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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 May 5, 2000.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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TEXOIL, INC.
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of March 31, 2000...................... 3
Consolidated Statements of Income for the three
months ended March 31, 2000 and 1999................................ 4
Consolidated Statements of Cash Flows for the
three months ended March 31, 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................................. 8
PART II. OTHER INFORMATION............................................... 15
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TEXOIL, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
MARCH 31,
2000
---------
Assets:
Current Assets:
Cash and cash equivalents ........................................ $ 3,585
Accounts receivable and other .................................... 7,267
Other current assets ............................................. 231
-------
Total current assets ........................................ 11,083
-------
Property, plant and equipment, at cost:
Oil and natural gas properties (full-cost method)
Evaluated properties ........................................ 63,670
Unevaluated properties ...................................... 5,111
Office and other equipment ............................................ 907
-------
69,688
-------
Less -- accumulated depletion, depreciation and amortization .......... (11,886)
-------
Net property, plant and equipment ..................................... 57,802
-------
Other assets, net ..................................................... 232
-------
Total assets ................................................ $69,117
=======
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable and accrued liabilities ......................... $ 4,494
Revenue royalties payable ........................................ 3,483
-------
Total current liabilities ................................... 7,977
-------
Long-term debt ........................................................ 21,000
Deferred tax liability ................................................ 2,304
Stockholders' equity:
Series A Preferred Stock -- 9% cumulative, $.01 par value and
liquidation preference of $8.00 per share, 10,000,000 shares
authorized; 2,829,533 issued and outstanding at March 31, 2000 .. 28
Common stock -- $.01 par value; 25,000,000 shares authorized;
6,648,920 shares issued and outstanding at March 31, 2000 ....... 67
Class B Common Stock -- $.01 par value, 10,000,000 shares
authorized and none issued and outstanding at March 31, 2000 .... --
Additional paid-in capital ............................................ 32,338
Retained earnings ..................................................... 5,403
-------
Total stockholders' equity ....................................... 37,836
-------
Total liabilities and stockholders' equity ....................... $69,117
=======
The accompanying notes are an integral part of these consolidated financial
statements.
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TEXOIL, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2000 1999
------------ ------------
Revenues:
Oil and gas sales ................... $ 10,614 $ 3,827
Operator and management fees ........ 348 242
Interest and other .................. 55 4
------------ ------------
Total revenues ................. 11,017 4,073
------------ ------------
Costs and Expenses:
Lease operating ..................... 2,711 1,502
Production taxes .................... 1,098 274
General and administrative .......... 547 447
Depletion, depreciation and
amortization ....................... 1,795 1,025
Interest ............................ 382 547
------------ ------------
Total expenses ................. 6,533 3,795
------------ ------------
Income before income taxes ............... 4,484 278
Deferred income tax provision ............ (1,502) (105)
------------ ------------
Net income ............................... $ 2,982 $ 173
Preferred stock dividend ................. (571) --
------------ ------------
Net income attributable to common
shareholders ........................... $ 2,411 $ 173
============ ============
Basic net income per share ............... $ .36 $ .03
============ ============
Basic weighted average shares ............ 6,621,091 6,549,182
============ ============
Diluted net income per share ............. $ .24 $ .03
============ ============
Diluted weighted average shares .......... 12,667,189 6,852,897
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
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TEXOIL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS)
2000 1999
------- -------
Cash flows from operating activities:
Net income ..................................... $ 2,982 $ 173
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depletion, depreciation and amortization .. 1,795 1,025
Deferred income tax provision ............. 1,502 105
Accounts receivable and other ............. (1,015) 1,042
Accounts payable and accrued liabilities .. (464) (554)
Revenue royalties payable ................. 684 (57)
Other, net ................................ (13) (14)
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Net cash provided by operating
activities ......................... 5,471 1,720
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Cash flows from investing activities:
Additions to oil and gas properties ....... (2,288) (833)
Other equipment additions ................. (24) 4
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Net cash used in investing activities. (2,312) (829)
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Cash flows from financing activities:
Proceeds from issuance of common stock .... 253 --
Preferred stock dividends paid in cash .... (50) --
Repayments of long-term debt .............. (1,000) (750)
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Net cash (used in) financing
activities ......................... (797) (750)
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Net increase in cash and cash equivalents ...... 2,362 141
Cash and cash equivalents -- beginning of
period ....................................... 1,223 423
------- -------
Cash and cash equivalents -- end of period .... 3,585 564
======= =======
Supplemental disclosure of cash flow information:
Interest paid in cash ..................... $ 532 $ 680
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
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TEXOIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- ORGANIZATION AND ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Texoil 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.
REVERSE STOCK SPLIT
In June 1999, the Company's Board of Directors approved certain changes to
the Company's outstanding common shares intended to result in approximately a
1-for-6 reverse stock split. As of March 31, 2000, 6,648,920 shares of common
stock are issued and outstanding. All issued and outstanding common shares and
per share data reflected in the accompanying Consolidated Financial Statements
and Notes to Consolidated Financial Statements have been retroactively restated
to reflect the reverse stock split.
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 March 31, 2000 and
1999, consist of the following (in thousands, except per share data):
QUARTER ENDED
MARCH 31,
-----------------------
2000 1999
------- -------
Net income available for common ................ $ 2,411 $ 173
Basic weighted average shares .................. 6,621 6,549
Effect of dilutive securities:
Warrants .................................. 143 88
Options ................................... 244 216
Convertible preferred stock ............... 5,659 --
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Diluted weighted average shares ................ 12,667 6,853
Per common share net income:
Basic ..................................... $ .36 $ .03
Diluted ................................... $ .24 $ .03
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
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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, the Series A Preferred Stock is mandatorily convertible into
Class B Common Stock on a two-for-one share basis, after December 31, 2002, 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. The net proceeds from
the sale of the Series A Preferred Stock was used to redeem $10.0 million of
convertible subordinated notes and reduce bank indebtedness.
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 first quarter of 2000,
the Company recorded the preferred stock dividends at an estimated fair value of
$9.50 per preferred share, or $4.75 per equivalent common share. This estimate
was based solely on factors directly related to the marketability of the
preferred securities during the first 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 first 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 first quarter was $5.18 per share and the average trading volume was
approximately 9,600 shares per day. Estimates of fair value could vary in the
future.
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, as amended, provides up to $50.0 million in
available borrowings, limited by a borrowing base (as defined in the Credit
Agreement) which was $42.5 million at March 31, 2000. As of March 31, 2000,
borrowings outstanding under the Credit Agreement were $21.0 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 over
a five-year period on a straight-line basis. The average interest rate paid to
the lender was 7.8% for the three months ended March 31, 2000. The Company has
granted first mortgages, assignments of production, security agreements and
other encumbrances on its oil 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.
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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 an active and 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.
Product prices, particularly the price of crude oil, were depressed in 1998
and early 1999. Texoil reacted promptly to the low-price conditions by
implementing a series of corporate actions intended to offset the severe effects
of such price reductions. As a result of its business strategy and pro-active
reaction to the low price environment, the Company emerged from the low-price
period with significantly increased reserves and production levels, which have
led to increased revenues, cash flows and earnings. While commodity prices have
rebounded, no assurance can be given that current price levels will be sustained
or that such prices will increase. However, management believes that Texoil's
growth during the low-price environment has improved its standing in the
industry relative to its competitors and enhanced its credibility with sellers
and financial institutions. Management believes that an active acquisitions
market will exist as larger companies divest of "non-core" properties and
smaller companies, which were over-leveraged or not positioned to withstand the
significant price declines, sell assets, are liquidated or consolidate to
satisfy creditors or improve shareholder value. In addition, the Company has
identified numerous development and exploratory projects in its existing
property portfolio and has further undertaken detailed field studies intended to
define additional potential, if any.
Texoil expects to continue its business strategy and focus on capital
expenditures that can result in increased production and operating cost
reductions, on a per-unit basis. The current corporate strategy is
8
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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.
1) Acquire oil and gas properties with significant producing reserves and
development and exploration potential.
2) Undertake comprehensive field studies and implement capital 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 and long-term financing, as necessary, whether through
direct placement of securities or in connection with corporate
acquisition or merger activities.
Due to Texoil's growth, financial resources and industry conditions, the
Company intends to emphasize acquisition and development activities in the near
term. The Company will also focus on exploratory projects currently in
inventory, and those developed in connection with acquisitions.
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 to effect growth.
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 months
ended March 31, 2000 and 1999, were $186,000 and $137,000, 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 months ended March
31, 2000 and 1999, are interest costs of $98,000 and $122,790, respectively.
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At the end of the first 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
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 MARCH 31, 2000, COMPARED TO THREE MONTHS ENDED MARCH 31,
1999.
The Company recorded a net income of $2,982,000 and $173,000 for three
months ended March 31, 2000 and 1999, respectively. The $2,809,000 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 ........................ $ 6,787
Lease operating and workover
expenses ............................... (1,209)
Production taxes ......................... (824)
General and administrative
expenses -- net ........................ (100)
Depletion, depreciation and
amortization expense ("DD&A") .......... (770)
Interest expense -- net .................. 165
Other income -- net ...................... 157
Provision for income taxes ............... (1,397)
-------
$ 2,809
=======
The following discussion applies to the changes in the composition of net
income shown above.
The $6,787,000 or 177% increase in net oil and gas sales is attributable to
the increase in production volumes resulting from the acquisition and
development of properties during late 1998 and 1999, and an increase in average
realized prices as shown in the table presented immediately below.
THREE MONTHS ENDED
PERCENT MARCH 31,
INCREASE --------------------
(DECREASE) 2000 1999
---------- --------- ---------
Gas Production (MMcf) ....................... 56% 1,340 910
Oil Production (MBbls) ...................... 79% 301 168
Barrel of oil equivalent (MBOE) ............. 68% 524 320
Average Price Gas (per Mcf) ................. 23% $ 2.57 $ 2.09
Average Price Oil (per Bbl) ................. 114% $23.78 $11.09
Average Price per BOE ....................... 71% $20.26 $11.74
Lease operating expenses and workover costs increased $1,209,000 or 80%.
The increase is a result of increased production volumes resulting from the
acquisition and development of oil and gas properties in
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1998 and 1999. Production taxes increased by $824,000 or 300% due to increased
production volumes and revenues.
General and administrative costs increased $100,000 or 22%. The percentage
increase in general and administrative expenses was less than the increases in
production and revenues as a result of both rigorous cost containment efforts
and production increases. On a BOE basis, general and administrative expenses
actually were reduced by 24% 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 $770,000 or 75% 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 $63.7 million and $43.8
million at March 31, 2000 and 1999, respectively. In addition, estimated future
development costs associated with proved undeveloped reserves in the amount of
$23.5 million and $14.6 million at March 31, 2000 and 1999, respectively, were
included in the DD&A calculations. The proved reserve quantities used for the
calculation of DD&A were approximately 24.1 million BOE.
Interest expense decreased by $165,000 primarily due to a reduction in
long-term debt and repayment of $10,000,000 of convertible subordinated notes in
December 1999.
Other income increased $157,000 for the three months ended March 31, 2000,
principally due to increased operations and overhead reimbursements.
The provision for income taxes increased $1,397,000 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 1.1 million Bbls and 4.7 Bcf, representing an increase of 44%
and 11%, respectively, over 1999, exclusive of new acquisitions. These estimates
are predicated on the results of operations for 1999 and the first quarter of
2000, and reserve reports prepared by independent third parties. These projected
increases are a direct result of acquisition and development activities. 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 additional projects in its
existing property portfolio related to proved behind-pipe and undeveloped
reserves and expects to define additional development and exploratory potential.
Net future cash flows could be favorably affected by additional development and
exploratory potential and also by further price improvement and/or reductions to
per-unit operating costs. No assurance can be given, however, that the Company
will be able to successfully and economically develop additional reserves.
IMPACT OF CHANGING PRICES AND COSTS
Texoil's revenues and the carrying value of its oil and gas properties are
subject to significant change due to changes in oil and gas prices. As
demonstrated historically, prices are volatile and unpredictable. Oil prices
declined appreciably during 1998 and early 1999, but have recently rebounded.
Realized oil prices averaged $23.78 per Bbl for the three months ended March 31,
2000, or 114% higher than the comparable period in 1999. Realized gas prices
averaged $2.57 or 22% higher than the comparable period in 1999. 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.
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HEDGING ACTIVITIES
The Company implemented a hedging strategy 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.
Management 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 into
fixed price swaps for portions of its gas production through October 2000, at
prices ranging from $2.16 to $2.63 per MMBtu. Monthly quantities of natural gas
hedged range from 120,000 to 150,000 MMBtu. Monthly quantities of oil hedged
range from 25,000 to 55,000 Bbls over the period from April 2000 through
December 2000, at prices ranging from $19.23 per Bbl to $23.10 per Bbl. In
addition, on March 1, 2000, the Company entered into a crude oil hedge
structured as a costless collar for 25,000 barrels of oil per month for the
period from March 2000 through December 2000, with a floor price of $20.50 per
barrel and a ceiling price of $30.55 per barrel. 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 in 1999 resulted in a net reduction of debt in the
amount of $13.7 million as follows:
MARCH 31,
---------------
2000 1999
----- -----
(MILLIONS)
Balances outstanding:
Current portion of long-term debt ............ $ -- $ 2.6
Long-term debt ............................... 21.0 22.1
Convertible subordinated debt ................ -- 10.0
----- -----
$21.0 $34.7
===== =====
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.
12
<PAGE>
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 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 205,000 and 224,000 shares of preferred stock, respectively. The
cash dividend component is expected to be approximately $356,000 in both 2000
and 2001.
CREDIT FACILITY
At March 31, 2000, the Company had a $42.5 million borrowing base, with
available borrowing capacity of $21.5 million, in accordance with its revolving
Credit Agreement with its banks. The borrowing base is redetermined at least
annually.
CASH FLOW FROM OPERATING ACTIVITIES
For the three months ended March 31, 2000, the Company's net cash provided
by operating activities was $5.5 million, up $3.8 million from the prior year.
These increases are directly attributable to the increases in production
resulting from acquisitions in late 1998 and 1999, development activities and
increases in oil and gas prices. The Company expects its acquisitions 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 three month periods
ended March 31, 2000 and 1999, were $2.3 million and $1.1 million, respectively.
Capital expenditures in 2000 were financed principally from cash flow.
Management believes the Company can compete successfully for new acquisition
opportunities; therefore, the Company has directed a greater portion of its
current 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.
During 2000, Texoil expects to incur certain 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 during
2000 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.
13
<PAGE>
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) .......... $ 2.0 $ 2.3
Drilling .......................................... 1.5 5.7
Exploration
Land, geological & geophysical .................... .5 .5
Drilling .......................................... 1.0 1.5
----- -----
$ 5.0 $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, capital expenditures associated
with existing properties could be increased.
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.
14
<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
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: May 12, 2000 By: /s/ FRANK A. LODZINSKI
FRANK A. LODZINSKI
PRESIDENT AND CEO
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM TEXOIL QUARTERLY REPORT 03/31/00 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,585
<SECURITIES> 0
<RECEIVABLES> 7,267
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,083
<PP&E> 69,688
<DEPRECIATION> (11,886)
<TOTAL-ASSETS> 69,117
<CURRENT-LIABILITIES> 7,977
<BONDS> 0
0
28
<COMMON> 67
<OTHER-SE> 37,741
<TOTAL-LIABILITY-AND-EQUITY> 69,117
<SALES> 10,614
<TOTAL-REVENUES> 11,017
<CGS> 3,809
<TOTAL-COSTS> 547
<OTHER-EXPENSES> 1,795
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 382
<INCOME-PRETAX> 4,484
<INCOME-TAX> 1,502
<INCOME-CONTINUING> 2,982
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,982
<EPS-BASIC> .36
<EPS-DILUTED> .24
</TABLE>
