SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1996
Commission File Number 0-6580
PEASE OIL AND GAS COMPANY
(Name of small business issuer as specified in its charter)
Nevada 87-0285520
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
751 Horizon Court, Suite 203
Grand Junction, Colorado 81506
(Address of principal executive offices) (Zip code)
(970) 245-5917
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
(None)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (Par Value $.10 Per Share) Series A Cumulative Convertible
Preferred Stock (Par Value $0.01 Per Share)
Title of Class
Indicate by check mark whether the issuer (1) has 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 [ ]
As of August 1, 1995 the issuer had 7,301,207 shares of its $0.10 par value
Common Stock and 202,688 shares of its $0.01 par value Series A Cumulative
Convertible Preferred Stock issued and outstanding. As of August 1, 1996 the
aggregate market value of the common stock held by non-affiliates was
$10,181,480. This calculation is based upon the closing sale price of
$1.53125 per share on August 1, 1996.
TABLE OF CONTENTS
PAGE
NUMBER
PART I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3-4
June 30, 1996 (unaudited)
and December 31, 1995
Consolidated Statements of Operations 5-6
For the Three Months Ended June 30, 1996
(unaudited) and 1995 (unaudited)
Consolidated Statements of Operations 7-8
For the Six Months Ended June 30, 1996
(unaudited) and 1995 (unaudited)
Consolidated Statements of Cash Flows 9-10
For the Six Months Ended June 30, 1996
(unaudited) and 1995 (unaudited)
Notes to Consolidated Financial Statements 11-12
Item 2. Management's Discussion and Analysis of 13-25
Financial Condition and
Results of Operations
Part II - Other Information 26
Part III - Signatures 27
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<CAPTION>
June 30, December 31,
1996 1995
------------ -----------
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 770,200 $ 677,275
Trade receivables 712,988 963,315
Inventory 468,132 532,289
Prepaid expenses and other 102,421 77,844
Common Stock Subscription Receivable - 68,750
----------- -----------
Total current assets 2,053,741 2,319,473
----------- -----------
OIL AND GAS PROPERTIES, at cost
(successful efforts method):
Undeveloped properties 377,606 377,606
Work-in-process 326,397 -
Developed properties 9,037,220 9,149,516
----------- -----------
Total oil and gas properties 9,741,223 9,527,122
Less accumulated depreciation,
depletion and impairment (3,671,491) (3,608,917)
----------- -----------
Net oil and gas properties 6,069,732 5,918,205
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Gas plant 4,099,285 4,095,227
Service equipment and rolling-stock 871,633 855,025
Land, buildings and office equipment 539,251 529,703
----------- -----------
Total property, plant and equipment 5,510,169 5,479,955
Less accumulated depreciation (1,244,458) (1,034,731)
----------- -----------
Net property, plant and equipment 4,265,711 4,445,224
----------- -----------
ASSETS HELD FOR SALE - 92,432
----------- -----------
OTHER ASSETS:
Non-compete agreements, net 329,676 352,674
Deferred debt Issuance costs, net 372,245 -
Other 287,801 311,718
----------- -----------
Total other assets 989,722 664,392
----------- -----------
TOTAL ASSETS $ 13,378,906 $ 13,439,726
=========== ===========
</TABLE>
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (continued)
<TABLE>
June 30, December 31,
1996 1995
----------- -----------
(unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 939,869 $ 1,100,474
Accounts payable, trade:
Natural gas purchases 263,165 899,878
Other 382,490 272,689
Accrued production taxes 242,717 303,287
Other accrued expenses 190,155 243,325
----------- -----------
Total current liabilities 2,018,396 2,819,653
----------- -----------
LONG-TERM LIABILITIES:
Long-term debt, less current
maturities:
Related parties 349,081 338,741
Other 437,525 884,418
Convertible Debenture 1,015,000 -
Accrued production taxes and other 278,940 379,652
----------- -----------
Total long-term liabilities 2,080,546 1,602,811
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $ .01 per
share, 2,000,000 shares authorized,
202,688 shares of Series A Cumulative
Convertible Preferred Stock issued and
outstanding,(liquidation preference of
$2,381,584 at June 30, 1996) 2,027 2,027
Common Stock, par value $.10 per share,
25,000,000 shares authorized, 7,301,207
and 7,180,804 shares issued,
respectively 730,121 718,081
Additional paid-in capital 16,856,204 16,560,194
Accumulated deficit (8,308,388) (8,263,040)
----------- -----------
Total stockholders' equity 9,279,964 9,017,262
=========== ===========
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 13,378,906 $ 13,439,726
=========== ===========
</TABLE>
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
For The Three Months
Ended June 30,
---------------------------
1996 1995
------------ -----------
<S> <C> <C>
REVENUE:
Natural gas marketing and trading $ 702,610 $ 734,720
Oil and gas sales 638,879 712,508
Gas plant processing 167,837 322,324
Oil field services and supply 104,533 382,523
Well administration and other income 33,415 17,226
----------- -----------
Total revenue 1,647,274 2,169,301
OPERATING COSTS AND EXPENSES:
Natural gas marketing and trading 614,783 643,770
Oil and gas production 353,947 428,956
Gas plant processing 126,767 275,286
Oil field services and supply 93,402 359,665
General and administrative 327,282 291,609
Depreciation, depletion and
amortization 274,171 322,751
Restructuring charges - 60,465
----------- -----------
Total operating costs and expenses 1,790,352 2,382,502
----------- -----------
LOSS FROM OPERATIONS (143,078) (213,201)
OTHER INCOME (EXPENSES):
Interest expense (71,136) (83,745)
Gain on sale of assets 18,188 18,043
----------- -----------
Total other expenses, net (52,948) (65,702)
----------- -----------
LOSS BEFORE INCOME TAXES (196,026) (278,903)
INCOME TAXES
Deferred income tax benefit - 96,600
----------- -----------
NET LOSS $ (196,026) $ (182,303)
=========== ===========
</TABLE>
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(continued)
<TABLE>
For The Three Months
Ended June 30,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
NET LOSS $ (196,026) $ (182,303)
PREFERRED STOCK DIVIDENDS:
Declared - -
In arrears (50,672) (50,672)
----------- -----------
Total preferred stock dividends (50,672) (50,672)
----------- -----------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS $ (246,698) $ (232,935)
=========== ===========
NET LOSS PER COMMON SHARE $ (0.03) $ (0.03)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 7,262,000 6,671,800
=========== ===========
</TABLE>
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
For The Six Months
Ended June 30,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
REVENUE:
Natural gas marketing and trading $ 2,048,565 $ 2,045,520
Oil and gas sales 1,251,978 1,477,035
Gas plant processing 355,680 567,202
Oil field services and supply 306,135 923,564
Well administration and other income 65,572 47,726
----------- -----------
Total revenue 4,027,930 5,061,047
----------- -----------
OPERATING COSTS AND EXPENSES:
Natural gas marketing and trading 1,745,446 1,801,570
Oil and gas production 647,863 905,883
Gas plant processing 252,008 458,495
Oil field services and supply 240,677 838,510
General and administrative 567,768 580,768
Depreciation, depletion and
amortization 548,319 695,206
Restructuring charges - 79,719
----------- -----------
Total operating costs and expenses 4,002,081 5,360,151
----------- -----------
LOSS FROM OPERATIONS 25,849 (299,104)
OTHER INCOME (EXPENSES):
Interest expense (129,255) (161,385)
Gain on sale of assets 16,649 51,454
----------- -----------
Total other expenses, net (112,606) (109,931)
----------- -----------
LOSS BEFORE INCOME TAXES (86,757) (409,035)
INCOME TAXES
Federal income tax refund 41,409 -
Deferred income tax benefit - 141,100
----------- -----------
NET LOSS $ (45,348) $ (267,935)
=========== ===========
</TABLE>
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(continued)
<TABLE>
For The Six Months
Ended June 30,
---------------------------
1996 1995
---------- -----------
<S> <C> <C>
NET LOSS $ (45,348) $ (267,935)
PREFERRED STOCK DIVIDENDS:
In arrears (101,344) (101,344)
Converted in Tender Offer - (117,000)
----------- -----------
Total preferred stock dividends (101,344) (218,344)
----------- -----------
Loss before non-cash inducement (146,692) (486,279)
Non-cash inducement in tender offer - (1,523,906)
----------- -----------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS $ (146,692) $ (2,010,185)
=========== ===========
NET LOSS PER COMMON SHARE
Before non-cash inducement $ (0.02) $ (0.09)
Non-cash inducement - (0.30)
----------- -----------
Net loss per common share $ (0.02) $ (0.39)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 7,226,000 5,219,000
=========== ===========
</TABLE>
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
For The Six Months
Ended June 30,
---------------------------
1996 1995
----------- -----------
<S> <C> <C> <C> <S>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (45,348) $ (267,935)
Adjustments to reconcile net loss
to net cash provided by
operating activities:
Provision for depreciation
and depletion 525,320 647,206
Amortization of intangible assets 42,084 59,301
Provision for bad debts - 3,773
Deferred income taxes - (141,100)
Gain on sale of property and equipment (16,648) (51,454)
Issuance of stock for services 38,050 28,281
Other (26,668) (26,667)
Changes in operating assets
and liabilities:
(Increase) decrease in:
Account receivable 250,327 610,265
Inventory 64,157 (61,195)
Prepaid expenses and other assets (33,410) (7,004)
Increase (decrease) in:
Accounts payable (526,899) (707,766)
Accrued expenses (204,125) (166,761)
----------- -----------
Net cash provided by (used in)
operating activities 66,840 (81,056)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property
and equipment (541,801) (264,347)
Proceeds from sale of property
and equipment 153,547 309,606
Proceeds from redemption of
certificate of deposit 26,500 31,200
----------- -----------
Net cash provided by (used in)
investing activities (361,754) 76,459
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 1,015,000 -
Repayment of long-term debt (510,830) (449,147)
Net proceeds from issuance of
Common Stock 68,750 233,880
</TABLE>
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(continued)
<TABLE>
For The Six Months
Ended June 30,
---------------------------
1996 1995
----------- -----------
<S> <C> <S> <C> <C> <C> <C>
Debt Issuance costs (185,081) -
----------- -----------
Net cash provided by (used in)
financing activities 387,839 (215,267)
----------- -----------
INCREASE (DECREASE) IN CASH AND
EQUIVALENTS 92,925 (219,864)
CASH AND EQUIVALENTS, beginning
of period 677,275 532,916
----------- -----------
CASH AND EQUIVALENTS, end of period $ 770,200 $ 313,052
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 98,216 $ 142,251
=========== ===========
Cash paid for income taxes $ - $ -
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Estimated fair value of warrants
granted and capitalized as
debt issuance costs $ 200,000 $ -
=========== ===========
Conversion of long-term debt into
common stock $ 70,000 $ -
=========== ===========
Issuance of stock for services $ 38,050 $ 28,281
=========== ===========
Acquisition of oil and gas properties
for stock $ - $ 59,922
=========== ===========
Long-term debt incurred
for purchase of vehicles $ - $ 24,992
=========== ===========
<PAGE>
Note 1 - Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information. They do not include all information and
notes required by generally accepted accounting principles for complete
financial statements. However, except as disclosed herein, there has been
no material change in the information disclosed in the notes to consolidated
financial statements included in the Annual Report on Form 10-KSB of Pease
Oil and Gas Company and Subsidiaries (the Company) for the year ended
December 31, 1995. In the opinion of Management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the periods
presented are not necessarily indicative of the results that may be expected
for the full year.
The accounting policies followed by the Company are set forth in Note 1 to
the Company's financial statements in Form 10-KSB for the year ended
December 31, 1995. It is suggested that these financial statements be read
in conjunction with the financial statements and notes included in the Form
10-KSB.
Note 2 - Private Placement:
In April 1995, the Company initiated a private placement to sell up to
$5,000,000 of collateralized convertible debentures in the form of "Units".
The private placement is more thoroughly discussed later in Managements
Discussion and Analysis under the caption Liquidity and Capital resources.
Note 3 - Deferred Debt Issuance Costs:
In connection with the warrants issued to Beta Capital Group, Inc. In March
1996 to purchase one million shares of the Company's common stock at $ .75
per share, (which are more fully described in the Annual Report on Form 10-KSB),
the Company recorded the estimated fair value of the warrants of $200,000 as
a debt issuance cost. This amount will be amortized over the term of the
convertible debentures discussed in Note 2. The estimated fair value of the
warrants was determined under the valuation methodology prescribed in
Statement of Financial Accounting Standards No. 123 and the consensus reached
in issue No. 91-3 of the Emerging Issues Task Force.
In addition, all other direct costs incurred in connection with the private
placement have been capitalized and are being amortized over the term of the
convertible debentures.
Note 4 - Income Taxes:
The total income tax expense or benefit differs from the amount that would
be provided by applying the statutory U.S. Federal income tax rate to income
or loss before taxes primarily due to the utilization of net operating loss
carry forwards, tax credit carry forwards, and percentage depletion carry
forwards.
The income tax refund of $41,509 recorded during the first quarter of 1996
is related to a net operating loss carry back that was filed with the
Internal Revenue Service in March 1996.<PAGE>
Note 5 - Reclassifications:
Certain reclassifications have been made to the 1995 financial statements to
conform to the presentation in 1996. The reclassifications had no effect on
the 1995 net loss.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
</TABLE>
<TABLE>
SELECTED FINANCIAL DATA
Statement of Operations Data: For the Three Months
Ended June 30,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Natural gas marketing and trading $ 702,610 $ 734,720
Oil and gas sales 638,879 712,508
Gas plant processing revenue 167,837 322,324
Total operating revenues 1,647,274 2,169,301
Net income (loss) (196,026) (182,303)
Preferred Stock Dividends:
Declared - -
In arrears (50,672) (50,672)
--------- ---------
Net income (loss) applicable
to common stockholders $ (246,698) $ (232,935)
========= =========
Per Share Data:
Before non-cash inducement charge (0.03) (0.03)
Effect of non-cash inducement charge - -
--------- ---------
Net income (loss) per common share $ (0.03) $ (0.03)
========= =========
Cash dividends declared per common share - -
========= =========
</TABLE>
SELECTED FINANCIAL DATA
<TABLE>
Statement of Operations Data: For the Six Months
Ended June 30,
----------------------------
1996 1995
----------- -------------
<S> <C> <C>
Natural gas marketing and trading $ 2,048,565 $ 2,045,520
Oil and gas sales 1,251,978 1,477,035
Gas plant processing revenue 355,680 567,202
Total operating revenues 4,027,930 5,061,047
Net income (loss) (45,348) (267,935)
Preferred stock dividends:
Declared - -
In arrears (101,344) (101,344)
Converted in tender offer - (117,000)
Non-cash inducement charge to
convert perferred stock to common stock - (1,523,906)
----------- -----------
Net income (loss) applicable
to common stockholders $ (146,692) $(2,010,185)
=========== ===========
Per Share Data: For the Six Months
Ended June 30,
----------------------------
Before non-cash inducement charge (0.02) (0.09)
Effect of non-cash inducement charge - (0.30)
----------- -----------
Net income (loss) per common share $ (0.02) $ (0.39)
=========== ===========
Cash dividends declared per common share - -
=========== ===========
</TABLE>
Balance Sheet Data: As of
---------------------------
6/30/96 12/31/95
------------ ------------
Working capital (deficit) $ 35,345 $ (500,180)
Total assets $13,378,906 $13,439,726
Long-term liabilities $ 2,080,546 $ 1,602,811
Stockholder's equity $ 9,279,964 $ 9,017,262
Liquidity
At June 30, 1996, the Company's cash balance was $770,200 with a positive
working capital position of $35,345, compared to a cash balance of $677,275
and a working capital deficit of $500,180 at December 31, 1995. The change
in the Company's cash balances is summarized as follows:
Cash balance at December 31, 1995 $ 677,275
Cash provided by operating activities 66,840
Capital expenditures (541,801)
Proceeds from the sale of property
and equipment 153,547
Redemption of certificates of deposit 26,500
Payments on Long-term debt (510,830)
Net proceeds from issuance of
convertible debt 829,919
Proceeds from common stock
subscription receivable 68,750
---------
Cash balance at June 30, 1996 $ 770,200
=========
The success of the Company is largely dependent on its ability to raise
additional debt or equity capital to fund future drilling and development
activities. Since the acquisition of Skaer Enterprises Inc. ("Skaer")in
August of 1993, the Company has suffered from undercapitalization, lacking
the necessary funds to properly exploit the assets acquired from Skaer or
explore other opportunities outside of its existing asset base. Therefore,
management has diligently pursued various avenues in search of a strategic
partner to facilitate the Company's growth.
As a result of these efforts, in March 1996, the Company entered into a
consulting agreement with Beta Capital Group, Inc. ("Beta"). Beta is
located in Newport Beach, California and specializes in emerging companies
that have both capital needs and market support requirements. Steve Antry,
Beta's President, is from a third generation oil and gas background, was an
officer of Benton Oil and Gas between 1989 and 1992 and marketed Swift
Energy's Income Funds between 1987 and 1989. The Company has joined forces
with Beta in an effort to raise significant debt and/or equity capital in
the very near future.
In April 1995, the Company initiated a private placement to sell up to
$5,000,000 of collateralized convertible debentures in the form of "Units".
Each Unit consists of one $50,000 five-year 10% collaterized convertible
debenture and warrants to purchase 25,000 shares of the Company's common
stock at $1.25 per share. The debentures will be subordinate to payment in
full of the existing debt with Colorado National Bank. The debentures will
be collaterized by a second priority interest in certain oil and gas
properties owned and operated by the Company as well as a second priority
interest in the Company's gas processing facility. The debentures will be
convertible, at the holders option, into the Company's common stock of $3.00
per share and may be redeemed by the Company, in whole or in part, beginning
at a premium of 110% of the original principal amount and are subject to
adjustment beginning on April 25, 1999. Interest on the debentures will be
payable quarterly commencing on September 30, 1996 and the entire principal
balance will be due on April 15, 2001. The warrants will be exercisable
commencing on August 1, 1996 and will expire on July 31, 2001. The Company
will be entitled to call the warrants at any time commencing 90 days after
issuance at a price of $0.10 per warrant. As of August 1, 1996, the Company
had sold 27 units generating gross proceeds of $1,355,000. The Company has
agreed to use its best efforts to register for resale: (1) the shares of
common stock into which the debentures may be converted; (2) the warrants;
and (3) the shares of common stock issuable upon exercise of the warrants by
including such securities on a registration statement on an appropriate form
filed with the United States Securities and Exchange Commission within 60
days of terminating the private placement.
Any future proceeds generated from these efforts, if successful, will be
used to: retire the existing debt with Colorado National Bank, working
capital, more horizontal development drilling in Loveland Field (Colorado),
and to participate with other industry leaders in select drilling ventures
in Louisiana, the Gulf of Mexico or elsewhere in the continental United
States. The capital raising discussed above is only the first of a series
of financings the Company is contemplating with Beta's assistance.
Accordingly, Management firmly believes that this union with Beta will put
the Company well on its way to realizing its goal of growth and expansion.
Regardless of the outcome of the private placement, Management believes the
current cash flows will support continued operations for at least 12 months.
The Company has not yet determined what actions it will take if the
contemplated private placement should be unsuccessful, or if the current
cash flows will not support continued operations. Potential actions may
include (i) selling some of the existing oil and gas properties; (ii)
reducing, downsizing, discontinuing and/or spinning-off other assets and
operations of the Company; and (iii) attempting to raise additional capital
through private placements, joint ventures or debt financing with partners
other that Beta.
Capital Expenditures
During the first half of 1996, the Company invested $ 541,801 in property
and equipment as follows:
Oil and Gas Properties:
Horizontal drilling in process $ 326,397
Perforating and fracing 3 wells
in Loveland Field 95,473
Other workovers 87,689
---------
Total Oil and Gas prooperties $ 509,559
Service Equipment and
Rolling Stock 21,550
Office Equipment 6,634
Gas Plant facility 4,058
---------
$ 541,801
=========
As of June 30, 1996, the Company was in process of drilling the first
"double-stacked" horizontal well in Colorado. A "double-stacked" horizontal
well consists of drilling two separate horizontal wells, or legs, in two
separate geologic formations from a single well bore. This technology has
been used extensively in the Austin Chalk Formation in Texas. Pease Oil and
Gas Company is the first to bring this technology to Colorado. The drilling
rig was released on July 22, 1996 and the Company expects to have the well
completed in August 1996.
Prior to commencing the horizontal drilling, the Company recompleted 3 wells
in Loveland Field in the Timpas formation - a relatively undeveloped
formation. Based on the results of this work as well as other geologic and
engineering data, the Company concluded that the Timpas formation was an
excellent candidate to be included in the anticipated horizontal drilling
program in Loveland Field. Accordingly, one of the legs drilled in the
first horizontal well was in the Timpas formation. Should the Company be
successful in selling all of the private placement it is anticipated up to a
total $2.5 million will be invested for additional drilling and development
activities in 1996.
RESULTS OF OPERATIONS
Overview
The Company's largest source of operating income is from the sale of
produced oil, gas, and natural gas liquids. Therefore, the level of the
Company's revenues and earnings are affected by prices at which natural gas,
oil and natural gas liquids are sold. As a result, the Company's operating
results for any prior period are not necessarily indicative of future
operating results because of the fluctuations in natural gas, oil and
natural gas liquid prices and the lack of predictability of those
fluctuation as well as changes in production levels.
Early in 1995, the Company initiated a corporate restructuring that focused
on: eliminating areas of its business that were losing money; reducing
operating costs; increasing efficiencies; and generating funds for working
capital. These initiatives included but were not limited to:
1) downsizing of the Company's oil field service and supply operations.
As is more fully discussed later in this section under their respective
captions, the Company's oil field service and oil field supply
operating margins have been historically low and even unprofitable.
The burden of these low margins or operating losses have been
compounded with the risks inherent in these operations, the capital
investment required to maintain and operate, and the uncertainty of the
future prospects in light of the overall decrease in natural gas prices
and drilling activity. Downsizing these operations is not expected to
have a material negative effect on the Company's overall results of
operations.
2) closing the administrative office in Denver, Colorado which eliminated
annual payroll costs associated with its accounting and administrative
staff of approximately $140,000. The Company also expects savings of
an additional $60,000 annually from costs duplicated as a result of the
Company maintaining two administrative offices (such as rent,
telephone, insurance and office supplies).
Prior to the restructuring initiatives discussed above, the Company also
addressed one of the single largest cash demands burdening the Company - the
preferred stock dividend. In light of the Company's continuing operating
losses, deteriorating working capital position, and belief that the
Company's primary lender would not approve a payment thereon, the Company's
Board of Directors voted in December 1994 to not declare the quarterly cash
dividend to holders of the Company's Series A Cumulative Convertible
Preferred Stock ("Preferred Stock") for the fourth quarter of 1994. In
March 1995, the Board of Directors voted to suspend payment on any future
Preferred Stock dividends indefinitely. However, pursuant to the terms
underlying the Preferred Stock, dividends will continue to accrue on an
monthly basis. Dividends paid in the future, if any, on the Preferred stock
will be contingent on many factors, including but not limited to, whether or
not a dividend can be justified through the cash flow and earnings generated
from future operations.
Since the future payment of Preferred Stock dividends was so uncertain, and
the Company wanted to preserve its working capital, in January 1995, the
Company extended a tender offer to the Preferred stockholders. On February
28, 1995, the Company completed the tender offer to its Preferred
Stockholders whereby the holders of the Company's Preferred Stock were given
the opportunity to convert each share of Preferred Stock and all then
accrued and undeclared dividends (including the full dividend for the
quarters ended December 31, 1995 and March 31, 1995) into 4.5 shares of the
Company's Common Stock and warrants to purchase 2.625 shares of Common Stock
at $5.00 per share through December 31, 1996 and $6.00 per share through
August 13, 1998, (the date the warrants expire). As a result of the tender
offer 933,492 shares of the Preferred stock converted into 4,200,716 shares
of the Company's Common Stock and warrants to purchase 2,450,417 shares of
Common stock. In addition, 21,600 shares of Preferred Stock converted into
56,739 shares of Common Stock prior to the tender offer. Accordingly, as of
March 31, 1996 there remains 202,688 shares of Preferred Stock outstanding.
These events substantially changed the capital structure of the Company and
alleviated the burden of approximately 83% of Preferred Stock dividends.
These restructuring initiatives consolidated and focused the Company's
operations such that it is operating very efficiently today. The
consideration of the restructuring is an important component when comparing
the results of operations between the two periods presented.
<PAGE>
Total Revenue
Total Revenue from all operations was as follows:
For the Three Months Ended June 30,
-----------------------------------------
1996 1995
---------------- ----------------
Amount % Amount %
--------- ---- --------- ----
Natural gas marketing
and trading $ 702,610 43% $ 734,720 34%
Oil and gas sales 638,879 39% 712,508 33%
Gas plant processing 167,837 10% 322,324 14%
Oil field services and supply 104,533 6% 382,523 18%
Well administration
and other income 33,415 2% 17,226 1%
--------- ---- --------- ----
Total revenue $ 1,647,274 100% 2,169,301 100%
========= ==== ========= ====
For the Six Months Ended June 30,
-----------------------------------------
1996 1995
---------------- ----------------
Amount % Amount %
--------- ---- --------- ----
Natural gas marketing
and trading $ 2,048,565 51% $ 2,045,520 41%
Oil and gas sales 1,251,978 30% 1,477,035 29%
Gas plant processing 355,680 9% 567,202 11%
Oil field services and supply 306,135 8% 923,564 18%
Well administration
and other income 65,572 2% 47,726 1%
--------- ---- --------- ----
Total revenue $ 4,027,930 100% 5,061,047 100%
========= ==== ========= ====
The decrease in total revenue is a result of the Company not processing any
third party gas through its gas plant facility in 1996, a decrease in oil
and gas production and a loss of revenue resulting from the Company's
downsizing of its service and supply operations. These circumstances, along
with any known trends or changes that effect revenue on a line-by-line basis
are discussed in the following paragraphs under their respective captions.
Natural Gas Marketing and Trading
The Company has a "take-or-pay" contract with Public Service Company of
Colorado ("PSCo") which calls for PSCo to purchase from the Company a
minimum of 2.92 billion cubic feet ("BCF") of natural gas annually. The
price paid the Company by PSCo is based on the Colorado Interstate Gas
Commission's "spot" price, plus a fixed price bonus. The Company fills a
portion of this contract with marketing and trading activities which
represent gas purchased from third parties and sold to PSCo under the terms
of the contract.
Operating statistics for the Company's Marketing and Trading Activities for
the periods presented are as follows:
For the Three Months
Ended June 30,
---------------------------------
1996 1995
------------- -------------
Total Volume Sold (Mcf) 498,277 505,785
Average Price $ 1.41 $ 1.45
----------- -----------
Total Revenue $ 702,610 $ 734,720
Costs (614,784) (643,770)
----------- -----------
Gross Margin $ 87,826 $ 90,950
=========== ===========
For the Six Months
Ended June 30,
---------------------------------
1996 1995
------------- -------------
Total Volume Sold (Mcf) 1,223,756 1,345,742
Average Price $ 1.67 $ 1.52
----------- ------------
Total Revenue $ 2,048,565 $ 2,045,520
Costs (1,745,446) (1,801,570)
----------- ------------
Gross Margin $ 303,119 $ 243,950
=========== ============
The contract with PSCo expired on June 30, 1996. Historically, the price
paid by PSCo under that contract was at a premium above the market and
therefore allowed for the marketing and trading activities. Although the
Company has been negotiating with PSCo to renew the contract, no formal
agreement has been reached as of the date of this report. Consequently, no
marketing and trading revenues have been generated subsequent to June 30,
1996. With the increasing competition fostering within all phases of the
natural gas industry, it is unlikely that the contract will be renewed at an
above market premium, if at all, and the Company's Marketing and Trading
activities will probably disappear. Accordingly, since the gross margin
represents the net cash flow and income generated from this activity, the
loss of this premium contract price will have a material and negative impact
on the Company's future operations.
<PAGE>
Oil and Gas
Operating statistics for oil and gas production for the periods presented
are as follows:
For the Three Months
Ended June 30,
------------------------------------
1996 1995
----------- -----------
Production:
Oil (bbls) 26,500 33,100
Gas (Mcf) 112,000 144,800
BOE (6:1) 45,100 57,200
Average Collected Price:
Oil (per bbl) $ 19.71 $ 16.77
Gas (per Mcf) $ 1.05 $ 1.08
Per BOE (6:1) $ 14.16 $ 12.44
Gross Margin:
Revenue $ 638,879 $ 712,508
Costs (353,947) (428,956)
---------- ----------
Gross Margin $ 284,932 $ 283,552
========== ==========
Gross Margin Percent 45% 40%
========== ==========
Average Production Costs per
BOE before DD&A $ 7.85 $ 7.50
DD&A per BOE 3.47 3.08
---------- ----------
Total Costs of Production
per BOE $ 11.32 $ 10.58
========== ==========
Change in oil and gas revenue
attributed to:
Production $ (147,894)
Price 74,265
----------
(73,629)
==========
For the Six Months
Ended June 30,
-------------------------------------
1996 1995
----------- ------------
Production:
Oil (bbls) 53,100 68,500
Gas (Mcf) 228,200 280,500
BOE (6:1) 91,100 115,300
Average Collected Price:
Oil (per bbl) $ 18.72 $ 16.87
Gas (per Mcf) $ 1.13 $ 1.14
Per BOE (6:1) $ 13.75 $ 12.81
Gross Margin:
Revenue $1,251,978 $ 1,477,035
Costs (647,863) (905,883)
---------- ----------
Gross Margin $ 604,115 $ 571,152
========== ==========
Gross Margin Percent 48% 39%
========== ==========
Average Production Costs per
BOE before DD&A $ 7.11 $ 7.86
DD&A per BOE 3.45 3.42
---------- ----------
Total Costs of Production
per BOE $ 10.56 $ 11.28
========== ==========
Change in oil and gas revenue
attributed to:
Production $ (320,535)
Price 95,478
----------
(225,057)
As illustrated, most of the decrease in oil and gas revenue and the
corresponding costs were caused by a decrease in production which can be
attributed to the following: 1) the sale of several marginal, uneconomic, or
nonstrategic oil and gas properties; 2) operating reconfigurations on
certain properties designed to lower the production levels yet maximize the
gross margins from operations; and 3) the natural decline inherent of oil
and gas wells.
The sale and reconfiguration efforts are reflective of the Company's focus
on managing production, controlling costs and increasing the net margin from
oil and gas producing activities.
Gas Plant Processing Revenues
This category accounts for the natural gas sold at the tailgate of the Gas
Plant and the natural gas liquids extracted and sold by the Gas Plant
facility. The revenues generated from these products are derived from the
Company's own production.
Operating statistics for the periods presented are as follows:
For the Three Months
Ended June 30,
--------------------------
1996 1995
---------- -----------
Production: Volumes Volumes
---------- -----------
Natural Gas Sold (Mcf) 60,713 128,900
B-G Mix (gallons) 228,895 372,200
Propane (gallons) 175,531 299,000
Gross Margin: Amount Amount
----------- -----------
Revenue $ 167,837 $ 322,324
Costs (126,767) (275,286)
--------- ---------
Gross Margin $ 41,070 $ 47,038
Gross Margin Percent 24% 15%
For the Six Months
Ended June 30,
--------------------------
1996 1995
---------- -----------
Production: Volumes Volumes
---------- -----------
Natural Gas Sold (Mcf) 119,435 217,600
B-G Mix (gallons) 464,802 673,600
Propane (gallons) 352,481 551,900
Gross Margin: Amount Amount
----------- -----------
Revenue $ 355,680 $ 567,202
Costs (252,008) (458,495)
--------- ---------
Gross Margin $ 103,672 $ 108,707
Gross Margin Percent 29% 19%
The decrease in processing volumes and revenue during 1996 as compared to
the same periods in 1995, can be substantially attributed to the Company
purchased and processed third party gas between February 1995 and September
1995. In October 1995 the Company stopped processing third party gas to
correct some operational problems. The operational problems have been
corrected and the plant is now running more efficiently and effectively than
it has in the past. However, with the increased competition to process
natural gas and the historically low gas prices prevalent in the Rocky
Mountain Region, the Company has not been able to purchase third party gas
at an economical rate. These factors along with the declining rig count in
the DJ Basin where the gas plant facility is located, and the increasing
competitive environment in the natural gas market, it is uncertain at this
time if the Company will be able to compete with other gas plants and
purchasers of natural gas in its market area. Accordingly, it cannot be
determined at this time when, or if, the Company will process any additional
third party gas.
Costs associated with the Gas Plant operations consist of both semi-fixed
and variable costs. The semi-fixed costs consist of direct payroll,
utilities, operating supplies, general and administrative costs, and other
items necessary in the day-to-day operations. The semi-fixed costs average
approximately $435,000 annually and are not expected to change significantly
regardless of the volume processed by the Gas Plant. The variable costs
consist primarily of purchased gas, plant fuel and shrink, lubricants,
repair and maintenance, and costs of gas marketing and buying. These costs
are generally a direct function of the volume processed by the Gas Plant and
are expected to either increase or decrease proportionately with the
corresponding plant production. The costs in 1995 increased both in amount
and as a percentage of revenue, when compared to 1996, as a result of the
Company purchasing and processing third party gas between February 1995 and
September 1995. Currently, the gas processed by the Gas Plant facility is
from wells the Company owned. Accordingly, the costs, as a percentage of
revenue, have decreased in 1996.
Oil Field Services and Oil Field Supply
Operating statistics for the Company's oil field service and supply
operations for the periods presented are as follows:
For the Three Months Ended June 30,
--------------------------------------
Service and Supply Operations
--------------------------------------
1996 1995
------------- -------------
Revenue $ 104,533 $ 382,523
Costs (93,402) (359,665)
----------- -----------
Net Operating
Income (Loss) $ 11,131 $ 22,858
=========== ===========
For the Six Months Ended June 30,
--------------------------------------
Service and Supply Operations
--------------------------------------
1996 1995
------------- -------------
Revenue $ 306,135 $ 923,564
Costs (240,677) (838,510)
----------- -----------
Net Operating
Income (Loss) $ 65,458 $ 85,054
=========== ===========
The decrease in revenue from the operations are directly related to the
restructuring initiatives conducted in 1995. A summary of the restructuring
for both operations is discussed in the following paragraphs.
Service Operations
Historically, the Company's service business has operated out of two
locations - Loveland and Sterling Colorado. The services provided included:
servicing rigs, vacuum trucks, roustabout services, and hot oiling services.
The operations serviced both the Company's needs and those of third parties.
The restructuring was focused on reducing the service rig, vacuum truck, and
roustabout operations to a point where the Company can service its own needs
efficiently and at the lowest possible cost, while performing only limited
services for third parties. Any services of this type to third parties will
be limited to those circumstances when the equipment and man power is not
needed in the Company's operations. The Company did retain its hot oiler
fleet and intends to continue providing this service to third parties on a
full time basis.
Supply Operations
Historically, the Company's supply business has operated out of two
locations - Loveland and Sterling, Colorado. The restructuring was focused
on consolidating the operations to one location (Loveland, Colorado),
eliminating duplicate costs and ultimately reducing the amount of inventory.
Although management expects total revenues from the service and supply
operations to decrease approximately 50% on an annual basis, and therefore
generate approximately $600,000 to $700,000 annually, it is not expected to
have a material negative effect on the Company's overall results of
operations in light of the historically low margins.
Well Administration and Other Income
This revenue primarily represents the revenue generated by the Company for
operating oil and gas properties. There has been no significant change in
the average monthly revenue between 1996 and 1995 and Management does not
expect any significant change in the future.
General and Administrative Expenses
Total General and administrative costs for the periods presented remained
relatively consistent despite the increased costs attributable to the
consulting contract entered into with Beta in March 1996. Fees and
reimbursed expenses incurred by the Company in connection with Beta's
contract were $64,778 and $79,826 for the three months ended June 30, 1996
and the six months ended June 30, 1996, respectively.
Depreciation, Depletion and Amortization
Depreciation, Depletion and Amortization ("DD&A") for the periods presented
consisted of the following:
For the Three Months
Ended June 30,
-----------------------------
1996 1995
------------ ------------
Oil and Gas Properties $ 156,468 $ 176,454
Gas Plant and Other Buildings 60,868 61,057
Rolling Stock 25,570 37,550
Other Field Equipment 7,936 12,104
Furniture and Fixtures 11,830 11,586
Non-Compete Agreements 11,499 24,000
--------- ---------
Total $ 274,171 $ 322,751
========= =========
For the Six Months
Ended June 30,
-----------------------------
1996 1995
------------ ------------
Oil and Gas Properties $ 314,369 $ 394,672
Gas Plant and Other Buildings 122,940 121,920
Rolling Stock 48,618 81,331
Other Field Equipment 15,882 26,139
Furniture and Fixtures 23,512 23,144
Non-Compete Agreements 22,998 48,000
--------- ---------
Total $ 548,319 $ 695,206
========= =========
DD&A per BOE for oil and gas properties has remained relatively consistent
for the periods presented. The decrease in DD&A for the Rolling Stock and
Other Field Equipment can be attributed to the disposition of the
corresponding assets during the restructuring of the Service and Supply
operations. The decrease in the amortization of the Non-compete Agreements
is because one agreement with an original cost basis of $100,000, which was
being amortized over a 24 month period, became fully amortized in 1995.
Interest Expense:
The lower interest expense for the periods presented is reflective of the
decrease in the average long term debt outstanding during those periods.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company may from time to time be involved in various claims, lawsuits,
disputes with third parties, actions involving allegations of
discrimination, or breach of contract incidental to the operation of its
business. The Company is not currently involved in any such incidental
litigation which it believes could have a materially adverse effect on its
financial condition or results of operations.
Item 2. Changes in Securities
(a) There is no information reportable under this item for the period
covered by this report.
(b) No rights evidenced by any class of registred securities have been
mateially limited or qualified by the issuance or modification of any
other class of securities.
Item 3. Defaults Upon Senior Securities
(a) There has been no material default in the payment of principal,
interest, or any other material default, with respect to any
indebtedness of the small business issuer during the period covered by
this report.
(b) In December 1994, the Board of Directors elected to forgo the
declaration of the regular quarterly dividend for the Company's Series
A Cumulative Convertible Preferred Stock for the fourth quarter of
1994. In March 1995, the Board of Directors elected to suspend the
Preferred Stock dividend indefinitely. However, the dividends continue
to accrue on a monthly basis and are cumulative. Accordingly, as of
June 30, 1996, dividends in arrears aggregate $354,704 or $1.75 per
share.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted reportable under this item for the period covered by
this report.
Item 5. Other Information
There is no information reportable under this item for the period covered by
this report.
Item 6. Exhibits and Reports on Form 8-K
(a) There are no exhibits filed as part of this report.
(b) There were no reports on Form 8-K filed during the quarter ended June
30, 1996.
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
PEASE OIL AND GAS COMPANY
Date: August 13, 1996 By: /s/ Willard H. Pease, Jr.
Willard H. Pease, Jr.
President and Chief Executive Officer
Date: August 13, 1996 By: /s/ Patrick J. Duncan
Patrick J. Duncan
Chief Financial Officer and
Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 770,200
<SECURITIES> 0
<RECEIVABLES> 735,246
<ALLOWANCES> 22,258
<INVENTORY> 468,132
<CURRENT-ASSETS> 2,053,741
<PP&E> 15,251,392
<DEPRECIATION> 4,915,949
<TOTAL-ASSETS> 13,378,906
<CURRENT-LIABILITIES> 2,018,396
<BONDS> 0
0
2,027
<COMMON> 730,121
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 13,378,906
<SALES> 3,962,358
<TOTAL-REVENUES> 4,027,930
<CGS> 2,885,994
<TOTAL-COSTS> 2,885,994
<OTHER-EXPENSES> 1,116,087
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 129,255
<INCOME-PRETAX> (86,757)
<INCOME-TAX> (41,409)
<INCOME-CONTINUING> (45,348)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (45,348)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
