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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
Commission file number: 0-12633
TEXOIL, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
NEVADA 88-0177083
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
110 CYPRESS STATION DRIVE
SUITE 220
HOUSTON, TEXAS 77090
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(281) 537-9920
(ISSUER'S TELEPHONE NUMBER)
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: 6,659,956 shares of common
stock, $.01 par value, issued and outstanding at August 8, 2000.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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TEXOIL, INC.
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of June 30, 2000.................. 3
Consolidated Statements of Income for the three and six months
ended June 30, 2000 and 1999.................................. 4
Consolidated Statements of Cash Flows for the six months ended
June 30, 2000 and 1999........................................ 5
Notes to Consolidated Financial Statements...................... 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION...................................... 9
PART II. OTHER INFORMATION.......................................... 17
2
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TEXOIL, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JUNE 30,
2000
--------
Assets:
Current Assets:
Cash and cash equivalents ..................................... $ 1,365
Accounts receivable and other ................................. 8,491
Other current assets .......................................... 159
--------
Total current assets ..................................... 10,015
--------
Property, plant and equipment, at cost:
Oil and natural gas properties (full-cost method)
Evaluated properties ..................................... 69,471
Unevaluated properties ................................... 5,185
Office and other equipment ......................................... 818
--------
75,474
Less -- accumulated depletion, depreciation and amortization ...... (13,489)
--------
Net property, plant and equipment .................................. 61,985
--------
Other assets, net .................................................. 175
--------
Total assets ............................................. $ 72,175
========
Liabilities and Stockholders" Equity:
Current liabilities:
Accounts payable and accrued liabilities ...................... $ 4,397
Revenue royalties payable ..................................... 3,827
--------
Total current liabilities ................................ 8,224
--------
Long-term debt ..................................................... 19,000
Deferred tax liability ............................................. 3,696
Stockholders" equity:
Series A Preferred Stock -- 9% cumulative, $.01 par value and
liquidation preference of $8.00 per share, 10,000,000 shares
authorized; 2,822,734 issued and outstanding at June 30, 2000. 29
Common stock -- $.01 par value; 25,000,000 shares authorized;
6,659,956 shares issued and outstanding at June 30, 2000 ..... 68
Class B Common Stock -- $.01 par value, 10,000,000 shares
authorized and none issued and outstanding at June 30, 2000 .. --
Additional paid-in capital ......................................... 32,930
Retained earnings .................................................. 8,228
--------
Total stockholders' equity .................................... 41,255
--------
Total liabilities and stockholders' equity .................... $ 72,175
========
The accompanying notes are an integral part of these consolidated financial
statements.
3
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TEXOIL, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------------------- -------------------------
2000 1999 2000 1999
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales............... $ 11,334 $ 4,845 $ 21,948 $ 8,672
Operator and management fees.... 321 237 669 479
Interest and other.............. 52 8 107 12
----------- ---------- ----------- ----------
Total Revenues............. 11,707 5,090 22,724 9,163
----------- ---------- ----------- ----------
Costs and Expenses:
Lease operating................. 2,676 1,534 5,384 3,034
Workover........................ 103 44 106 46
Production taxes................ 1,094 338 2,193 612
General and administrative...... 583 449 1,130 896
Depletion, depreciation and
amortization.................. 1,646 1,069 3,441 2,094
Interest........................ 327 535 709 1,082
----------- ---------- ----------- ----------
Total expenses............. 6,429 3,969 12,963 7,764
----------- ---------- ----------- ----------
Income (loss) before income taxes.... 5,278 1,121 9,761 1,399
Provision for income taxes........... (1,768) (424) (3,270) (529)
----------- ---------- ----------- ----------
Net income........................... $ 3,510 $ 697 $ 6,491 $ 870
Preferred stock dividend............. (684) -- (1,255) --
----------- ---------- ----------- ----------
Net income attributable to common
shareholders....................... $ 2,826 $ 697 $ 5,236 $ 870
=========== ========== =========== ==========
Basic net income per share........... $ .42 $ .11 $ .79 $ .13
=========== ========== =========== ==========
Basic weighted average shares........ 6,655,954 6,555,126 6,638,523 6,555,126
=========== ========== =========== ==========
Diluted net income per share......... $ .27 $ .10 $ .49 $ .13
=========== ========== =========== ==========
Diluted weighted average shares...... 13,190,859 6,721,681 13,288,567 6,789,882
=========== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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TEXOIL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS)
2000 1999
-------- --------
Cash flows from operating activities:
Net income ............................................. $ 6,491 $ 870
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depletion, depreciation and amortization .......... 3,441 2,094
Deferred income tax provision ..................... 2,894 529
Accounts receivable ............................... (2,239) 134
Other assets ...................................... 166 (52)
Accounts payable and accrued liabilities .......... (602) (862)
Revenue royalties payable ......................... 1,029 260
-------- --------
Net cash provided by operating activities .... 11,180 2,973
-------- --------
Cash flows from investing activities:
Proceeds from sale of assets ...................... 194 --
Additions to oil and gas properties ............... (8,310) (1,674)
Additions of office and other equipment ........... (36) (51)
-------- --------
Net cash used in investing activities ........ (8,152) (1,725)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock ............ 253 --
Preferred stock dividends paid in cash ............ (139) --
Repayments of long-term debt ...................... (3,000) (1,000)
-------- --------
Net cash used in financing activities ........ (2,886) (1,000)
-------- --------
Net increase in cash and cash equivalents .............. 142 248
Cash and cash equivalents -- beginning of period ....... 1,223 423
-------- --------
Cash and cash equivalents -- end of period ............. 1,365 671
======== ========
Supplemental disclosure of cash flow information:
Interest paid in cash ............................. $ 1,039 $ 1,348
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
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TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: -- ORGANIZATION AND ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Texoil, Inc. ("Texoil" or the "Company") operates a single business segment
involved in the acquisition, development and production of, and exploration for,
crude oil, natural gas and related products primarily in Texas and Louisiana.
The financial statements included herein have been prepared by the Company
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Accordingly, the statements reflect all adjustments
(which consist solely of normal recurring adjustments) which are, in the opinion
of management, necessary for a fair presentation of the financial results for
interim periods. Certain information and notes normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. However,
the Company believes that the disclosures are adequate to make the information
presented not misleading. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1999.
NET INCOME PER COMMON SHARE
Basic net income per common share is computed based on the weighted average
shares of common stock outstanding. Net income per share computations to
reconcile basic and diluted net income for the quarters ended June 30, 2000 and
1999, consist of the following (in thousands, except share and per share data):
<TABLE>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net income available for common......... $ 2,826 $ 697 $ 5,236 $ 870
Basic weighted average shares........... 6,655,954 6,555,126 6,638,523 6,555,126
Effect of dilutive securities:
Warrants........................... 210,752 38,042 182,337 62,833
Options............................ 558,844 128,513 702,399 171,923
Awards............................. -- -- -- --
Convertible preferred stock........ 5,765,309 -- 5,765,308 --
----------- ---------- ----------- ----------
Diluted weighted average shares......... 13,190,859 6,721,681 13,288,567 6,789,882
Per common share net income:
Basic.............................. $ .42 $ .11 $ .79 $ .13
Diluted............................ $ .27 $ .10 $ .49 $ .13
</TABLE>
NOTE 2: -- NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The statement establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows the gains and losses on derivatives to offset related
results on the hedged item either in the income statement or in the statement of
stockholders" equity, and requires that a company must formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting. The statement is effective for fiscal
6
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TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
years beginning after June 15, 2000. The Company is currently evaluating the new
standard but has not yet determined the impact it will have on its financial
position and results of operations.
NOTE 3: -- PREFERRED STOCK
In November 1999, the Company closed a private placement of 2,750,000
shares of Series A Convertible Preferred Stock ("Series A Preferred Stock") at a
price of $8.00 per share. The Series A Preferred Stock is convertible into
Common Stock on a two-for-one share basis, at any time at the Investor's option.
Alternatively, after December 31, 2002, the Series A Preferred Stock is
mandatorily convertible into Class B Common Stock on a two-for-one share basis
if the Company achieves certain net asset and per share values. Common Stock and
Class B Common Stock are identical in all rights, except that Class B Common
stockholders have the right to elect certain directors.
Holders of the Series A Preferred Stock are entitled to receive dividends
at a rate of 9% per annum, payable quarterly. In accordance with the terms of
the Preferred Stock Agreement, at funding, holders were entitled to elect to
receive dividends in additional preferred shares or in cash. Approximately 82%
of such holders elected dividends payable in additional preferred shares. After
December 31, 2001, the Company, in its sole discretion, may elect to pay
dividends in cash rather than in additional preferred shares. Preferred Stock
issued as dividends are computed as the number of shares required to achieve a
9% per annum dividend, based on a contractually specified price of $8.00 per
share. In accordance with generally accepted accounting principles, such
Preferred Stock dividends are recorded at their estimated fair value as earned,
rather than the contractually specified price. During the second quarter of
2000, the Company recorded the preferred stock dividends at an estimated fair
value of $11.18 per preferred share, or $5.59 per equivalent common share. This
estimate was based solely on factors directly related to the marketability of
the preferred securities during the second quarter of 2000, including the terms
of the preferred stock agreement and existing markets, if any, for such shares.
Contractual terms that were considered included the dividend rate, liquidation
preference, conversion options and mandatory conversion requirements, the lack
of redemption features and other provisions of the preferred stock agreement. In
addition, the Company considered the lack of market liquidity for such preferred
shares and the limited liquidity in the underlying market for its common shares.
The estimated fair value of the Preferred Stock during the second quarter of
2000 is approximately 9% below the average closing price of the underlying
common stock. The average underlying common stock price, based on the daily
close, during the second quarter was $6.148 per share and the average trading
volume was approximately 19,644 shares per day. Future estimates of fair value
will vary from those amounts.
NOTE 4: -- CREDIT AGREEMENT
The Company has a revolving credit agreement ("Credit Agreement") with two
banks to finance property acquisitions and for temporary working capital
requirements. The Credit Agreement is currently being amended to provide up to
$100.0 million in available borrowings, limited by a borrowing base (as defined
in the Credit Agreement) which was $50.0 million at June 30, 2000. As of
June 30, 2000, borrowings outstanding under the Credit Agreement were $19.0
million. The borrowing base is redetermined annually by the bank pursuant to the
Credit Agreement (or more frequently at the option of the Company) and is
reduced at a rate of $1.0 million per month commencing September 1, 2000.
Amendments to the Credit Agreement will result in certain reductions to
commitment fees and interest. In particular, the facility fees on borrowing base
increases are being reduced to 1/2% and interest rates are being reduced to the
prime rate plus 0% --1/4% depending on the level of borrowings outstanding. In
addition, interest rates based on the optional London Interbank Offering Rate
("LIBOR") are being reduced to LIBOR plus 1 1/2 --2%, depending on the level of
borrowings outstanding. The average interest rates paid to the lender were 7.9%
and 7.3% for the six months ended June 30, 2000 and 1999, respectively. The
Company has granted first mortgages, assignments of production, security
agreements and other encumbrances on its oil
7
<PAGE>
TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and gas properties to the lender, as collateral, pursuant to the Credit
Agreement. The Credit Agreement contains covenants which, among other things,
restrict the payment of dividends on Common Stock, limit the amount of
consolidated debt, limit the Company's ability to make certain loans and
investments, and require that the Company remain in compliance with certain
covenants of the Credit Agreement.
NOTE 5: -- HEDGING ACTIVITIES
OIL AND GAS PRICES
The Company has entered into various oil and gas hedging contracts in an
effort to manage its exposure to product price volatility. Under these
contracts, the Company receives or makes payments based on a differential
between fixed and variable prices for crude oil and natural gas. Such amounts
are reflected in oil and gas sales in the accompanying financial statements.
Amounts received or paid under such hedging and financial instrument contracts
resulted in a decrease to oil and gas sales of $1,741,855 and $2,704,151 for the
three and six months ended June 30, 2000, respectively, as compared to an
increase in oil and gas sales of $9,225 and $100,225 for the same period in
1999. For the six months ended June 30, 2000, the Company sold 540,000 MMBtu at
a fixed price of $2.16 per MMBtu, and 420,000 MMBtu at an average fixed price of
$2.79 per MMBtu under two natural gas swap agreements. In addition to these
amounts, the Company has various fixed price swap contracts for July 2000
through October 2000 covering 600,000 MMBtu of natural gas at a per-unit average
price of $2.35 based on Houston Ship Channel/Beaumont Index pricing. The Company
is also subject to a natural gas hedge, structured as a costless collar, for the
period of August 2000 through July 2001, for 150,000 MMBtu per month, at a floor
price of $3.25 per MMBtu and a ceiling price of $5.25 per MMBtu. For the six
months ended June 30, 2000, the Company sold 300,000 Bbls at prices ranging from
$19.25 to $23.10 per barrel. The Company also has fixed price swaps covering
125,000 Bbls of oil at prices averaging $19.78 per Bbl for the period of July
2000 through November 2000. In addition, the Company is subject to crude oil
hedges, structured as a costless collar, for 25,000 barrels of oil per month for
July through December 2000, with a floor price of $20.50 per barrel and a
ceiling price of $30.55 per barrel, and 25,000 Bbls per month for the period
August 2000 through January 2001 with a floor price of $24.00 per barrel and a
ceiling price of $31.27 per barrel.
INTEREST RATES
The Company entered into an interest rate swap effective November 5, 1998,
which fixed the floating portion of its interest rate of 5.25% on $12,000,000
notional amount for the period from November 5, 1998 through November 6, 2000.
For the three and six months ended June 30, 2000, the Company was paid $34,563
and $53,754, respectively, pursuant to this swap, which has been recorded as an
adjustment to interest expense. For the comparable period of 1999, the Company
paid $9,826 and $17,618, respectively.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
The following discussion should be read in conjunction with the unaudited
Consolidated Financial Statements and related notes thereto, included elsewhere
in this 10-QSB and should further be read in conjunction with the Company's
Annual Report on Form 10-KSB, for the year-ended December 31, 1999.
FORWARD-LOOKING INFORMATION
This quarterly report on Form 10-QSB, and in particular, this Management's
Discussion and Analysis of Financial Condition and Results of Operations,
contains "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. All statements other than statements of historical
facts included in this report and, in particular, this section of this report,
including, without limitation, statements regarding the Company's business
strategy, plans, objectives, expectations, intent and beliefs of management
related to current or future operations are forward-looking statements. Such
statements are based on certain assumptions and analyses made by management,
based on its experience and its perception of historical trends, current
conditions, expected future developments and other factors it believes to be
appropriate. The forward-looking statements included in this report are subject
to a number of material risks and uncertainties including assumptions about the
pricing of oil and gas, assumptions about operating costs, production operations
continuing as in the past or as projected by independent engineers, the ability
to generate and take advantage of acquisition opportunities and numerous other
factors which may be subject to material change. A detailed discussion of
important factors that could cause actual results to differ materially from the
Company's expectations is discussed herein and in the Company's Annual Report on
Form 10-KSB for 1999. Forward-looking statements are not guarantees of future
performance and actual results, developments and business decisions may differ
from those envisioned by such forward-looking statements.
GENERAL
Texoil is an independent oil and gas company engaged in the acquisition and
development of oil and gas reserves through a diversified program, which
includes purchases of oil and gas reserves, re-engineering, development and
exploration activities currently focused in Texas and Louisiana. As further
discussed herein, future growth in assets, earnings, cash flows and share values
are dependent upon the Company's ability to acquire, discover and develop
commercial quantities of oil and gas reserves that can be produced at a profit
and assemble an oil and gas reserve base with a market value exceeding its
finding and production costs.
Oil and gas prices, particularly the price of crude oil, have increased
significantly from the depressed levels which existed during 1998 and early
1999. Texoil's business strategy and pro-active reaction to declining prices has
allowed the Company to emerge from the low-price period with significantly
increased reserves and production levels, which have led to increased revenues,
cash flows and earnings.
Management believes that the Company's growth and performance during the
low-price cycle has enhanced its credibility and standing in the industry with
sellers and financial institutions. Management further believes that the
acquisition and divestiture market will continue to provide opportunities for
additional growth, along with development and exploration projects that are
presently in inventory. These factors and the Company's financial resources
should allow Texoil to compete effectively for corporate and asset acquisitions
that are consistent with its business strategy. However, prevailing commodity
prices may result in seller price expectations that the Company considers
unreasonable and, therefore, further acquisition opportunities could be
economically limited.
Texoil expects to continue to focus on acquisitions and capital
expenditures that can result in increased production and operating cost
reductions, on a per-unit basis. The current corporate strategy is merely an
expansion and adaptation of the business plan which was conceived and
implemented in 1996, and has resulted in significant growth to date. Following
is a brief outline of management's current plans.
9
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1) Acquire oil and gas properties with producing reserves, current cash
flows and development and exploration potential.
2) Complete field studies and implement development programs.
3) Continue the Company's exploration program; solicit industry partners
on a promoted basis.
4) Continue activities directed toward reducing per-unit operating and
general administrative costs on a long-term sustained basis.
5) Actively pursue corporate acquisitions or mergers as a means of growth,
increasing common share value and liquidity.
6) Increase equity, long-term or project financing, as necessary.
In addition to its fundamental business strategy, the Company intends to
actively pursue corporate acquisitions or mergers as a means of continued
growth, increasing share value or creating liquidity for its shareholders.
Management believes that the industry will consolidate and that opportunities
may become available to acquire corporate entities, effect business
combinations, or merge with or be acquired by another corporation. Management
intends to consider any such opportunities which may become available and are
beneficial to shareholders. The primary financial considerations in the
evaluation of any such potential transaction include, but are not limited to:
(1) the ability of small cap oil and gas companies to gain recognition and favor
in the public markets; (2) growth in share price; (3) shareholder liquidity, and
(4) capital formation and cost of capital.
OIL AND GAS PROPERTIES
The Company uses the full-cost method of accounting for its investment in
oil and gas properties. Under the full-cost method, all costs of acquisition,
exploration and development of oil and gas reserves are capitalized separately
for each cost center (generally defined as a country). Capitalized balances are
referred to as the "Full-Cost Pool" and are further classified as evaluated or
unevaluated. Evaluated costs are those where proved reserves have been
determined or where the property has been impaired or abandoned. Such costs are
subject to depletion, depreciation and amortization expense ("DD&A").
Unevaluated costs are not subject to DD&A and generally require additional
geological, geophysical and/or engineering evaluation prior to management's
decision to drill, develop or abandon such properties. When such properties are
evaluated, capitalized costs will be transferred to an evaluated status and
included in the calculation of DD&A. Depletion expense is calculated using the
units of production method based on the ratio of current production to total
proved recoverable oil and natural gas reserves. The units of production are
applied to a cost base which includes net capitalized evaluated costs plus
estimated future net development and net projected abandonment costs. Under the
full-cost method, a write-down of oil and gas properties must be charged to
operations if net capitalized costs at the end of each quarterly reporting
period exceed the estimated discounted future net revenues of proved oil and
natural gas reserves, using current oil and gas prices and costs, held constant
over the life of the properties, plus the lower of cost or fair value of
unevaluated properties, both on an after-tax basis (the "full cost ceiling").
Capitalized costs include payroll and related costs of technical personnel
which are directly attributable to the Company's oil and gas acquisition,
exploration and development activities. Amounts capitalized for the three and
six months ended June 30, were $169,000 and $355,000 for 2000 and $162,000 and
$331,000 for 1999, respectively. The Company capitalizes interest attributable
to oil and natural gas properties which are not subject to amortization and are
in the process of being evaluated. Included in the unevaluated capitalized costs
for the three and six months ended June 30, are interest costs of $99,000 and
$197,000 for 2000 and $123,000 and $236,000 for 1999, respectively.
At the end of the second quarter of 2000, the Company's full-cost ceiling
exceeded its net capitalized costs. Net capitalized costs could exceed the
full-cost ceiling in future periods due to downward revisions to estimated
proved reserve quantities, declines in oil and gas prices, increases in
operating costs, unsuccessful exploration and development activities or other
factors which cannot be reasonably predicted by the Company. Once recorded, a
write-down of oil and gas properties cannot be reversed at a later date even if
10
<PAGE>
the estimated reserve quantities or oil and gas prices subsequently increase.
Management believes that current reserve estimates, which represent the basis
for calculating limitations on capitalized costs, are reasonable under present
operating conditions and circumstances. However, reserve estimates and forecasts
are inherently imprecise and, therefore, subject to significant future changes.
RECENT PROPERTY ACQUISITIONS
During 1999, the Company purchased two proved oil and gas fields, as well
as incremental working interests in previously acquired properties. Such
incremental acquisitions resulted in gaining operating control in two additional
fields. The properties were acquired as proved producing properties with
anticipated future development and drilling potential. These acquisitions
substantially increased production volumes and estimated quantities of proved
oil and gas reserves.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000, COMPARED TO THREE MONTHS ENDED JUNE 30,
1999.
The Company recorded a net income of $3,510,000 and $697,000 for three
months ended June 30, 2000 and 1999, respectively. The $2,813,000 increase in
the Company's comparative net income resulted primarily from the following
factors:
NET AMOUNT CONTRIBUTING
TO INCREASE (DECREASE)
IN NET INCOME
-----------------------
(000'S)
Oil and gas sales.................... $ 6,489
Lease operating and workover
expenses........................... (1,201)
Production taxes..................... (756)
General and administrative
expenses........................... (134)
Depletion, depreciation and
amortization expense ("DD&A")...... (577)
Interest expense..................... 208
Other income -- net................. 128
Provision for income taxes........... (1,344)
-------
$ 2,813
=======
The following discussion applies to the changes in the composition of net
income shown above.
The $6,489,000 or 134% increase in net oil and gas sales is attributable to
the increase in production volumes resulting from the acquisition and
development of properties and an increase in average realized prices as shown in
the table presented immediately below.
THREE MONTHS ENDED
PERCENT JUNE 30,
INCREASE -------------------
(DECREASE) 2000 1999
---------- ------ ------
Gas Production (MMcf)................ 26% 1,325 1,051
Oil Production (MBbls)............... 69% 296 175
Barrel of oil equivalent (MBOE)...... 48% 517 350
Average Price Gas (per Mcf).......... 48% $ 3.40 $ 2.30
Average Price Oil (per Bbl).......... 46% $23.06 $15.80
Average Price per BOE................ 58% $21.93 $13.84
Lease operating expenses and workover costs increased $1,201,000 or 76%.
The increase is a result of increased production volumes resulting from the
acquisition and development of oil and gas properties. Production taxes
increased by $756,000 or 224% due to increased production volumes and revenues.
General and administrative costs increased $134,000 or 30%. The percentage
increase in general and administrative expenses was less than the increases in
production and revenues as a result of both continuing cost containment efforts
and production increases. On a BOE basis, general and administrative expenses
actually were reduced by 12% in 2000 over 1999 levels. The dollar increase is
comprised
11
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primarily of increases in management, operating and administrative staffing
associated with the Company's growth. The Company must attract and retain
competent management, technical and administrative personnel to pursue its
business strategy and fulfill its contractual obligations.
The $577,000 or 54% increase in DD&A expenses is primarily due to the
increase in oil and gas production volumes and capitalized balances subject to
DD&A, offset by increases in estimated recoverable reserves, resulting from the
acquisition and development of gas and oil properties. Refer to the discussion
of DD&A for the six month periods ended June 30, 2000 and 1999, below for
information related to capitalized costs and reserves used to calculate DD&A.
Interest expense decreased by $208,000 primarily due to a reduction in
long-term debt and repayment of $10,000,000 of convertible subordinated notes.
Other income increased $128,000 for the three months ended June 30, 2000,
principally due to increased operations and overhead reimbursements.
The provision for income taxes increased $1,344,000 as a result of the
increase in net income before taxes.
SIX MONTHS ENDED JUNE 30, 2000, COMPARED TO SIX MONTHS ENDED JUNE 30, 1999.
The Company recorded a net income of $6,491,000 and $870,000 for six months
ended June 30, 2000 and 1999, respectively. The $5,621,000 increase in the
Company's comparative net income resulted primarily from the following factors:
NET AMOUNT CONTRIBUTING
TO INCREASE (DECREASE)
IN NET INCOME
------------------------
(000'S)
Oil and gas sales.................... $13,276
Lease operating and workover
expenses........................... (2,410)
Production taxes..................... (1,581)
General and administrative
expenses........................... (234)
Depletion, depreciation and
amortization expense ("DD&A")...... (1,347)
Interest expense..................... 373
Other income -- net................. 285
Provision for income taxes........... (2,741)
-------
$ 5,621
=======
The following discussion applies to the changes in the composition of net
income shown above.
The $13,276,000 or 153% increase in net oil and gas sales is attributable
to the increase in production volumes resulting from the acquisition and
development of properties and an increase in average realized prices as shown in
the table presented immediately below.
SIX MONTHS ENDED
PERCENT JUNE 30,
INCREASE ----------------
(DECREASE) 2000 1999
----------- ------ ------
Gas Production (MMcf)................ 36% 2,665 1,961
Oil Production (MBbls)............... 74% 597 343
Barrel of oil equivalent (MBOE)...... 55% 1,041 670
Average Price Gas (per Mcf).......... 44% $ 2.99 $ 2.07
Average Price Oil (per Bbl).......... 74% $23.43 $13.43
Average Price per BOE................ 63% $21.08 $12.94
Lease operating expenses and workover costs increased $2,410,000 or 78%.
The increase is a result of increased production volumes resulting from the
acquisition and development of oil and gas properties. Production taxes
increased by $1,581,000 or 258% due to increased production volumes and
revenues.
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<PAGE>
General and administrative costs increased $234,000 or 26%. The percentage
increase in general and administrative expenses was less than the increases in
production and revenues as a result of both continuing cost containment efforts
and production increases. On a BOE basis, general and administrative expenses
actually were reduced by 19% in 2000 over 1999 levels. The dollar increase is
comprised primarily of increases in management, operating and administrative
staffing associated with the Company's growth. The Company must attract and
retain competent management, technical and administrative personnel to pursue
its business strategy and fulfill its contractual obligations.
The $1,347,000 or 64% increase in DD&A expenses is primarily due to the
increase in oil and gas production volumes and capitalized balances subject to
DD&A, offset by increases in estimated recoverable reserves, resulting from the
acquisition and development of gas and oil properties. Capitalized costs
included in the full-cost pool and subject to DD&A were $69.5 million and $45.6
million at June 30, 2000 and 1999, respectively. In addition, estimated future
development costs associated with proved undeveloped reserves in the amount of
$26.4 million and $14.6 million at June 30, 2000 and 1999, respectively, were
included in the DD&A calculations. The proved reserve quantities used for the
calculation of DD&A were approximately 27.2 million BOE in 2000.
Interest expense decreased by $373,000 primarily due to a reduction in
long-term debt and repayment of $10,000,000 of convertible subordinated notes.
Other income increased $285,000 for the six months ended June 30, 2000,
principally due to increased operations and overhead reimbursements.
The provision for income taxes increased $2,741,000 as a result of the
increase in net income before taxes.
IMPACT OF ACQUISITION AND DEVELOPMENT ACTIVITIES
Management presently estimates that production volumes for the year 2000
will approximate 1.2 million Bbls and 5.4 Bcf, representing an increase of 57%
and 28%, respectively, over the year 1999. These estimates are predicated on the
results of operations for the six months ended June 30, 2000, reserve reports
prepared by independent third parties and management's expectations, but are
subject to change resulting from numerous uncontrollable factors. In connection
with its acquisitions, the Company generally implements a capital expenditures
program, which it refers to as "re-engineering activities", designed to increase
production or arrest natural or mechanical production declines, as well as lower
recurring expenses. Thereafter, the Company conducts detailed field studies
designed to isolate development and exploration opportunities, if any. The
Company has identified projects in its existing property portfolio related to
proved behind-pipe and undeveloped reserves and to exploratory prospects. Future
cash flows could be favorably affected if current price levels are sustained, if
reductions to per-unit operating costs can be achieved or by the development of
additional reserve quantities. No assurance can be given, however, that the
Company will be able to successfully and economically develop additional
reserves or that commodity prices will not decline.
IMPACT OF CHANGING PRICES
Texoil's revenues and the carrying value of its oil and gas properties are
subject to significant change due to the volatility of oil and gas prices.
Should prices decrease or fail to remain at levels which will facilitate
repayment of debt and reinvestment of cash flow to replace current production,
the Company could experience difficulty in developing its assets and continuing
its growth.
HEDGING ACTIVITIES
The Company implemented certain hedging activities in May of 1999, in
direct response to market conditions. The intent of the hedging strategy was to
"lock-in" profits and cash flows greater than realized during 1998 and early
1999. Management expects to continue to hedge some portion of production and
believes its hedging strategy will result in greater predictability of
internally generated funds, which can be dedicated to capital development
projects and corporate obligations. In general, the Company has entered
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<PAGE>
into fixed price swaps for 150,000 MMBtus of gas production per month through
October 2000, at prices ranging from $2.16 to $2.63 per MMBtu. The Company is
also subject to a natural gas hedge, structured as a costless collar for the
period of August 2000 through July 2001, for 150,000 MMBtu per month, at a floor
price of $3.25 per MMBtu and a ceiling price of $5.25 per MMBtu. Monthly
quantities of oil hedged total 25,000 Bbls per month over the period July 2000
through November 2000, at prices ranging from $19.23 per Bbl to $23.10 per Bbl.
In addition, the Company is subject to crude oil hedges, structured as a
costless collar, for 25,000 barrels of oil per month for July through December
2000, with a floor price of $20.50 per barrel and a ceiling price of $30.55 per
barrel and 25,000 Bbls per month for the period August 2000 through January 2001
with a floor price of $24.00 per Bbl and a ceiling price of $31.27 per Bbl.
Amounts paid under such hedging and financial instrument contracts decreased oil
and gas sales by $1,741,855 and $2,704,151 for the three and six months ended
June 30, 2000. Texoil does not engage in speculative trading activities and does
not hedge all available or anticipated quantities. Texoil's strategy involves
the following factors:
1) Effectively manage cash flow to minimize price volatility and generate
internal funds available for capital development projects and
additional acquisitions;
2) Ensure the Company's ability to fully support its exploration
activities and administrative and debt service obligations;
3) "Lock-in" growth in revenues, cash flows and profits for financial
reporting purposes; and
4) Allow certain quantities to float, particularly in months with high
price potential.
Management believes that speculation and trading activities are
inappropriate for the Company, but further believes appropriate management of
realized prices is an integral part of managing its business strategy.
Furthermore, as a growth Company actively pursuing additional acquisitions and
development activities, the Company expects to realize additional production
that may expose the Company to pricing upside.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects to finance its future acquisition, development and
exploration activities through cash flow from operating activities, its bank
credit facility, sale of non-strategic assets, various means of corporate and
project finance and ultimately through the issuance of additional securities, as
and if necessary. In addition, the Company intends to continue to subsidize
drilling activities through the sale of participations to industry partners.
Financing activities have resulted in a net reduction of debt in the amount of
$15.5 million as follows:
JUNE 30
-------------------
2000 1999
------ ------
(MILLIONS)
Balances outstanding:
Long-term debt................................... $ 19.0 $ 24.5
Convertible subordinated debt.................... $ -- $ 10.0
------ ------
$19.00 $ 34.5
====== ======
The Company has set a goal of $50.0 million of capital expenditures over
the next two years. Accordingly, it is likely that the Company will incur
additional debt in connection with acquisition activities or corporate
acquisitions or mergers, if any.
CONVERTIBLE PREFERRED STOCK OFFERING
In November 1999, Texoil issued 2,750,000 shares of Series A Convertible
Preferred Stock at $8.00 per share, convertible into two (2) shares of common
stock. Preferred shareholders may elect to convert to common at any time.
Alternatively, such shares are mandatorily convertible, after December 31, 2002,
based on the achievement of certain net asset and per share values. Net proceeds
were used to reduce bank indebtedness, repay convertible subordinated notes and
for other corporate purposes. The dividend rate is
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<PAGE>
9% per annum, payable quarterly. In accordance with the terms of the Preferred
Stock Agreement, at funding, holders were entitled to elect to receive dividends
in additional preferred stock or in cash. Approximately 82% of such holders
elected dividends payable in additional preferred shares. After December 31,
2001, the Company, in its sole discretion, may elect to pay dividends in cash
rather than in additional preferred shares. In 2000 and 2001, the Company
expects to issue approximately 213,000 and 278,000 shares of preferred stock,
respectively. The cash dividend component is expected to be approximately
$356,000 in both 2000 and 2001.
CREDIT FACILITY
The Company has a revolving Credit Agreement with two banks which is
currently being amended. The new agreement (which has been approved) will
provide up to $100.0 million in available borrowings, limited by a borrowing
base as redetermined at least annually. Modifications include interest rate,
commitment fee and facility fee reductions, among other items. The borrowing
base is $50.0 million and borrowings outstanding at June 30, 2000, were $19.0
million.
CASH FLOW FROM OPERATING ACTIVITIES
For the six months ended June 30, 2000, the Company's net cash provided by
operating activities was $11.1 million, up $8.2 million from the prior year.
These increases are directly attributable to the increases in production
resulting from acquisitions and development activities and increases in oil and
gas prices. The Company expects its acquisition and development activities to
significantly increase cash provided by operating activities in 2000.
CAPITAL EXPENDITURES
The Company's oil and gas capital expenditures for the six month periods
ended June 30, 2000 and 1999, were $8.2 million and $2.1 million, respectively.
Capital expenditures in 2000 were financed from cash flow. Management
believes the Company can compete successfully for new acquisition opportunities;
therefore, the Company has focused a large part of its efforts toward new
corporate and asset acquisitions, which are expected to include both proved and
exploratory assets. Certain exploration and development projects have been
deferred in favor of anticipated industry opportunities. In particular, the
Company has deferred projects which are "held-by-production" in favor of
projects with definitive lease expirations. The Company's business strategy has
always been to shift its emphasis among acquisitions, development and
exploratory activities, consistent with changes in the marketplace. Accordingly,
the Company's capital budget is subject to change.
Texoil expects to incur capital expenditures related to its existing
portfolio of properties for re-engineering facilities (surface and down-hole),
restoring shut-in wells to production and recompletions. In addition, the
Company expects to drill certain development wells in existing fields. The
Company also expects to make additional capital expenditures to maintain leases
and complete the interpretation of 3-D seismic data associated with certain
exploratory and development projects. Texoil will continue its practice of
soliciting partners, on a promoted basis, for higher risk projects.
15
<PAGE>
Texoil has increased its capital expenditure budget for fiscal 2000 to a
total of $14.2 million, including acquisitions closed through June 30, 2000.
Based solely on its existing portfolio of properties and projects, the Company
presently expects to incur the following capital expenditures during the
remainder of 2000 and in 2001:
2000 2001
---- -----
Development of proved properties:
Re-engineering and well
recompletions(1)............... $3.4 $ 2.3
Drilling........................ 1.0 5.7
Exploration
Land, geological &
geophysical.................... .7 .5
Drilling........................ .9 1.5
---- -----
$6.0 $10.0
==== =====
------------
(1) Includes expenditures associated with facilities, equipment, compression
saltwater disposal, restoring shut-in wells to production and recompletions
to other productive zones.
Management believes projected expenditures will result in increased
production, cash flows and reserve value and will further expose the Company to
potentially significant upside from exploration. Management further believes the
deferral of certain projects will not result in any material losses. Should the
Company be unable to acquire new properties, or make corporate acquisitions,
capital expenditures associated with existing properties could be adjusted.
YEAR 2000 COMPLIANCE
During 1999, the Company reviewed its computer systems and made inquiries
with its financial institutions, suppliers and customers. As of the date of this
report, there have been no business interruptions or disruptions of financial
transactions or information exchanged as a result of the year 2000 rollover.
16
<PAGE>
PART II. OTHER INFORMATION
Item 1 -- Legal Proceedings -- No material change from legal proceedings
reported in Registrant's Form 10-KSB for the fiscal year ended
December 31, 1999.
Item 2 -- Change in Securities -- 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 on Form 8-K -- None
17
<PAGE>
SIGNATURE
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.
TEXOIL, INC.
Date: August 10, 2000 By: /s/ FRANK A. LODZINSKI
----------------------------------
FRANK A. LODZINSKI
CEO PRESIDENT AND
18
