available, the Company cannot conclude that any failure of
the Company or third parties to achieve Year 2000 compliance will not adversely
effect the Company.
The Company has designated personnel responsible to not only identify
and respond to these issues, but also to develop a contingency plan in the event
that a problem arises after the turn of the century. The Company is currently
identifying appropriate contingency plans in the event of potential problems
resulting from failure of the Company's or significant third party computer
systems on January 1, 2000. The Company has not completed any continency plans
to date. Specific contingency plans will be developed in response to the results
of testing
11
<PAGE>
scheduled to be complete by October 1999, as well as the assessed probability
and risk of system or equipment failure. These contingency plans may include
installing backup computer systems or equipment, temporarily replacing
systems or equipment with manual processes, and identifying alternative
suppliers, service companies and purchasers. The Company expects these plans
to be complete by December 1999.
EFFECTS OF INFLATION AND CHANGES IN PRICE
The Company's results of operations and cash flows are affected by
changes in oil and natural gas prices. If the price of oil and natural gas
increases (decreases), there could be a corresponding increase (decrease) in the
operating costs that the Company is required to bear for operations, as well as
an increase (decrease) in revenues. Inflation has had only a minimal effect on
the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
HEDGING ACTIVITIES
There have been no material changes regarding market risk and the Company's
derivative instruments during the first quarter of 1999. Accordingly, no
additional disclosures have been provided in accordance with Regulation S-K,
Item 305(c).
12
<PAGE>
PART II - OTHER INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
Item 1. Legal Proceedings......................................................... Not Applicable
Item 2. Changes in Securities and Use of Proceeds................................. Not Applicable
Item 3. Defaults upon Senior Securities........................................... Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders....................... Not Applicable
Item 5. Other Information......................................................... Not Applicable
Item 6. Exhibits and Reports on Form 8-K.......................................... Not Applicable
(A) EXHIBITS. The following exhibits are filed as part of this report:
EXHIBIT NO.
27.1* Financial Data Schedule.
* Filed herewith
(B) Reports on Form 8-K during the quarter ended March 31, 1999.......... None
</TABLE>
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
MICHAEL PETROLEUM CORPORATION
(REGISTRANT)
<TABLE>
<CAPTION>
<S> <C>
Date May 17, 1999 By /s/ Glenn D. Hart
----------------------------------------
Glenn D. Hart
Chief Executive Officer and Chairman
of the Board
Date May 17, 1999 By /s/ Michael G. Farmar
----------------------------------------
Michael G. Farmar
President and Chief Operating Officer
Date May 17, 1999 By /s/ Robert L. Swanson
----------------------------------------
Robert L. Swanson
Vice President, Finance
Date May 17, 1999 By /s/ Scott R. Sampsell
----------------------------------------
Scott R. Sampsell
Vice President, Controller and Treasurer
</TABLE>
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 8,183
<SECURITIES> 0
<RECEIVABLES> 7,844
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,718
<PP&E> 166,818
<DEPRECIATION> (28,619)
<TOTAL-ASSETS> 162,050
<CURRENT-LIABILITIES> 42,754
<BONDS> 156,049
0
0
<COMMON> 1
<OTHER-SE> (13,595)
<TOTAL-LIABILITY-AND-EQUITY> 162,050
<SALES> 0
<TOTAL-REVENUES> 7,019
<CGS> 0
<TOTAL-COSTS> 5,533
<OTHER-EXPENSES> (73)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,997
<INCOME-PRETAX> (2,438)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,438)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,436)
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
