<PAGE>
1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
----------------------------
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2000 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition period from to
--------------------------
COMMISSION FILE NUMBER 0-13305
--------------------------
PARALLEL PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-1971716
(State of other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
One Marienfeld Place, Suite 465,
Midland, Texas 79701
(Address of principal executive offices) (Zip Code)
(915) 684-3727
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes 'X' No
At May 10, 2000, there were 20,331,858 shares of the Registrant's Common
Stock, $0.01 par value, outstanding.
================================================================================
<PAGE>
2
INDEX
PART I. - FINANCIAL INFORMATION
Page No.
ITEM 1. FINANCIAL STATEMENTS
Reference is made to the succeeding pages for the
following financial statements:
- Balance Sheets as of December 31, 1999 and June 30, 2000
(unaudited) 3
- Unaudited Statements of Operations for the three
months and six months ended June 30, 1999 and 2000 5
- Unaudited Statements of Cash Flows for the six months 6
ended June 30, 1999 and 2000
- Notes to Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 16
PART II. - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
<PAGE>
3
PARALLEL PETROLEUM CORPORATION
BALANCE SHEETS
<TABLE>
ASSETS December 31, June 30, 2000
1999 * (Unaudited)
----------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,276,417 $ 2,904,364
Accounts receivable:
Oil and gas 1,312,923 2,015,856
Others, net of allowance for
doubtful accounts of $157,187
in 1999 and 2000 314,911 262,910
Affiliate 20,658 17,835
------------ ------------
1,648,492 2,296,601
------------ ------------
Other assets 39,677 52,459
Assets held for sale 2,127,734 -
------------ ------------
Total current asset 5,092,320 5,253,424
------------ ------------
Property and equipment, at cost:
Oil and gas properties, full cost method 65,136,783 66,230,708
Other 289,720 315,703
------------ ------------
65,426,503 66,546,411
Less accumulated depreciation and depletion 27,502,855 29,785,466
------------ ------------
Net property and equipment 37,923,648 36,760,945
------------ ------------
Investment in First Permian, LLC (Notes 1 and 5) 201,311 -
Other assets, net of accumulated amortization of
$141,428 in 1999 and $86,391 in 2000 46,791 53,153
------------ ------------
$ 43,264,070 $ 42,067,522
============ ============
</TABLE>
<PAGE>
4
PARALLEL PETROLEUM CORPORATION
BALANCE SHEETS
(Continued)
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, June 30, 2000
1999 * (Unaudited)
------------ --------------
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt $ 3,665,889 $ 3,600,000
Investment liability in First Permian
(Notes 1 and 5) - 362,272
Accounts payable and accrued liabilities:
Trade 1,471,013 1,007,832
Affiliate 2,702 1,546
Preferred stock dividend 24,363 24,363
------------ ------------
1,498,078 1,033,741
------------ ------------
Total current liabilities 5,163,967 4,996,013
------------ ------------
Long-term debt, excluding current maturities
(Note 2) 12,300,000 10,700,000
Stockholders' equity:
Preferred stock 6% convertible preferred stock
par value $.10 per share (aggregate liquidation
preference of $10) authorized 10,000,000
shares, issued and outstanding 974,500
in 1999 and 2000 97,450 97,450
Common stock - par value $.01 per share,
authorized 60,000,000 shares, issued and
outstanding 20,331,858 in 1999 and 2000 203,319 203,319
Additional paid-in surplus 34,847,141 34,530,428
Retained deficit (9,347,807) (8,459,688)
------------ ------------
Total stockholders' equity 25,800,103 26,371,509
Contingencies
------------ ------------
$ 43,264,070 $ 42,067,522
============ ============
</TABLE>
*The balance sheet as of December 31, 1999 has been derived from Parallel's
audited financial statements. The accompanying notes are an integral part of
these financial statements.
<PAGE>
5
PARALLEL PETROLEUM CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ----------------------
1999 2000 1999 2000
------ ------ ------ ------
<S> <C> <C> <C> <C>
Oil and gas revenues $ 1,991,727 $ 3,196,614 $ 3,954,816 $ 5,971,205
Cost and expenses:
Lease operating expense 551,142 618,570 1,064,964 1,232,385
General and administrative 220,911 260,160 424,148 457,960
Depreciation, depletion and amortization 956,958 1,219,142 1,860,794 2,282,611
------------ ------------ ------------ -----------
1,729,011 2,097,872 3,349,906 3,972,956
------------ ------------ ------------ -----------
Operating income 262,716 1,098,742 604,910 1,998,249
------------ ------------ ------------ -----------
Other income (expense), net:
Interest income 13,695 12,490 26,971 31,245
Other income 6,606 41,976 13,229 48,437
Interest expense (376,057) (348,842) (747,128) (691,747)
Other expense (1,205) (276) (2,510) (1,982)
------------ ------------ ------------ ------------
Total other expense, net (356,961) (294,652) (709,438) (614,047)
Equity in loss of First Permian, LLC - (109,572) - (496,083)
------------ ------------ ------------ ------------
(356,961) (404,224) (709,438) (1,110,130)
------------ ------------ ------------ ------------
Income (loss) before income taxes (94,245) 694,518 (104,528) 888,119
Inncome taxes - - - -
------------ ------------ ------------ ------------
Net income (loss) $ (94,245) $ 694,518 $ (104,528) $ 888,119
============ ============ ============ ============
Cumulative preferred stock dividend $ 146,175 $ 146,175 $ 316,713 $ 316,713
============ ============ ============ ============
Net income (loss) available to
common stockholders $ (240,420) $ 548,343 $ (421,241) $ 571,406
============ ============ ============ ============
Net income (loss) per common share:
Basic $ (.013) $ .027 $ (.023) $ .028
============ ============ ============ ============
Diluted $ (.013) $ .027 $ (.023) $ .028
============ ============ ============ ============
Weighted average common shares
outstanding - diluted 18,331,858 20,583,831 18,120,194 20,569,109
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
6
PARALLEL PETROLEUM CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
Six Months Ended June 30,
-----------------------------
1999 2000
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (104,528) $ 888,119
Adjustments to reconcile net income
(loss) to net cash provided by operating activities:
Depreciation and depletion 1,860,794 2,282,611
Equity in loss from investments in First Permian, LLC - 496,083
Other, net (7,520) (6,362)
Changes in assets and liabilities:
Decrease (increase) in accounts receivables (42,239) (648,109)
Decrease (increase) in prepaid expenses and other 33,492 (12,782)
Decrease in accounts payable and accrued liabilities (1,051,732) (464,337)
------------ -------------
Net cash provided by operating activities 688,267 2,535,223
------------ -------------
Cash flows from investing activities:
Additions to property and equipment (2,035,289) (1,909,566)
Proceeds from disposition of property and equipment 255,240 2,917,392
Investment in First Permian, LLC (2,250) -
Distribution from First Permian, LLC - 67,500
------------ -------------
Net cash provided by (used in) investing activities (1,782,299) 1,075,326
------------ -------------
Cash flows from financing activities:
Borrowings from bank line of credit 780,000 -
Payments on bank line of credit - (1,665,889)
Proceeds from exercise of options and warrants 17,189 -
Payment of preferred stock dividend (316,713) (316,713)
------------ -------------
Net cash provided by (used in) financing activities 480,476 (1,982,602)
------------ -------------
Net increase (decrease) in cash and cash equivalents (613,556) 1,627,947
Beginning cash and cash equivalents 1,178,819 1,276,417
------------ -------------
Ending cash and cash equivalents $ 565,263 $ 2,904,364
============ =============
Non-cash financing activities:
Accrued preferred stock dividend $ 24,362 $ 24,363
============ =============
Transfer of assets held for sale to oil and gas property $ - $ 2,127,734
============ =============
</TABLE>
The accompanying notes are an integral part of these financials.
<PAGE>
7
PARALLEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial information included herein, except the balance sheet as of
December 31, 1999, is unaudited. However, such information includes all
adjustments of management (consisting solely of normal recurring adjustments),
which are, in our opinion, necessary for a fair statement of the results of
operations for the interim periods. The results of operations for the interim
period are not necessarily indicative of the results to be expected for an
entire year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted in this Form 10-Q Report pursuant to certain
rules and regulations of the Securities and Exchange Commission. These financial
statements should be read with the financial statements and notes included in
Parallel's 1999 Annual Report and 1999 Form 10-K.
We own an equity interest in First Permian, LLC, a limited liability
company. The founding members of First Permian were Parallel Petroleum
Corporation, Baytech, Inc., Tejon Exploration Company and Mansefeldt Investment
Corporation. Parallel, Baytech, Tejon and Mansefeldt each contributed cash for
initial members' interests of 22.5%, 22.5%, 27.5% and 27.5%, respectively, on
June 30, 1999. At March 31, 2000, Parallel, Baytech, Tejon and Mansefeldt and
affiliates owned member interests of 35%, 35%, 15% and 15%, respectively.
Effective May 31, 2000, First Permian's original limited liability company
agreement was amended and restated to provide for, among other things, the
admission of additional members, the issuance of a new class of preferred
membership units and the issuance of additional common membership units in
return for additional capital contributions totaling $20,000,000 from new
members. As a result of the issuance of additional common membership units, our
interest at June 30, 2000 was 28.665%. However, on or before January 15, 2001,
we expect our interest to increase to 30.675%.
We account for our investment in First Permian on an equity basis.
Accordingly, our investment in First Permian is recorded at cost and is
increased or decreased by our proportionate share of First Permian's income or
loss. Our 28.665% interest is reported as an investment on the balance sheet and
our share of income or loss is recognized on the income statement as equity in
earnings (loss) of First Permian.
NOTE 2. LONG TERM DEBT
Our long term debt at June 30, 2000 consisted of the following:
Revolving credit facility payable to bank at the bank's base
lending rate plus .25% (9.75% at June 30, 2000) $14,300,000
===========
Scheduled maturities of Parallel's debt at June 30, 2000
are as follows:
June 30, 2001 $ 3,600,000
July 1, 2001 10,700,000
-----------
$14,300,000
===========
Revolving Credit Facility. Parallel is a party to a loan agreement with
Bank One, Texas, N.A. The loan agreement, as restated in December 1999,
currently provides for a revolving credit facility under which we may borrow up
to the lesser of (a) $30,000,000 or (b) the borrowing base then in effect. The
borrowing base automatically reduces by $300,000 each month, which means that we
are required to make a principal payment in the same amount by which the
borrowing base is reduced. The total outstanding principal amount of our bank
borrowings was $15,965,889 at December 31, 1999 and $14,300,000 at June 30,
2000. The borrowing base and the borrowing base reduction amount are required to
be redetermined by the bank on February 1, 2000 and on May 1 and November 1 of
each year, beginning May 1, 2000. Our borrowing base is currently under review.
<PAGE>
8
At June 30, 2000, we had borrowed all the funds currently available under
the revolving facility. All indebtedness under the revolving facility matures
July 1, 2001. The loan is secured by substantially all of our oil and gas
properties. Commitment fees of .25% per annum on the difference between the
commitment and the average daily amount outstanding are due quarterly.
The unpaid principal balance of the revolving facility bears interest at
our election at a rate equal to (i) the bank's base lending rate plus .25% or
(ii) the bank's Eurodollar rate plus a margin of 3.0%. Interest under the
revolving facility is due and payable monthly. At June 30, 2000, the interest
rate was the bank's base rate plus .25% or 9.75%.
The loan agreement contains various restrictive covenants and compliance
requirements, which include (1) maintenance of certain financial ratios, (2)
limiting the incurrence of additional indebtedness, (3) prohibiting payment of
dividends on common stock, and (4) prohibiting the payment of dividends on
preferred stock when an event of default under the loan agreement is in
existence.
NOTE 3. PREFERRED STOCK
We have outstanding 974,500 shares of 6% Convertible Preferred Stock, $0.10
par value per share. Cumulative annual dividends of $0.60 per share are payable
semiannually on June 15 and December 15 of each year. Each share of Preferred
Stock may be converted, at the option of the holder, into 2.8571 shares of
common stock at an initial conversion price of $3.50 per share, subject to
adjustment in certain events. The preferred stock has a liquidation preference
of $10 per share and has no vot rights, except as required by law. We may redeem
the preferred stock, in whole or part, for $10 per share plus accrued and unpaid
dividends.
NOTE 4. FULL COST CEILING TEST
We use the full cost method to account for our oil and gas producing
activities. Under the full cost method of accounting, the net book value of oil
and gas properties, less related deferred income taxes, may not exceed a
calculated "ceiling." The ceiling limitation is the discounted estimated
after-tax future net revenues from proved oil and gas properties. In calculating
future net revenues, current prices and costs are generally held constant
indefinitely. The net book value, less relate deferred income taxes, is compared
to the ceiling on a quarterly and annual basis. Any excess of the net book
value, less related deferred income taxes, is generally written off as an
expense. Under rules and regulations of the SEC, the excess above the ceiling is
not written off if, subsequent to the end of the quarter or year but prior to
the release of the financial results, prices increased sufficiently such that an
excess above the ceiling would not have existed if the increased prices were
used in the calculations.
During the fourth quarter of 1999, we recognized a noncash impairment
charge of $1,705,000 related to our oil and gas reserves and unproved
properties. The impairment of oil and gas assets was primarily the result of a
decrease in year-end proved reserves. At June 30, 2000, our net book value of
oil and gas, less related deferred income taxes, was below the calculated
ceiling. As a result, we were not required to record a reduction of our oil and
gas properties under the full cost method of accounting.
NOTE 5. LIABILITY IN FIRST PERMIAN, LLC
At June 30, 2000, our net investment in First Permian, LLC was a liability
as a result of recording our share of the losses of First Permian. We have
recorded a liability to the extent that we have guaranteed $10,000,000 of the
debt of First Permian, LLC. We expect the $10,000,000 guarantee to be removed on
or before December 31, 2000.
NOTE 6. NET INCOME PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). FAS
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share is
<PAGE>
9
computed similarly to the previously reported fully diluted earnings per share
and reflects the assumed conversion of all potentially dilutive securities.
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ----------------------
1999 2000 1999 2000
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic EPS Computation:
Numerator -
Net income (loss) $ (94,245) $ 694,518 $ (104,528) $ 888,119
Preferred stock dividends (146,175) (146,175) (316,713) (316,713)
--------- --------- ---------- ---------
Net income (loss) available
to common stockholders $ (240,420) $ 548,343 $ (421,241) $ 571,406
========== ========= ========== =========
Denominator -
Weighted average common shares
outstanding 18,331,858 20,331,858 18,120,194 20,331,858
========== ========== ========== ==========
Basic earnings (loss) per share $ (.013) $ .027 $ (.023) $ .028
========== ========== ========== ==========
</TABLE>
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ----------------------
1999 2000 1999 2000
------ ------ ------ ------
<S> <C> <C> <C> <C>
Diluted EPS Computation:
Numerator -
Net income (loss) $ (94,245) $ 694,518 $ (104,528) $ 888,119
Preferred stock dividends (146,175) (146,175) (316,713) (316,713)
---------- --------- ---------- ---------
Net income (loss) available
to common stockholders $ (240,420) $ 548,343 $ (421,241) $ 571,406
========== ========== ========== ==========
Denominator -
Weighted average common shares
outstanding 18,331,858 20,331,858 18,120,194 20,331,858
Employee stock options - 251,973 - 237,251
---------- ---------- ---------- ----------
18,331,858 20,583,831 18,120,194 20,569,109
========== ========== ========== ==========
Diluted earnings (loss) per share $ (.013) $ .027 $ (.023) $ .028
========== ========== ========== ==========
</TABLE>
Convertible preferred stock equivalents of 974,500 shares for the
three-month period ended March 31, 2000 and the six-month period ended June 30,
2000 that could potentially dilute basic earnings per share in the future, were
not included in the computation of diluted earnings per share for the periods
presented because to do so would have been antidilutive.
NOTE 7: RECENTLY ANNOUNCED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which establishes standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. It establishes conditions
under which a derivative may be designated as a hedge, and establishes standards
for reporting changes in the fair value of a derivative. SFAS No. 133 is
required to be implemented for the first quarter of the fiscal year ended 2001.
Early adoption is permitted. Recently, the FASB deferred the implementation
requirements of SFAS No. 133 for one year. We have not evaluated the effects of
implementing SFAS No. 133.
<PAGE>
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
In addition to historical information contained herein, this Form 10-Q
Report contains forward-looking statements subject to various risks and
uncertainties that could cause our actual results to differ materially from
those in the forward-looking statements. Forward-looking statements can be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "intend," "anticipate," "estimate," "continue," "present value,"
"future," "reserves" or other variations thereof or comparable terminology.
Factors, that could cause or contribute to such differences could include, but
are not limited to, those relating to our growth strategy, outstanding
indebtedness, changes in interest rates, dependence on weather conditions,
seasonality, expansion and other activities of competitors, changes in federal
or state environmental laws and the administration of such laws, and the general
condition of the economy and its effect on the securities market. While we
believe our forward-looking statements are based upon reasonable assumptions,
there are factors that are difficult to predict and that are influenced by
economic and other conditions beyond our control. Investors are directed to
consider such risks and other uncertainties discussed in documents filed by
Parallel with the SEC.
The following discussion and analysis should be read in conjunction with
our Financial Statements and the related notes.
OVERVIEW
Our business strategy is to increase oil and gas reserves, production, cash
flow and earnings through:
. using 3-D seismic and other advanced technologies to conduct our
exploratory activities;
. investing in high-potential exploration prospects;
. acquiring producing properties we believe can add
incremental value;
. exploiting our existing producing properties;
. emphasizing cost controls; and
. positioning for opportunity.
As part of this business strategy, we have discovered oil and gas reserves
using 3-D seismic technology in the Horseshoe Atoll Reef Trend of west Texas and
the Yegua/Frio Gas Trend onshore the Gulf Coast of Texas. Additionally, we have
acquired oil and gas producing properties in the Permian Basin of west Texas.
Capital utilized to acquire such reserves has been provided primarily by secured
bank financing, sales of our equity securities and cash flow from operations.
Investment in First Permian. During 1999, we joined with three privately
held oil and gas companies to acquire oil and gas properties from Fina Oil and
Chemical Company. The acquisition was effected through the formation of First
Permian, LLC, a limited liability company. First Permian entered into a cash
merger with a wholly owned subsidiary of Fina Oil and Chemical Company. The
primary assets of the acquired subsidiary are oil and gas reserves and
associated assets in producing fields located in the Permian Basin of west
Texas. After giving effect to purchase price adjustments, First Permian paid to
Fina Oil and Chemical Company cash in the aggregate amount of approximately
$92.0 million.
The founding members of First Permian were Parallel Petroleum Corporation,
Baytech, Inc., Tejon Exploration Company and Mansefeldt Investment Corporation.
Parallel, Baytech, Tejon and Mansefeldt each contributed cash for initial
members' interests of 22.5%, 22.5%, 27.5% and 27.5%, respectively, on June 30,
1999. At March 31, 2000, Parallel, Baytech, Tejon and Mansefeldt and affiliates
owned member interests of 35%, 35%, 15% and 15%, respectively. Effective May 31,
2000, First Permian's original company agreement was amended and restated to
provide for, among other things, the admission of additional members, the
issuance of a new class of preferred membership units and the issuance of
additional common membership units in return for capital contributions totaling
$20,000,000. As a result of issuance of additional common units, our interest at
June 30, 2000 was 28.665%. However, on or before January 15, 2001, we expect our
interest to increase to 30.675%.
We account for our interest in First Permian using the equity method of
accounting whereby our investment is increased or decreased by our proportionate
share of First Permian's net income or loss.
<PAGE>
11
Operating Performance. Our operating performance is influenced by several
factors, the most significant of which are the prices we receive for our oil and
gas production volumes. The world price for oil has overall influence on the
prices we receive for our oil production. The prices received for different
grades of oil are based upon the world price for oil, which is then adjusted
based upon the particular grade. Typically, light oil is sold at a premium,
while heavy grades of crude are discounted. Gas prices we receive are primarily
influenced by seasonal demand, weather, hurricane conditions in the Gulf of
Mexico, availability of pipeline transportation to end users and proximity of
our wells to major transportation pipeline infrastructure and, to a lesser
extent, world oil prices. Additional factors influencing our operating
performance include production expenses, overhead requirements, and cost of
capital.
Our oil and gas exploration, development and acquisition activities require
substantial and continuing capital expenditures. Historically, the sources of
financing to fund our capital expenditures have included:
. cash flow from operations,
. sales of our equity securities, and
. bank borrowings.
For the six months ended June 30, 2000, the average sales price we received
for our crude oil production averaged $26.93 per barrel compared with $12.68 per
barrel at June 30, 1999 and $17.32 per barrel at December 31, 1999. The average
sales price for natural gas during this same period was $3.01 per mcf compared
with $1.94 per mcf at June 30, 1999 and $2.27 per mcf at December 31, 1999.
Sustained low oil and gas prices in 1998 and 1999 limited the capital we
had available for drilling activities during this time, which adversely affected
the quantities and value of our proved oil and gas reserves. As a result, our
available borrowing capacity under our revolving credit facility was reduced
from $18,815,889 to $15,965,889 at December 31, 1999 and $14,300,000 at June 30,
2000. This means we have borrowed all the funds currently available under our
revolving credit agreement. In the past few months, oil and gas prices have
increased significantly. Our borrowing base is currently under review.
Our oil and gas producing activities are accounted for using the full cost
method of accounting. Under this method, we capitalize all costs incurred in
connection with the acquisition of oil and gas properties and the exploration
for and development of oil and gas reserves. See Note 4 to Financial Statements.
These costs include lease acquisition costs, geological and geophysical
expenditures, costs of drilling both productive and non-productive wells, and
overhead expenses directly related to land acquisition and exploration and
development activities. Proceeds from the disposition of oil and gas properties
are accounted for as a reduction in capitalized costs, with no gain or loss
recognized unless such disposition involves a material change in reserves, in
which case the gain or loss is recognized.
Depletion of the capitalized costs of oil and gas properties, including
estimated future development costs, is provided using the equivalent
unit-of-production method based upon estimates of proved oil and gas reserves
and production, which are converted to a common unit of measure based upon their
relative energy content. Unproved oil and gas properties are not amortized, but
are individually assessed for impairment. The cost of any impaired property is
transferred to the balance of oil and gas properties being depleted.
Our production and results of operations vary from quarter to quarter. We
do not expect our 2000 production volumes to increase significantly compared to
our production volumes in the prior year as a result of our drilling activities.
RESULTS OF OPERATIONS
Our business activities are characterized by frequent, and sometimes
significant, changes in our:
. sources of production;
. product mix (oil vs. gas volumes); and
. the prices we receive for our oil and gas production.
Year-to-year or other periodic comparisons of the results of our operations
can be difficult and may not accurately describe our condition. The following
table compares the results of operations on the basis of equivalent barrels of
oil ("EBO") for the period indicated. An EBO means one barrel of oil equivalent
using the ratio of six Mcf of gas to one barrel of oil.
<PAGE>
12
<TABLE>
Three Months Ended Three Months Ended
------------------------------------ ----------------------
12-31-99 3-31-00 6-30-00 6-30-99 6-30-00
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Production and prices:
Oil (Bbls) 41,177 39,283 44,753 45,908 44,753
Natural gas (Mcf) 615,766 570,504 657,039 749,856 657,039
Equivalent barrels of oil (EBO) 143,805 134,367 154,260 170,884 154,260
Oil price (per BBL) $23.96 $26.70 $27.13 $13.17 $27.13
Gas price (per Mcf) $2.82 $3.02 $3.02 $1.85 $3.02
Price per EBO $18.97 $20.65 $20.72 $11.66 $20.72
Results of operations per EBO:
Oil and gas revenues $18.97 $20.65 $20.72 $11.66 $20.72
Costs and expenses:
Lease operating expense 4.80 4.57 4.01 3.23 4.01
Provision for losses on
trade receivables 0.60 0.00 0.00 0.00 0.00
General and administrative 1.13 1.47 1.69 1.29 1.69
Depreciation and depletion 13.49 7.91 7.90 5.60 7.90
Impairment of oil and gas
properties 11.86 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------
Total costs and expenses 31.88 13.95 13.60 10.12 13.60
------ ------ ------ ------ ------
Operating income (loss) (12.91) 6.70 7.12 1.54 7.12
------ ------ ------ ------ ------
Interest expense, net (2.50) (2.41) (2.18) (2.12) (2.18)
Other income, net 0.03 0.04 0.27 0.03 0.27
------ ------ ------ ------ ------
(2.47) (2.37) (1.91) (2.09) (1.91)
Equity in earnings (loss) of
First Permian, LLC 0.12 (2.88) (0.71) - (0.71)
------ ------ ------ ------ ------
Net income (loss) $(15.26) $ 1.45 $ 4.50 $(0.55) $ 4.50
====== ====== ====== ====== ======
Net operating cash flow before working
capital adjustments $ 9.97 $12.24 $13.11 $ 5.05 $13.11
====== ====== ====== ====== ======
</TABLE>
<TABLE>
Six Months Ended
-------------------------------------------
6/30/98 6/30/99 6-30-00
--------- --------- ---------
<S> <C> <C> <C>
Production and prices:
Oil (Bbls) 87,859 90,527 84,037
Natural gas (Mcf) 1,538,536 1,447,449 1,227,543
Equivalent barrels of oil (EBO) 344,281 331,768 288,627
Oil price (per BBL) $13.86 $12.68 $26.93
Gas price (per Mcf) $2.18 $1.94 $3.01
Price per EBO $13.26 $11.92 $20.69
Results of operations per EBO:
Oil and gas revenues $13.26 $11.92 $20.69
Costs and expenses:
Lease operating expense 3.40 3.21 4.27
General and administrative 1.22 1.28 1.59
Depreciation and depletion 5.79 5.61 7.91
------ ------ ------
Total costs and expenses 10.41 10.10 13.77
------ ------ ------
Operating income 2.85 1.82 6.92
------ ------ ------
Interest expense, net (1.88) (2.17) (2.29)
Other income, net 0.12 0.03 0.16
------ ------ ------
(1.76) (2.14) (2.13)
Equity in earnings (loss) of First Permian, LLC 0.00 0.00 (1.72)
------ ------ ------
Net income (loss) before income taxes $ 1.09 $(0.32) $ 3.07
Income tax expense - deferred 0.36 0.00 0.00
------ ------ ------
Net income (loss) $ 0.73 $(0.32) $ 3.07
====== ====== ======
Net operating cash flow before working
capital adjustments $ 6.88 $ 5.29 $12.70
====== ====== ======
</TABLE>
<PAGE>
13
The following table sets forth for the periods indicated the percentage of
total revenues represented by each item reflected on our statements of
operations.
<TABLE>
Three Months Ended Three Months Ended
------------------------------------ ----------------------
12-31-99 3-31-00 6-30-00 6-30-99 6-30-00
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Oil and gas revenues 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Lease operating expense 25.3 22.1 19.4 26.9 20.6
Provision for losses on
trade receivables 3.2 0.0 0.0 0.0 0.0
General and administrative 6.0 7.1 8.1 10.7 7.7
Depreciation and depletion 71.1 38.3 38.1 47.1 38.2
Impairment of oil and gas
properties 62.5 0.0 0.0 0.0 0.0
----- ----- ----- ----- -----
Total costs and expenses 168.1 67.5 65.6 84.7 66.5
----- ----- ----- ----- -----
Operating income (68.1) 32.5 34.4 15.3 33.5
----- ----- ----- ----- -----
Interest expense, net (13.2) (11.7) (10.5) (18.2) (11.1)
Other income, net 0.2 0.2 1.3 0.3 0.8
----- ----- ----- ----- -----
(13.0) (11.5) (9.2) (17.9) (10.3)
Equity in earnings (loss) of
First Permian, LLC 0.6 (13.9) (3.4) 0.0 (8.3)
----- ----- ----- ----- -----
(12.4) (25.4) (12.6) (17.9) (18.6)
----- ----- ----- ----- -----
Net income (loss) (80.5) 7.1 21.8 (2.6) 14.9
===== ===== ===== ===== =====
</TABLE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 2000
Oil and Gas Revenues. Oil and gas revenues increased $1,204,887, or 60%, to
$3,196,614 for the three months ended June 30, 2000, from $1,991,727 for the
same period of 1999. The increase was primarily the result of a 78% increase in
the average sales price per EBO. We received $20.72 per EBO in the three months
ended June 30, 2000 compared with $11.66 per EBO for the same period of 1999.
Higher prices were partially offset by a 10% decrease in oil and gas production
volumes.
Production Costs. Production costs increased $67,428, or 12%, to $618,570
during the second three months of 2000, compared with $551,142 for the same
period of 1999. Average production costs per EBO increased 24%, to $4.01, for
the second three months in 2000 compared to $3.23 for the same period in 1999,
primarily a result of increased production taxes associated with higher oil and
gas revenues and a 10% decrease in oil and gas production volumes.
General and Administrative Expenses. General and administrative expenses
increased by $39,249 or 18% to $260,160 for the second three months of 2000,
from $220,911 for the same period of 1999. The increase was primarily due to an
increase in audit, legal and reservoir engineering expenses. General and
administrative expenses were $1.69 per EBO in the second three months of 2000
compared to $1.29 per EBO in the second three months of 1999. The increase per
EBO is a result of lower production volumes in the second quarter of 2000 when
compared with the same period of the prior year. Future general and
administrative costs are expected to remain fairly stable with no material
increases expected in any particular category.
Depreciation, Depletion and Amortization Expense. Depreciation, depletion
and amortization expense ("DD&A") increased by $262,184 or 27%, to $1,219,142
for the second three months of 2000 compared with $956,958 for the same period
of 1999. As a percentage of revenues, the DD&A rate decreased by 1% when
compared with the prior year second quarter, a result of an increase in the
average sales price per EBO we received in the second quarter of 2000. The DD&A
rate per EBO increased to $7.90 for the second quarter of 2000 compared with
$5.60 per EBO for the second quarter of 1999. The increase in the DD&A rate per
EBO is attributable to lower production volumes in the current quarter, a
decrease in proved reserves and a noncash impairment charge incurred in the
fourth quarter of 1999 that reduced our full cost pool.
<PAGE>
14
Historically, we have reviewed our estimates of proven reserve quantities
on an annual basis. However, due to the recent volatility of oil and gas prices,
we conduct internal reviews of our estimated proven reserves on a more frequent
basis and make necessary adjustments to our DD&A rate accordingly. We believe
periodic reviews and adjustments, if necessary, will result in a more accurate
reflection of its DD&A rate during the year and minimize possible year-end
adjustments.
Equity in Earnings (Loss) of First Permian, LLC. Our share of the operating
results of First Permian resulted in a noncash charge of $109,572 for the three
months ended June 30, 2000, which reflects our pro rata share of First Permian's
loss for the three months ended June 30, 2000. First Permian recorded a loss for
the quarter primarily as a result of a noncash charge of $960,825 associated
with the restructuring of its debt during the second quarter ended June 30,
2000, which was booked as a nonrecurring extraordinary item. Also contributing
to First Permian's loss was an oil hedge payment of $3,046,548 for the three
months ended June 30, 2000. Since First Permian's date of inception was June 30,
1999, there are no results for the comparable period a year ago.
Net Interest Expense. Interest expense decreased $26,010, or 7%, to
$336,352 for the three months ended June 30, 2000 compared with $362,362 for the
same period of 1999, due principally to decreased bank borrowings.
Net Income and Operating Cash Flow. We reported net income of $694,518 for
the three months ended June 30, 2000 compared to a net loss of $94,245 for the
three months ended June 30, 1999. Operating cash flow increased $1,160,519 or
134%, to $2,023,232 for the three months ended June 30, 2000 compared to
$862,713 for the three months ended June 30, 1999. The increase in net income
and operating cash flow resulted from a 60% increase in oil and gas revenues, a
78% increase in the average sales price per EBO and a 7% decrease in interest
expense. These factors were partially offset by a 12% increase in production
costs, a 18% increase in general and administrative costs, a 27% increase in
DD&A expenses and a 10% decrease in production volumes. In addition, we recorded
a loss of $109,572 associated with our 28.665% interest in First Permian. This
is a noncash charge and does not affect operating cash flows.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000:
Oil and Gas Revenues. Oil and gas revenues increased $2,016,389, or 51%, to
$5,971,205 for the six months ended June 30, 2000, from $3,954,816 for the same
period of 1999. The increase was primarily the result of a 74% increase in the
average sales price per EBO. We received $20.69 per EBO in the six months ended
June 30, 2000 compared with $11.92 per EBO for the same period of 1999. Higher
prices were partially offset by a 13% decrease in oil and gas production.
Production Costs. Production costs increased $167,421 or 16%, to $1,232,385
during the first six months of 2000, compared with $1,064,964 for the same
period of 1999. Average production costs per EBO increased 33%, to $4.27, for
the first six months in 2000 compared to $3.21 for the same period in 1999,
primarily a result of increased production taxes associated with higher oil and
gas revenues and a 13% decrease in oil and gas production.
General and Administrative Expenses. General and administrative expenses
increased by $33,812 or 8% to $457,960 for the first six months of 2000, from
$424,148 for the same period of 1999.The increase was primarily due to an
increase in audit, legal and reservoir engineering expenses. General and
administrative expenses were $1.59 per EBO in the first six months of 2000
compared to $1.28 per EBO in the first six months of 1999. The increase per EBO
is a result of lower production volumes in the first six months of 2000 when
compared with the same six-month period of the prior year. Future general and
administrative costs are expected to remain fairly stable with no material
increases expected in any particular category.
Depreciation, Depletion and Amortization Expense. Depreciation, depletion
and amortization expense ("DD&A") increased by $421,817, or 23%, to $2,282,611
for the first six months of 2000 compared with $1,860,974 for the same period of
1999. As a percentage of revenues, the DD&A rate decreased by 9% when compared
with the prior year six months, a result of an increase in the average sales
price per EBO we received in the first six months of 2000. The DD&A rate per EBO
increased to $7.91 for the first six months of 2000 compared with $5.61 per EBO
for the first six months of 1999. The increase in the DD&A rate per EBO is
attributable to lower production volumes in the current six-month period, a
decrease in proved reserves and a noncash impairment charge incurred in the
fourth quarter of 1999 that reduced our full cost pool.
<PAGE>
15
Historically, we have reviewed our estimates of proven reserve quantities
on an annual basis. However, due to the recent volatility of oil and gas prices,
we conduct internal reviews of our estimated proven reserves on a more frequent
basis and make necessary adjustments to our DD&A rate accordingly. We believe
periodic reviews and adjustments, if necessary, will result in a more accurate
reflection of its DD&A rate during the year and minimize possible year-end
adjustments.
Equity in Earnings (Loss) of First Permian, LLC. Our share of the operating
results of First Permian resulted in a noncash charge of $496,083 for the six
months ended June 30, 2000, which reflects our pro rata share of First Permian's
loss for the six months ended June 30, 2000. First Permian recorded a loss for
the six-month period primarily as a result of a noncash charge of $960,825
associated with the restructuring of its debt during the second quarter ended
June 30, 2000, which was booked as a nonrecurring extraordinary item. Also
contributing to First Permian's loss were oil hedge payments totaling $6,125,064
for the six months ended June 30, 2000. Since First Permian's date of inception
was June 30, 1999, there are no results for the comparable period a year ago.
Net Interest Expense. Interest expense decreased $59,655, or 8%, to
$660,502 for the six months ended June 30, 2000 compared with $720,157 for the
same period of 1999; due principally to decreased bank borrowings.
Net Income and Operating Cash Flow. We reported net income of $888,119 for
the six months ended June 30, 2000 compared to a net loss of $104,528 for the
six months ended June 30, 1999. Operating cash flow increased $1,910,547, or
74%, to $3,666,813 for the six months ended June 30, 2000 compared to $1,756,266
for the six months ended June 30, 1999. The increase in net income and operating
cash flow resulted from a 51% increase in oil and gas revenues, a 74% increase
in the average sales price per EBO and an 8% decrease in interest expense. These
factors were partially offset by a 16% increase in production costs, an 8%
increase in general and administrative costs, a 23% increase in DD&A expenses
and a 13% decrease in production volumes. In addition, we recorded a loss of
$496,083 associated with our 28.665% interest in First Permian. This is a
noncash charge and does not affect operating cash flows.
LIQUIDITY AND CAPITAL RESOURCES
Our capital resources consist primarily of cash flows from our oil and gas
properties and bank borrowings supported by our oil and gas reserves. Our level
of earnings and cash flows depends on many factors, including the price of oil
and natural gas.
Working capital increased $329,058 as of June 30, 2000 compared to December
31, 1999. Current assets exceeded current liabilities by $257,411 at June 30,
2000. As of December 31, 1999, current liabilities exceeded current assets by
$71,647. Current assets as of June 30, 2000 increased primarily due to an
increase in cash and cash equivalents and an increase in accounts receivables.
Current liabilities as of June 30, 2000 decreased because of a reduction in
accounts payable - trade.
We incurred property costs of approximately $1,900,000, primarily for our
oil and gas property acquisition, development, and enhancement activities for
the six months ended June 30, 2000. Such costs were financed by the utilization
of the cash provided by operations and proceeds from the sale of certain
undeveloped properties.
Based on our projected oil and gas revenues and related expenses, we
believe that our internally generated cash flow will be sufficient to fund
normal operations, interest expense and principal reduction payments on bank
debt and preferred stock dividends. We continually review and consider
alternative methods of financing.
TRENDS AND PRICES
Changes in oil and gas prices significantly affect our revenues, cash flows
and borrowing capacity. Markets for oil and gas have historically been, and will
continue to be, volatile. Prices for oil and gas typically fluctuate in response
to relatively minor changes in supply and demand, market uncertainty, seasonal,
political and other factors beyond our control. We are unable to accurately
predict domestic or worldwide political events or the effects of other such
factors on the prices we receive for our oil and gas. Historically, we have not
entered into transactions to hedge against changes in oil and gas prices, but we
may elect to enter into hedging transactions in the future to protect against
fluctuations in oil and gas prices.
<PAGE>
16
Because of the prolonged deterioration in oil and gas prices experienced in
1998 and the first half of 1999, the capital normally available to us from our
cash flows and bank borrowings during that period was significantly reduced,
affecting our ability to fund future capital expenditures. Although oil and
natural gas prices have improved significantly since that time, our capital
expenditure budget for 2000 is still highly dependent on future oil and gas
prices and will be consistent with internally generated cash flows.
During 1999, the average sales price we received for our oil was
approximately $17.32 per barrel while the average sales prices we received for
natural gas was approximately $2.27 per thousand cubic feet ("Mcf"). At June 30,
2000, the average price we received for our oil production was approximately
$26.93 per Bbl, while the average price received at that same date for our
natural gas production was approximately $3.01 per Mcf.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not trade in derivative financial instruments and do not have firmly
committed sales transactions. We have not entered into hedging arrangements and
do not have any delivery commitments. While hedging arrangements reduce exposure
to losses as a result of unfavorable price changes, they also limit our ability
to benefit from favorable market price changes.
Our major market risk exposure is in the pricing applicable to our oil and
natural gas production. Realized pricing is primarily driven by the prevailing
domestic price for crude oil and spot prices applicable to the region in which
we produce natural gas. Historically, prices received for oil and gas production
have been volatile and unpredictable. Pricing volatility is expected to
continue. Oil prices ranged from a monthly low of $24.91 per barrel to a monthly
high of $29.68 per barrel during second quarter 2000. The natural gas prices we
received during second quarter 2000 ranged from a monthly low of $1.19 per Mcf
to a monthly high of $3.58 per Mcf. A significant decline in the prices of oil
and natural gas could have a material adverse effect on our financial condition
and results of operations.
Our only financial instrument sensitive to changes in interest rates is
bank debt. Our annual interest costs in 2000 will fluctuate based on short-term
interest rates. As the interest rate is variable and reflects current market
conditions, the carrying value approximates the fair value. The table below
shows principal cash flows and related weighted average interest rates by
expected maturity dates. Weighted average interest rates were determined using
weighted average interest paid and accrued in December 1999.
<TABLE>
June July
2001 2001 Total Fair Value
---- ---- ----- ----------
(in 000's, except interest rates)
<S> <C> <C> <C> <C>
Variable rate debt:
Revolving Facility (secured) $ 3,600 $ 10,700 $ 14,300 $ 14,300
Average interest rate 9.75% 9.75% 9.75%
</TABLE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Parallel's annual meeting of stockholders was held on June 22, 2000. At the
meeting, the following persons were elected to serve as Directors of Parallel
for a term of one year expiring in 2001 and until their respective successors
are duly qualified and elected: (1) Thomas R. Cambridge, (2) Ernest R. Duke, (3)
Myrle Greathouse, (4) Larry C. Oldham and (5) Charles R. Pannill. Set forth
below is a tabulation of votes with respect to each nominee for Director:
<TABLE>
NAME VOTES CAST FOR VOTES WITHHELD BROKER NON-VOTES
------------------- -------------- -------------- ----------------
<S> <C> <C> <C>
Thomas R. Cambridge 17,912,441 308,060 --
Ernest R. Duke 17,912,011 308,490 --
Myrle Greathouse 17,892,791 327,710 --
Larry C. Oldham 17,910,442 310,059 --
Charles R. Pannill 17,911,911 308,590 --
</TABLE>
<PAGE>
17
In addition to electing Directors, the stockholders also voted upon and
ratified the appointment of KPMG LLP to serve as our independent public
accountants for 2000. Set forth below is a tabulation of votes with respect to
the proposal to ratify the appointment of Parallel's independent public
accountants:
<TABLE>
VOTES CAST FOR VOTES CAST AGAINST ABSTENTIONS
-------------- ------------------ -----------
<S> <C> <C> <C>
18,181,168 12,933 26,400
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of Registrant. (Incorporated by reference
to Exhibit 3.1 to Form 10-K of the Registrant for the fiscal year
ended December 31, 1998)
3.2 Bylaws of Registrant (Incorporated by reference to Exhibit 3.2 to Form
10-K of the Registrant for the fiscal year ended December 31, 1995)
4.1 Certificate of Designations, Preferences and Rights of Serial
Preferred Stock 6% Convertible Preferred Stock (Incorporated by
reference to Exhibit 4.1 to Form 10-Q of the Registrant for the fiscal
quarter ended September 30, 1998)
10.1 Restated Loan Agreement, dated December 27, 1999, between the
Registrant and Bank One, Texas, N.A. (Incorporated by reference to
Exhibit 10.8 to Form 10-K of the Registrant for the fiscal year ended
December 31, 1999)
*27. Financial Data Schedule
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the quarter ended June 30,
2000.
-----------------------
* Filed herewith.
<PAGE>
18
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PARALLEL PETROLEUM CORPORATION
BY: /s/ THOMAS R. CAMBRIDGE
Date: August 14, 2000 ------------------------------
Thomas R. Cambridge
Chairman of the Board of Directors
and Chief Executive Officer
Date: August 14, 2000 BY: /s/ LARRY C. OLDHAM
-------------------------------
Larry C. Oldham,
President and
Principal Financial Officer
