UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number0-9965
QUESTA OIL & GAS CO.
(Exact name of registrant as specified in its charter)
COLORADO 84-0846588
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
7030 South Yale
Suite 700
Tulsa, Oklahoma 74136-5718
(Address of principal executive offices)
Registrant's telephone number, including area code: (918) 494-6055
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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 o file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
As of November 1,1998, the Company had 1,919,696 shares of Common. Stock issued
and outstanding.
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QUESTA OIL & GAS CO.
Contents
Page
Part I - Financial Information
Consolidated balance sheets at September 30, 1998
and December 31, 1997 ........................... 3
Consolidated statements of operations for the nine
months ended September 30, 1998 and 1997 ......... 4
Consolidated statements of cash flow for
the nine months ended September 30, 1998 and 1997 5
Consolidated notes to financial statements ....... 6
Management's discussion and analysis of
financial condition and results of operations..... 6
Part II - Other Information ............................... 7
Signature page ................................... 8
2
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Part I Financial Information
QUESTA OIL & GAS CO.
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997
September 30,
1998 DECEMBER 31,
(UNAUDITED) 1997
ASSETS
Current Assets:
Cash and cash equivalents $ 226,538 $ 490,388
Accounts receivable - Trade 158,516 167,922
- Other 73,936 17,285
- Oil & Gas Sales 239,000 302,097
Notes Receivable 0 0
Inventory 9,658 16,793
Prepaid expenses and other assets 2,407 3,495
Total Current Assets 710,055 997,980
Property and equipment, at cost:
Oil and gas properties, successful efforts:
Unproved properties 154,016 190,326
Proved properties 14,495,925 13,045,317
Furniture, fixture and automobiles 149,260 149,260
14,799,201 13,384,903
Less accumulated depletion and depreciation (5,869,162) (4,956,893)
Net Property and Equipment 8,930,039 8,428,010
TOTAL ASSETS $9,640,094 $9,425,990
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Long-term debt due within one year $ 300,000 $ 300,000
Accounts Payable - Trade 207,897 230,765
Accounts Payable - Related Parties 0 20,854
Accounts Payable - Oil & Gas 275,568 218,066
Short Term Loans Payable 8,504 8,504
Other Current Liabilities 66,122 103,328
Advances From Drilling Partners 0 13,513
Total Current Liabilities 858,091 895,030
Other Long-term Liabilities $ 66,644 $ 84,137
Long-term debt due after one year $1,147,583 $1,379,963
Deferred income tax $1,150,000 $1,015,000
Stockholders' equity:
Common stock, $.01 par value;
Authorized 50,000,000 shares;
Issued 1,358,328 shares 13,583 13,583
Additional paid-in capital 1,098,050 1,098,050
Accumulated earnings 5,892,548 5,892,548
Current earnings 424,137 0
Treasury stock at cost, 796,960 shares at
September 30,1998 and 783,672 shares at
December 31,1997 (1,010,542) (952,321)
Total Stockholders' Equity 6,417,776 6,051,860
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $9,640,094 $9,425,990
See accompanying notes to financial statements.
3
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Part I Financial Information
QUESTA OIL & GAS CO.
Consolidated Statement of Operations
(UNAUDITED)
THREE THREE NINE NINE
MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
REVENUES:
Oil and gas sales $ 893,055 $ 909,282 $2,727,668 $2,995,444
Management fees 14,400 14,400 43,200 43,200
Administrative charges 80,704 70,965 229,225 207,830
988,159 994,647 3,000,093 3,246,474
OPERATING COSTS AND EXPENSES:
Lease operating expenses 251,597 237,410 764,359 722,082
Dry Hole & geological costs 58,346 33,713 110,921 69,450
Depletion, depreciation,
and amortization 289,140 310,877 904,937 983,328
General & administrative 216,025 160,020 591,430 541,292
815,108 742,020 2,371,647 2,316,152
Income From Operations $ 173,051 $ 252,627 $ 628,446 $ 930,322
OTHER INCOME (EXPENSES):
Dividends $ 0 $ 0 $ 0 $ 0
Interest income 2,923 14,768 14,336 44,819
Interest expense (32,389) (40,063) (103,181) (120,188)
Gain (loss) on sale of
oil & gas properties (2,000) 0 29,536 0
(31,466) (25,295) (59,309) (75,369)
Income before income taxes and
unusual item $ 141,585 $ 227,332 $ 569,137 $ 854,953
Unusual item 0 40,000 0 40,000
Income before income taxes $ 141,585 $ 267,332 $ 569,137 $ 894,953
Provision for income taxes:
Current 0 0 (10,000) 0
Deferred (35,000) (68,000) (135,000) (220,000)
NET INCOME $ 106,585 $ 199,332 $ 424,137 $ 674,953
EARNINGS PER COMMON SHARE:
Net income per common
share and common equivalent
PRIMARY $ .05 $ .10 $ .22 $ .34
FULLY DILUTED$ .05 $ .10 $ .22 $ .34
Weighted average number of common shares
and common share equivalent outstanding:
PRIMARY 1,944,888 1,969,192 1,944,888 1,968,278
FULLY DILUTED1,944,888 1,969,192 1,944,888 1,968,278
See accompanying notes to financial statements
4
<PAGE>
Part I Financial Information
QUESTA OIL & GAS CO.
Consolidated Statement of Cash Flows
(Unaudited)
FOR THE NINE MONTHS ENDED
Sept. 30, Sept. 30,
1998 1997
Cash Flows From Operating Activities:
Operations:
Net Income (Loss) $ 424,137 $ 674,953
Plus Adjustments to Reconcile Net Income
(Loss) to Net Cash Flows From Operating Activities:
Gain (Loss) on Sale of Assets 0 0
Depreciation,Depletion and Amortization 904,937 983,328
Dry Hole and Exploration 110,921 69,450
Provision for Deferred Income Taxes 135,000 220,000
Changes In Operating Assets and Liabilities:
Accounts Receivable 15,852 122,155
Notes Receivable 0 100,000
Equipment Inventory 7,135 (405)
Other Current Assets 1,088 (1,871)
Accounts Payable and Accrued Expenses (23,426) (275,210)
Advances from Drilling Partners (13,513) (33,832)
Net Cash Provided By Operating Activities 1,562,131 1,858,568
Cash Flows From Investing Activities:
Purchase of Property and Equipment:
Oil and Gas Properties (1,535,380) (1,948,908)
Furniture, Fixtures & Automobiles 0 (10,270)
Net Cash Used In Investing Activities (1,535,380) (1,959,178)
Cash Flows From Financing Activities:
Proceeds From Borrowing 0 0
Payment of Debt (232,380) (209,930)
Purchase of Treasury Stock (58,221) (39,412)
Net Cash (Used In) Provided By Financing Activities (290,601) (249,342)
Net Increase (Decrease) In Cash And Cash Equivalent (263,850) (349,952)
Cash and Cash Equivalents, Beginning of Year 490,388 1,027,793
Cash and Cash Equivalent, End of Period $ 226,538 $ 677,841
5
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Part I Financial Information
QUESTA OIL & GAS CO.
Notes to Consolidated Financial Statements
(Unaudited)
(1) Basis of Preparation and Presentation
In the opinion of the Company, the accompanying unaudited financial
statements contain all adjustments necessary to present fairly the financial
position of Questa Oil & Gas Co. as of September 30, 1998 and the results of
their operations for the three and nine month periods ended September 30, 1998
and 1997 and cash flows for the nine months ended September 30, 1998 and 1997.
Results for the three and nine months ended September 30, 1998 are not
necessarily indicative of the results to be realized during the full year. The
accompanying unaudited financial statements have been prepared in accordance
with the instructions to Form 10-Q and do not include all of the information
and foot notes required by generally accepted accounting principles for
complete financial statements.These statements should be read in conjunction
with the Questa Oil & Gas Co. financial statements and notes thereto as of
December 31, 1997, which are included in the Company's annual report and Form
10-K.
(2) Note Payable
The Company has a line of credit and a term loan with a local bank.The
aggregate borrowing of the loans are $3,100,000. The term loan was $2,100,000
with quarterly installments of $75,000 plus accrued interest with the final
payment due September 30, 1999. The line of credit is $1,000,000 with interest
of one quarter of one percent on the amount not used. For the first nine months
of 1998 the interest rate on both the line and the term loan was at New York
prime, 8.5%, interest on the term loan as of November 1, 1998 is 8%. As of
September 30, 1998, the outstanding principal amount of the term loan was
$1,425,000 and zero on the line of credit. Loans are secured by certain of the
Company's interests in oil and gas properties. The Company is not required by
the loan agreement to maintain a certain balance in our demand accounts with the
bank. The Company also has two automobile loans with the bank. The loans are for
60 months, 7.5% and 7.75% rates, with final payment due September, 2002.
QUESTA OIL & GAS CO.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 1998
Liquidity and Capital Resources
At September 30, 1998, the Company had current assets of $710,000
compared to current liabilities of approximately $858,000 resulting in negative
working capital of $148,000. As of September 30, 1998 the total outstanding
bank loan balance was $1,425,000 compared to $1,650,000 as of December 31, 1997.
The Company is in a positive position to participate in new acquisitions and
offset drilling through its fourth quarter negotiation, with its local bank,of
the term loan balance from $1,425,000 to $2,500,000.This additional $1,075,000,
the current line of credit of $1,000,000 and cash flows from operations puts
the Company in a very positive position for future drilling and acquisitions.
Working capital will continue to fluctuate during the year as the Company wells
are drilled, completed and connected to a sales outlet.
Average oil and natural gas prices received during the first nine
months of 1998 were considerably lower than during the same period in 1997.
6
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The average oil price received by the Company during the first nine months of
1998 was $13.12 per barrel which was a $6.13 per barrel decrease when compared
to 1997. Average natural gas prices decreased to $2.19 per MCF, a $.37 per MCF
decrease when compared to 1997. Oil prices within the industry remain largely
dependent upon world markets for crude oil. Prices for natural gas are
influenced by weather conditions and supply imbalances. Natural gas comprises
approximately 83 percent of the Company's revenues. A large drop in the natural
gas prices will have a significant effect on the earning potential of the
Company. Such decreases, if sustained, will adversely effect the Company's cash
flow in future quarters.
During the first nine months of 1998 the Company participated in the
drilling of fourteen wells; five dry holes and nine producing gas wells. The
Company's working interest in the fourteen wells range from 6% to 97% with the
Company acting as operator on four of the wells and an outside joint owner in
the other ten wells. The new wells drilled and on line in 1998 are providing
the Company an additional net cash flow of $26,000 monthly.
Expenditures for drilling during the three quarters ending September
30, 1998 was $750,000. The Company purchased additional units in four of the
drilling partnerships managed by the Company. The Company spent $181,500 in
acquiring the final 15% to 27% in three of the partnerships, and these
partnerships will be closed out this year. Questa will continue to manage, as
General Partner, five limited partnerships.
In the fourth quarter of 1998 the Company is participating in the
drilling of three new wells in West Texas with estimated drilling and
completion costs of $221,000 and one well in Harper County, Oklahoma with
estimated costs of $89,000.
The Company currently anticipates that its information system and
equipment will be Year 2000 compliant by the end of the second quarter of 1999
and that the associated costs will not have a material adverse effect on the
Company's financial condition. The Company cannot currently determine the
impact third parties will have on the Company's Year 2000 exposure, but intends
to continue to evaluate its Year 2000 compliance.
In the fourth quarter of 1998, the Company's Board of Directors
authorized the Company to purchase up to 30,000 shares of its outstanding
common stock on the open market. The Company will periodically make these
purchases, based upon terms determined by management. If the maximum number of
shares are purchased, it will represent four (4) percent of the public float of
Questa's common stock.
Results of Operations
1997 to 1998
Oil and gas sales during the three quarters ending September 30, 1998
decreased from $2,995,000 to $2,728,000 over the comparable period last year as
the result of lower oil and gas prices (oil prices have dropped 32% and gas
prices dropped 14%).
The lease operating expenses for the three quarters increased from
$722,000 to $764,000 over the same period last year. This increase is the
result of the increase in the number of producing wells and workovers of
existing wells. Dry hole expense increased $41,000 in 1998. Decreases in
depletion, depreciation, and amortization from $983,000 to $905,000 are due to
the drop in oil and gas prices. Changes in the Company's general and
administrative expenses was due to salary increases, expenses associated with
two shareholder meetings, and the hiring of a contract exploration analyst.
Interest income decreased due to smaller cash balances in the bank
accounts. Interest expenses decreased due to the lower principal balance on the
term loan. Miscellaneous income comes from the settlement of outstanding
7
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payables and other non oil and gas related items. The Company's $40,000 unusual
item in 1997 was a payment from a factoring company note that was written off
in a previous period.
Net income for the first nine month period decreased from a $675,000
profit to a $424,000 profit, due to the decreases in the Company's oil and gas
prices, increases in dry hole expenses and increases in lease operating
expenses.
Part II Other Information
Item 1 - Not Applicable.
Item 2 - Not Applicable.
Items 3 through 5 - Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - None
(b) No reports on Form 8-K have been filed during the
quarter for which this report is filed.
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.
QUESTA OIL & GAS CO.
Date November 13, 1998 /s/ Alan W. Meeks
Alan W. Meeks, President
Chief Operating Officer
Date November 13, 1998 /s/ Donald A. Towner
Donald A. Towner, Vice President
Chief Financial Officer
8
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from
the Financial Statements of Questa Oil & Gas Co. under cover of Form 10-Q
for the nine months ended September 30, 1998 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000352511
<NAME> Questa Oil & Gas Co.
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<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
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