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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NO. 1-12334
FORTUNE PETROLEUM CORPORATION
Doing business in Texas and Louisiana as
FORTUNE NATURAL RESOURCES CORPORATION
(Exact Name of Registrant as specified in its charter)
Delaware 95-4114732
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Commerce Green, 515 W. Greens Rd.,
Suite 720, Houston, Texas 77067
(Address of Principal Executive Offices) (Zip Code)
281-872-1170
-------------------------
Issuer's telephone number
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 corporate issuers:
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
12,123,917 as of April 30, 1997
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<TABLE>
<CAPTION>
FORTUNE PETROLEUM CORPORATION
BALANCE SHEETS
ASSETS
March 31, December 31,
1997 1996
------------ ------------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ..................................... $ 1,753,000 $ 2,174,000
Accounts receivable ........................................... 553,000 695,000
Prepaid expenses .............................................. 7,000 25,000
------------ ------------
Total Current Assets ...................................... 2,313,000 2,894,000
------------ ------------
PROPERTY AND EQUIPMENT:
Oil and gas properties, accounted for
using the full cost method .................................. 23,775,000 23,079,000
Automotive, office and other .................................. 387,000 375,000
------------ ------------
24,162,000
23,454,000
Less--accumulated depletion, depreciation and amortization .... (13,229,000) (12,545,000)
------------ ------------
10,933,000 10,909,000
OTHER ASSETS:
Materials, supplies and other ................................. 122,000 188,000
Bond issuance costs (net of accumulated
amortization of $266,000 and $238,000 at March 31, 1997
and December 31, 1996, respectively) ........................ 23,000 51,000
Restricted cash ............................................... 2,238,000 2,293,000
------------ ------------
2,383,000 2,532,000
TOTAL ASSETS ...................................................... $ 15,629,000 $ 16,335,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
1997 1996
------------ ------------
CURRENT LIABILITIES:
Current portion of long term debt ............................. $ 2,034,000 $ 2,253,000
Accounts payable .............................................. 58,000 84,000
Accrued expenses .............................................. 180,000 77,000
Royalties and working interests payable ....................... 50,000 103,000
Accrued interest .............................................. 35,000 101,000
------------ ------------
Total Current Liabilities ................................. 2,357,000 2,618,000
------------ ------------
LONG-TERM DEBT, net of current portion ........................... -- 680,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value:
Authorized--2,000,000 shares
Issued and outstanding--None .............................. -- --
Common stock, $.01 par value :
Authorized--40,000,000 shares
Issued and outstanding 12,123,918 and
11,853,663 at March 31, 1997 and
December 31, 1996, respectively ........................... 121,000 119,000
Capital in excess of par value ................................ 30,269,000 29,273,000
Accumulated deficit ........................................... (17,118,000) (16,355,000)
------------ ------------
NET STOCKHOLDERS' EQUITY .......................................... 13,272,000 13,037,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................ $ 15,629,000 $ 16,335,000
============ ============
</TABLE>
See accompanying notes to financial statements.
2
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<TABLE>
<CAPTION>
FORTUNE PETROLEUM CORPORATION
STATEMENTS OF OPERATIONS
For the Three Months Ended
----------------------------
March 31, March 31,
1997 1996*
------------ ------------
(Unaudited)
<S> <C> <C>
REVENUES
Sales of oil and gas, net of royalties ............... $ 1,113,000 $ 1,225,000
Other income ......................................... 52,000 65,000
------------ ------------
1,165,000 1,290,000
COSTS AND EXPENSES
Production and operating ............................. 193,000 285,000
Provision for depletion, depreciation and amortization 484,000 432,000
Impairment to oil and gas properties ................. 200,000 --
General and administrative ........................... 553,000 526,000
Office relocation and severance ...................... -- 105,000
Debt conversion expense .............................. 316,000 --
Stock offering cost .................................. 114,000 --
Interest ............................................. 68,000 120,000
------------ ------------
1,928,000 1,468,000
LOSS BEFORE PROVISION FOR INCOME TAXES ................... (763,000) (178,000)
PROVISION FOR INCOME TAXES ............................... -- --
NET LOSS ................................................. $ (763,000) $ (178,000)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING .............................. 11,974,443 11,168,624
============ ============
NET LOSS PER COMMON SHARE ................................ $ (0.06) $ (0.02)
============ ============
</TABLE>
*Restated
See accompanying notes to financial statements.
3
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<TABLE>
<CAPTION>
FORTUNE PETROLEUM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE THREE MONTHS ENDED MARCH 31, 1997
Common Stock Capital in
----------------------- Excess of Accumulated
Shares Amount Par Value Deficit Net
---------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1996*......... 11,139,709 $ 111,000 $27,228,000 $(15,025,000) $12,314,000
Common stock issued for
exercise of stock options...... 46,150 1,000 114,000 - 115,000
Common stock issued for
exercise of warrants........... 255,638 3,000 813,000 - 816,000
Common stock issued for
directors' fees................ 1,395 - 4,000 - 4,000
Common stock canceled and
stock issuance cost............ (1,227) - (31,000) - (31,000)
Common stock issued for
stock offerings................ 412,000 4,000 1,145,000 - 1,149,000
Common stock returned to treasury. (2) - - - -
Net loss.......................... - - - (1,330,000) (1,330,000)
---------- ---------- ----------- ------------ -----------
BALANCE, December 31, 1996........ 11,853,663 $ 119,000 $29,273,000 $(16,355,000) $13,037,000
---------- ---------- ----------- ------------ -----------
Common stock issued for
exercise of stock options...... 6,400 - 18,000 - 18,000
Common stock issued for
exercise of warrants........... 45,000 - 89,000 - 89,000
Common stock issued in exchange
for debentures, net of
offering costs 218,858 2,000 889,000 - 891,000
Common stock returned to treasury. (3) - - - -
Net loss.......................... - - - (763,000) (763,000)
---------- ---------- ----------- ------------ -----------
BALANCE, March 31, 1997 (unaudited) 12,123,918 $ 121,000 $30,269,000 $(17,118,000) $13,272,000
========== ========== =========== ============ ===========
</TABLE>
*Restated
See accompanying notes to financial statements.
4
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<TABLE>
<CAPTION>
FORTUNE PETROLEUM CORPORATION
STATEMENTS OF CASH FLOWS
For the Three Months Ended
--------------------------
March 31, March 31,
1997 1996*
----------- -----------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................... $ (763,000) $ (178,000)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Common stock issued for directors' fees .................. -- 5,000
Depletion, depreciation and amortization ................. 484,000 432,000
Non-cash compensation expense ............................ 5,000 --
Amortization of deferred financing cost .................. 14,000 19,000
Impairment of oil and gas assets ......................... 200,000 --
Debt conversion expense .................................. 316,000 --
Stock offering cost ...................................... 114,000 --
Changes in assets and liabilities:
Accounts receivable ...................................... 142,000 (55,000)
Prepaids ................................................. 18,000 64,000
Accounts payable and accrued expenses .................... 78,000 86,000
Royalties and working interest payable ................... (53,000) (42,000)
Accrued interest ......................................... (66,000) (64,000)
----------- -----------
Net cash provided by operating activities .................... 489,000 267,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for oil and gas properties ...................... (899,000) (619,000)
Restricted cash used ......................................... 55,000 246,000
Proceeds from sale of properties and equipment ............... 203,000 1,621,000
Expenditures for other property and equipment and other assets (8,000)
-----------
(193,000)
Net cash provided by used in investing activities ............ (649,000) 1,055,000
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long term debt .................................. (225,000) (1,304,000)
Proceeds from issuance of common stock ....................... 103,000 71,000
Expenditures for debenture exchange and stock offering ....... (139,000) (27,000)
----------- -----------
Net cash used in financing activities ........................ (261,000) (1,260,000)
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ........................................... (421,000) 62,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................... 2,174,000 1,888,000
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ......................... $ 1,753,000 $ 1,950,000
=========== ===========
Supplemental information:
Interest paid in cash ........................................ $ 54,000 $ 102,000
Non-cash transactions
Common stock issued or issuable as directors' fees ........... -- 5,000
Common stock issued for conversion of debt ................... 975,000 --
</TABLE>
*Restated
See accompanying notes to financial statements
5
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FORTUNE PETROLEUM CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS
March 31, 1997
(1) LINE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES AND PROCEDURES
The condensed financial statements at March 31, 1997, and for the three
months then ended included herein have been prepared by the Company, without
audit, pursuant to the Rules and Regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such Rules and
Regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These condensed financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Company's latest annual report on Form 10-K/A.
Certain reclassifications have been made to prior period amounts to conform to
presentation in the current period. In the opinion of the Company, the financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position of Fortune
Petroleum Corporation as of March 31, 1997 and December 31, 1996, the results of
its operations for the three months ended March 31, 1997 and March 31, 1996, and
cash flows for the three months ended March 31, 1997 and March 31, 1996. The
results of the operations for such interim periods are not necessarily
indicative of the results for the full year.
In the fourth quarter of 1996, the Company changed its method of
accounting for oil and gas operations from the successful efforts to the full
cost method. All prior year financial statements presented herein have been
restated to reflect the change.
(2) LONG TERM DEBT
At March 31, 1997, a summary of long-term debt is as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- -----------
<S> <C> <C>
Convertible Subordinated Debentures of $1,725,000
(net of discount of $19,000 and $57,000) due
December 31, 1997, including interest of 10-1/2%
per annum paid semi-annually......................... $ 1,009,000 $ 1,683,000
Bank One credit facility due October 1, 1997 including
interest at 1-1/2% over Bank One, Texas, NA's
prime rate payable monthly........................... 1,025,000 1,250,000
----------- -----------
Total long-term debt................................... 2,034,000 2,933,000
Less current installments.............................. 2,034,000 2,253,000
----------- -----------
Long-term debt, excluding current installments......... $ - $ 680,000
=========== ===========
</TABLE>
The 10-1/2% Convertible Subordinated Debentures due December 31, 1997 bear
an effective interest rate of 12.13% and are convertible into shares of the
Company's Common Stock, at a conversion price of $6.32 per share or 158 shares
per Debenture. On, February 26, 1997, the Company closed an Exchange Offer for
these Debentures which resulted in $697,000 ($680,000 net of discount) principal
amount of Debentures being converted to 218,858 shares of Common Stock. The
Company also issued 174,250 Common Stock Warrants to the Debentureholders who
exchanged their Debentures in connection with the Exchange Offer. The Common
Stock Warrants are exercisable for a period of three years, one-half at $4.00
per share and one-half at $5.00 per share. Subsequent to the conversion, the
remaining balance due on the Debentures at December 31, 1997 is $1,028,000.
Furthermore,
6
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the Company recorded a non-cash debt conversion expense of $316,000
during the first quarter of 1997. The non-cash debt conversion expense
represents the difference between the fair market value of all of the Common
Stock and Common Stock Warrants issued in connection with the Exchange Offer and
the fair market value of the lower number of Common Stock that could have been
issued upon the conversion of the Debentures under the Indenture prior to the
Exchange Offer. For purposes of calculating the non-cash debt conversion
expense, the Company valued the 218,858 shares of Common Stock issued in
connection with the Exchange Offer at $547,502 ($2.625 per share) based on the
closing price of the Common Stock on the American Stock Exchange on February 26,
1997. The Company estimated the value of the Common Stock Warrants issued to the
Debentureholders at $8,713 ($0.05 per warrant). As of December 31, 1996, the
Company classified, as long term liabilities, the portion, net of discount, of
the Debentures that were converted to Common Stock in the Exchange Offer.
The amount the Company may borrow under the Bank One, Texas, N.A. (the
Bank) credit facility is determined by the borrowing base as calculated by the
Bank semi-annually on the basis of the Company's oil and gas reserves. The
credit facility contains various financial covenants, is secured by all of the
Company's oil and gas producing properties and currently requires monthly
principal payments of $75,000. The Company is not able to borrow additional
amounts under the credit facility because the Bank has set the borrowing base
equal to the loan balance, which declines by $75,000 per month. At May 9, 1997,
the remaining balance owed on the credit facility was $875,000.
All of the Company's outstanding debt is due in 1997.
(3) INCOME TAX EXPENSE
No provision for income taxes was required for the three months ended
March 31, 1997.
At March 31, 1997, the Company estimates it had cumulative net operating
loss carryforwards for federal income tax purposes of $13.2 million which are
significantly restricted under IRC Section 382. These carryforwards are
available to offset future federal taxable income, if any, with various
expirations through 2010. The Company is uncertain as to the recoverability of
the above deferred tax assets and has therefore applied a 100% valuation
allowance.
The Company has available IRC Section 29 Tax Credits that may be used to
reduce or eliminate any corporate taxable income in future years. It is
uncertain at this time to what extent the Company will be able to utilize these
federal tax credits, as their utilization is dependent upon the amount, if any,
of future federal income tax incurred, after application of the Company's net
operating loss carryforwards.
(4) LEGAL PROCEEDINGS
There are no pending material legal proceedings involving any of the
Company's properties or which involve a claim for damages which exceed 10% of
the Company's current assets.
On March 26, 1996, Fortune was served with a lawsuit which had been filed
in the Federal District Court in Delaware by one of the purchasers of Fortune
Common Stock in an offering in December 1995 under Regulation S. Under the terms
of the subscription agreement pursuant to which the plaintiff acquired his
shares, he was entitled to receive additional shares of Fortune stock if the
market price fell below a stated level during a specified period following the
40-day holding period prescribed by Regulation S. Fortune vigorously contested
this action, believing that plaintiff either participated in a scheme to
unlawfully manipulate the market price of the Common Stock or benefited from
such manipulation by others. On February 3, 1997, the plaintiff voluntarily
dismissed the complaint without prejudice, and the court ordered the return to
Fortune of shares of Common Stock which had been voluntarily placed in escrow by
Fortune. Management does not anticipate that the action will be refiled.
On April 16, 1996, Fortune was advised that similar suits had been filed
in Federal District Court in New York by two other buyers in the same offering.
Fortune responded to the suits, admitting that the stock price declined but
alleged that suspicious trading activity in Fortune stock occurred immediately
prior to and during the time period in which the additional-share allocation was
computed. Fortune believes that it has discovered evidence of active market
manipulation in the Common Stock by these plaintiffs; accordingly, it has
commenced a countersuit for damages suffered by the Company and its shareholders
as a result of these acts. Fortune intends to continue to vigorously defend the
remaining litigation.
7
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(5) COMPUTATION OF LOSS PER SHARE
Primary loss per common share is computed by dividing net loss by the
weighted average number of common and common equivalent shares outstanding.
Common equivalent shares are shares which may be issuable upon exercise of
outstanding stock options and warrants; however, they are not included in the
computation for the three month period ended March 31, 1997 since they would not
have a dilutive effect on earnings per share.
Fully diluted earnings per common share are not presented, since the
conversion of the Company's 10-1/2% Convertible Subordinated Debentures would
have an anti-dilutive effect.
(6) COMMITMENTS AND CONTINGENCIES
In July 1996, the Company received invoices from AMPOLEX (USA), Inc., the
current operator of the Company's New Mexico properties, billing Fortune for
$232,805 of outstanding accounts receivable attributable to two other working
interest owners in the properties which the operator failed to collect from such
owners. The Company reviewed this matter and determined that it does not owe any
portion of such amounts. AMPOLEX (USA), Inc. has notified the Company that it
concurs with the Company's position and will not pursue the matter further.
(7) IMPAIRMENT TO OIL AND GAS PROPERTIES
Had the Company used the oil and gas prices that it was receiving for its
production as of March 31, 1997 in its full cost ceiling test as of that date,
the Company would have recorded an impairment to oil and gas properties during
the first quarter of 1997 of approximately $450,000. Oil and gas prices have
risen since March 31, 1997, thereby reducing the amount on any impairment
expense. Accordingly, the Company recorded an impairment to oil and has
properties during the first quarter of 1997 of $200,000.
8
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FORTUNE PETROLEUM CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISONS OF OPERATING RESULTS FOR FIRST QUARTER OF 1997
TO THE FIRST QUARTER OF 1996.
During the first quarter of 1997, Fortune had a net loss of $763,000
compared to a net loss of $178,000 for the same 1996 period. The increase in
loss in 1997 is primarily attributable to the $316,000 non-cash debt conversion
expense incurred in connection with closing the Company's Exchange Offer on
February 26, 1997 and a $200,000 non-cash impairment to oil and gas properties.
Net revenues from sales of oil and gas decreased $112,000 (9%) in the
first quarter of 1997, compared to the same 1996 period. 1996 revenues were
higher because they included revenues from the Company's California properties
that were sold in February and March 1996 and a higher ownership interest in the
producing well at South Timbalier Block 76 in 1996. On March 8, 1996, the
Company sold 25% of its interest in the South Timbalier Block 76 well for
$940,000 pursuant to a preexisting arrangement. Furthermore, 1997 revenues were
adversely affected by shutting in the South Timbalier Block 76 well on March 24,
1997, for a workover. The workover has been completed and the well resumed
production on April 19, 1997. These production declines were partially offset by
significantly higher oil and gas prices in 1997. 1997 revenues were further
helped by the commencement of production at East Bayou Sorrel from permanent
production facilities in January 1997. Development drilling is currently
underway at this 1996 exploration discovery.
Natural gas prices on the Company's production averaged $3.04 per MCF for
the first quarter of 1997 as compared to $2.39 per MCF for the same 1996 period.
Oil prices averaged $20.84 per barrel for the first quarter of 1997 compared to
$16.32 per barrel for the same 1996 period.
Production and operating expenses decreased by $92,000 (32%) in the first
quarter of 1997 as compared to 1996. The decrease results primarily from the
Company's sale of its high operating cost California properties in early 1996.
In the first quarter of 1997, general and administrative expense increased
by $27,000 (5%) over 1996. 1997 general and administrative expense includes
$129,000 of attorney's fees incurred in connection with the litigation discussed
in note 4 to the financial statements regarding a Regulation S stock offering.
The Company incurred non-recurring office relocation and severance cost of
$105,000 in the first quarter of 1996 in connection with the Company's move to
Houston. In 1997, the Company expensed $114,000 of costs associated with a
public offering that the Company withdrew on April 25, 1997.
Interest expense decreased by $52,000 (43%) for the first quarter of 1997
over 1996 due to the lower debt balance. The Company's provision for depletion,
depreciation and amortization increased $52,000 (12%) in the first quarter of
1997 as compared to 1996 because of higher property costs and lower reserves in
1997. The Company incurred a $200,000 impairment to oil and gas properties in
the first quarter of 1997 as a result of lower oil and gas prices.
LIQUIDITY AND CAPITAL RESOURCES
Fortune's operating cash flow increased for the first quarter of 1997 to
$489,000 as compared to $267,000 for 1996. This increase in cash flow was a
result of lower production and operating expense and interest expense in 1997,
as discussed above. The Company's working capital, which is net of all of the
Company's outstanding debt, decreased to a deficit of $44,000 as compared to
working capital of $276,000 for December 31, 1996. One of the primary uses of
cash in the first quarter of 1997 was a $357,000 acquisition of an additional
interest in the East Bayou Sorrel producing field.
Fortune's internal liquidity and capital resources in the near term will
consist of working capital and cash flow from its oil and gas operations.
Because the borrowing base under the credit facility is currently set at the
outstanding debt balance, the Company is not able to borrow any additional
amounts at this time under its credit facility. The credit facility is due
October 1, 1997, at which date the loan balance would be $575,000 after payment
of the required monthly principal reductions. Prior to that date, the Company
expects its borrowing base will be
9
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sufficient to allow the Company to extend the term of its credit facility
or refinance its debt with another lender. The Company has not received a
commitment from the bank to extend the term of the credit facility and there can
be no assurance that the term will be extended or that the Company will be able
to obtain other financing to replace the credit facility. The Company's
remaining outstanding Debentures of $1,028,000 ($1,009,000 net of discount) is
due December 31, 1997. In the event that the Company is unable to refinance and
extend all of its outstanding debt, the Company believes it will be able to
raise, through an equity or debt offering, sufficient cash to pay off all of its
debt prior to the due dates.
Cash expenditures for oil and gas properties for the first quarter of 1997
were $899,000 as compared to $619,000 for 1996. The first quarter 1997
expenditures includes the above mentioned $357,000 acquisition of an additional
interest at East Bayou Sorrel. During the first quarter of 1997, the Company was
participating in the drilling of a development well at East Bayou Sorrel and an
exploratory well at South Lake Arthur. The development well is still in progress
as of the date hereof. Although the exploratory well may have encountered
hydrocarbons in a shallower zone, the well was temporarily abandoned when it was
determined that the deeper primary objective was faulted out. The working
interest owners in the well are evaluating whether to attempt a completion in
the shallower zone.
Fortune's net capital expenditures for 1997 are currently estimated to be
approximately $2.5 million for its exploration and development activities. The
Company intends to provide for these expenditures with its available cash and
its cash flow from operations. Should such funds not be available to the Company
as required for timely drilling, the Company can reduce its working interest
participation in the wells, farm-out additional interests or, with respect to
the Zydeco joint venture projects, put its interest back to Zydeco for an
overriding royalty and after-payout working interest. Should the Company's
working interest in exploration projects be reduced, the Company would not
derive as great a benefit in the event of an exploration success.
Conditions outside of the control of Fortune influence the price Fortune
receives for oil and gas. As of May 1, 1997, the Company was receiving
approximately $18.00 per barrel as an average price for its oil production and
$2.20 per MCF as an average price for its gas production.
In February 1997, the Financial Accounting Standards Board issued
Statement 128, "Earnings Per Share" (Statement 128). Statement 128 changes the
calculation and financial statement presentation of earnings per share.
Statement 128 will be effective for financial statements issued for periods
beginning after December 15, 1997 and requires the restatement of prior period
earnings per share amounts. The Company does not believe that the adoption of
Statement 128 will have an impact on the loss per share information presented
herein.
FORWARD LOOKING STATEMENTS
This Report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933. Forward looking statements
include statements regarding: future oil and gas production and prices, future
exploration and development spending, future drilling and operating plans,
reserve and production potential of the Company's properties and prospects and
the Company's strategy. Actual events or results could differ materially from
those discussed in the forward-looking statements as a result of various factors
including, without limitation, the factors set forth below and elsewhere in this
10-Q, and in the Company's annual report on Form 10-K/A.
EXPLORATION RISKS. The business of exploring for and, to a lesser extent,
of acquiring and developing oil and gas properties is an inherently speculative
activity that involves a high degree of business and financial risk. Although
available geological and geophysical information can provide information with
respect to a potential oil or gas property, it is impossible to determine
accurately the ultimate production potential, if any, of a particular property
or well.
DEPENDENCE ON LIMITED NUMBER OF WELLS. Over one-half of the Company's oil
and gas revenues, cash flow and proved oil and gas reserves is currently
accounted for by two wells, the South Timbalier Block 76 well and the East Bayou
Sorrel well. Although the East Bayou Sorrel well only began producing in
December 1996, this field is expected to have a significant impact on 1997
operations. The South Timbalier Block 76 well was recently shut-in for repairs
and was shut-in for over two months during 1996 as the result of a mechanical
failure. A significant curtailment or loss of production from either of these
wells for a prolonged period before the Company could replace the reserves
through new discoveries or acquisitions would have a material adverse effect on
the Company's projected operating results and financial condition in 1997.
10
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VOLATILITY OF OIL AND GAS PRICES. The Company's revenues, profitability
and future rate of growth are substantially dependent upon prevailing market
prices for natural gas and oil, which can be extremely volatile and in recent
years have been depressed by excess domestic and imported supplies.
UNCERTAINTY OF ESTIMATES OF PROVED RESERVES AND FUTURE NET REVENUES. There
are numerous uncertainties inherent in estimating quantities of proved reserves
and in projecting future rates of production and timing of development
expenditures, including many factors beyond the control of the producer.
Estimating quantities of proved reserves is inherently imprecise. Such estimates
are based upon certain assumptions about future production levels, future
natural gas and crude oil prices and future operating costs made using currently
available geologic engineering and economic data, some or all of which may prove
to be incorrect over time.
OPERATING AND WEATHER HAZARDS. The cost and timing of drilling, completing
and operating wells is often uncertain, and drilling operations may be
curtailed, delayed or canceled as a result of a variety of factors, including
unexpected drilling conditions, equipment failures, accidents, adverse weather
conditions, encountering unexpected formations or pressures in drilling and
completion operations, corrosive or hazardous substances, mechanical failure of
equipment, blowouts, cratering and fires, which could result in damage or injury
to, or destruction of, formations, producing facilities or other property or
could result in personal injuries, loss of life or pollution of the environment.
ADDITIONAL FACTORS. Additional factors that could cause actual events to
vary from those discussed above and elsewhere in this annual report include,
among others: loss of key company personnel; adverse change in governmental
regulation; inability to obtain critical supplies and equipment, personnel and
consultants; and inability to access capital to pursue the Company's plans.
11
<PAGE>
FORTUNE PETROLEUM CORPORATION
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit No. Description
----------- ----------------------------------------------------------
27.1* Financial Data Schedule
99.1 Notes to Financial Statements included in the
Registrant's Form 10-KSB filed for the fiscal year ended
December 31, 1995 incorporated herein by reference.
(B) REPORTS ON FORM 8-K / 8K-A
A report on Form 8-K dated January 24, 1997 was filed with the
Securities and Exchange Commission (the "Commission") to report the appointment
of a new director and a private placement of Common Stock.
A report on Form 8-K dated February 18, 1997 was filed with the
Commission to report the dismissal of certain litigation and the termination of
acquisition discussions on a proposed acquisition.
A report on Form 8-K dated March 24, 1997 was filed with the Commission
to report that the Company entered into the Espiritu Santo Bay 3D Seismic
Project joint venture and to report a workover on the Company's South Timbalier
Block 76 well.
A report on Form 8-K dated April 7, 1997 was filed with the Commission
to report that the source of the problem which resulted in the workover at South
Timbalier Block 76 had been determined and remedial work was underway.
A report on Form 8-K dated April 18, 1997 was filed with the Commission
to report the suspension of drilling on the South Lake Arthur exploratory well.
*Filed herewith.
12
<PAGE>
FORTUNE PETROLEUM CORPORATION
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.
FORTUNE PETROLEUM CORPORATION
By: /s/ TYRONE J. FAIRBANKS
-------------------------------------------
Tyrone J. Fairbanks
President and Chief Executive Officer
By: /s/ J. MICHAEL URBAN
-------------------------------------------
J. Michael Urban
Vice President and Chief Financial
and Accounting Officer
Date: May 14, 1997
13
<PAGE>
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