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
FOR THE QUARTER ENDED MARCH 31, 1997
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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)
Common Stock Purchase Warrants (Expire August 13, 1998)
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 May 12, 1997 the issuer had 12,617,886 shares of its $0.10 par
value Common Stock and 122,922 shares of its $0.01 par value Series A Cumulative
Convertible Preferred Stock issued and outstanding.
Transitional Small Business Issuer Disclosure Format Yes[ ]No[X]
1
<PAGE>
TABLE OF CONTENTS
PAGE
NUMBER
PART I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3-4
March 31, 1997 (unaudited)
and December 31, 1996
Consolidated Statements of Operations 5
For the Three Months
Ended March 31, 1997
(unaudited) and 1996 (unaudited)
Consolidated Statements of Cash Flows 6-7
For the Three Months Ended March 31, 1997
(unaudited) and 1996 (unaudited)
Notes to Consolidated Financial Statements 8-9
Item 2. Management's Discussion and Analysis of 10-19
Financial Condition and
Results of Operations
Part II - Other Information 19-21
Part III - Signatures 22
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ --------
(unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and equivalents ...................................... $ 2,901,908 $ 1,995,860
Trade receivables ......................................... 591,335 599,648
Inventory ................................................. 459,304 408,787
Prepaid expenses and other ................................ 88,636 56,327
------------ ------------
Total current assets .................................... 4,041,183 3,060,622
------------ ------------
OIL AND GAS PROPERTIES, at cost (successful efforts method):
Exploratory wells in progress ............................. 527,439 181,312
Undeveloped properties .................................... 2,101,727 351,727
Developed properties ...................................... 12,697,554 9,505,408
------------ ------------
Total oil and gas properties ............................ 15,326,720 10,038,447
Less accumulated depreciation
and depletion ............................................. (4,086,845) (3,946,974)
Net oil and gas properties .............................. 11,239,875 6,091,473
PROPERTY, PLANT AND EQUIPMENT, at cost:
Gas plant ................................................. 4,099,285 4,099,285
Service equipment and vehicles ............................ 891,512 879,313
Land, buildings and office equipment ...................... 459,228 459,228
------------ ------------
Total property, plant and equipment ..................... 5,450,025 5,437,826
Less accumulated depreciation ............................. (1,454,796) (1,376,154)
------------ ------------
Net property, plant and equipment ....................... 3,995,229 4,061,672
------------ ------------
OTHER ASSETS:
Non-compete agreements, net ............................... 295,179 306,678
Other ..................................................... 272,493 274,830
Deferred debt issuance costs .............................. 1,042,074 1,105,874
------------ ------------
Total other assets ...................................... 1,609,746 1,687,382
------------ ------------
TOTAL ASSETS ............................................... $ 20,886,033 $ 14,901,149
============ ============
</TABLE>
3
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ---------
<S> <C> <C>
(unaudited)
CURRENT LIABILITIES:
Current maturities of long-term debt:
Related parties ................................. $ -- $ 285,895
Other ........................................... 32,610 45,944
Accounts payable, trade .............................. 605,412 267,540
Accrued production taxes ............................. 288,122 288,122
Other accrued expenses ............................... 199,869 265,427
------------ ------------
Total current liabilities ......................... 1,126,013 1,152,928
------------ ------------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities:
Convertible debentures ........................ 4,650,000 5,000,000
Other ......................................... 29,855 19,945
Accrued production taxes ............................. 309,284 256,088
------------ ------------
Total long-term liabilities .......................... 4,989,139 5,276,033
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $ .01 per share,
2,000,000 shares authorized, 122,922 and 179,938
shares of Series A Cumulative
Convertible Preferred Stock issued and
outstanding, respectfully (liquidation
preference of $1,536,525 at March 31, 1997) ..... 1,229 1,799
Common Stock, par value $.10 per share,
25,000,000 shares authorized, 11,510,819
and 7,526,817 shares issued and
outstanding, respectively .......................... 1,151,082 752,682
Additional paid-in capital ........................... 23,807,265 17,392,329
Accumulated deficit .................................. (10,188,695) (9,674,622)
------------ ------------
Total stockholders' equity ......................... 14,770,881 8,472,188
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,886,033 $ 14,901,149
============ ============
</TABLE>
4
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
For The Three Months
Ended March 31,
1997 1996
---------- --------
<S> <C> <C>
REVENUE:
Oil and gas sales ...................... $ 789,206 $ 613,099
Natural gas marketing and trading ...... -- 1,345,955
Gas plant processing ................... 209,510 187,843
Oil field services and supply .......... 198,319 201,602
Well administration and other income ... 21,805 30,749
----------- -----------
Total revenue ....................... 1,218,840 2,379,248
OPERATING COSTS AND EXPENSES:
Oil and gas production ................. 327,799 293,916
Exploration costs ...................... 307,280 --
Natural gas marketing and trading ...... -- 1,130,663
Gas plant processing ................... 104,838 125,241
Oil field services and supply .......... 153,658 147,275
General and administrative ............. 325,449 225,538
Consulting agreement-related party ..... 83,383 15,048
Depreciation, depletion and amortization 261,232 274,148
----------- -----------
Total operating costs and expenses .. 1,563,639 2,211,829
----------- -----------
INCOME (LOSS) FROM OPERATIONS ........... (344,799) 167,419
OTHER INCOME (EXPENSES):
Interest income ........................ 18,059 1,408
Interest expense:
Amortization of debt issuance costs .. (63,800) --
Interest paid or accrued ............. (125,889) (58,119)
Gain (Loss) on sale of assets .......... 2,356 (1,539)
----------- -----------
Total other expenses, net ........... (169,274) (58,250)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES ....... (514,073) 109,169
INCOME TAXES:
Federal income tax refund ............. -- 41,509
----------- -----------
NET INCOME (LOSS) ....................... (514,073) 150,678
Preferred stock dividends:
In arrears ............................ (30,731) (50,672)
Converted into common stock ........... (14,254) --
----------- -----------
NET INCOME (LOSS) APPLICABLE TO COMMON
STOCKHOLDERS ........................... $ (559,058) $ 100,006
=========== ===========
NET INCOME (LOSS) PER COMMON SHARE ...... $ (.06) $ .01
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING ..................... 8,923,500 7,316,500
=========== ===========
</TABLE>
5
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For The Three Months
Ended March 31,
1997 1996
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .............................. $ (514,073) $ 150,678
Adjustments to reconcile net loss to net cash
provided by operating activities:
provided by operating activities:
Provision for depreciation and depletion .... 249,733 262,649
Amortization of intangible assets ........... 75,299 14,624
Loss (Gain) on sale of property and equipment (2,356) 1,539
Exploration costs ........................... 307,280 --
Issuance of common stock for services ....... 8,000 --
Changes in operating assets and liabilities:
(Increase) decrease in:
Trade receivables ........................... 8,313 (115,625)
Inventory ................................... (50,517) 28,181
Prepaid expenses and other assets ........... (29,972) (17,005)
Increase (decrease) in:
Accounts payable ............................ 108,769 (53,193)
Accrued expenses ............................ (12,362) 1,906
----------- -----------
Net cash provided by (used in) ........ 148,114 273,754
operating activities ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property plant and .... (1,184,492) (144,575)
equipment
equipment, including dry hole costs
Acquisitions of oil and gas properties ......... (3,375,000) --
Proceeds from redemption of certificate of ..... -- 13,001
deposit
Proceeds from sale of property and equipment ... 56,559 8,047
----------- -----------
Net cash provided by (used in) ........... 4,502,933 (123,527)
investing activities ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt .................... (33,006) (267,813)
Repayment of long-term debt to related parties . (285,895) --
Proceeds from sale of common stock ............. 3,880,000 68,750
Proceeds from exercise of common stock warrants 2,264,650 --
Offering costs ................................. (564,882) --
----------- -----------
Net cash provided by (used in) .......... 5,260,867 (199,063)
financing activities ----------- -----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS .... 906,048 (48,836)
CASH AND EQUIVALENTS, beginning of period ...... 1,995,860 677,275
----------- -----------
CASH AND EQUIVALENTS, end of period ............ $ 2,901,908 $ 628,439
</TABLE>
=========== ===========
6
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For The Three
Ended March 31,
1997 1996
-------- --------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest:
Related parties ................... $ 42,417 $ --
Other ................................. 118,597 50,700
-------- --------
Total ............................... $161,014 $ 50,700
======== ========
Cash paid for income taxes .............. $ -- $ --
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Long-term debt incurred for purchase of
vehicles ............................... $ 29,582 $ --
======== ========
Conversion of debenture into common stock .. $350,000 $ --
======== ========
Acquisition of oil and gas property
for common stock ....................... $875,000 $ --
======== ========
Estimated fair value of warrants granted for
debt issuance costs .................... $ -- $200,000
======== ========
</TABLE>
7
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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 (the Company)
for the year ended December 31, 1996. 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,
1996. 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 - 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.
Note 3 - Net Income (Loss) Per Common Share:
The net income per common share for the first quarter of 1996 was computed by
dividing net income applicable to common stockholders (which includes preferred
stock dividends in arrears during the period presented) by the weighted average
number of shares of common stock and common stock equivalents outstanding during
the period. All the outstanding options and warrants that had an exercise price
below the market value at March 31, 1996 were considered common stock
equivalents and were included in the earnings per share computation using the
treasury stock method.
8
<PAGE>
PEASE OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net loss per common share for the first quarter of 1997 was computed by
dividing the net loss applicable to common stockholders (which includes
preferred stock dividends in arrears during the period presented) by the
weighted average number of common shares outstanding during the period. All
common stock equivalents were excluded from the computations because their
effect would be anti-dilutive.
Note 4 - Reclassifications:
Certain reclassifications have been made to the 1996 financial statements to
conform to the presentation in 1997. The reclassifications had no effect on the
1996 net income.
9
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
Disclosure Regarding Forward-Looking Statements
This report on Form 10-QSB includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All statements other than statements of historical
facts included under "Management's Discussion and Analysis", including, without
limitation, those regarding the Company's financial position, reserve quantities
and net present values, business strategy, plans and objectives of management of
the Company for future operations and capital expenditures, and the future
results from oil and gas drilling operations, are forward-looking statements and
the assumptions upon which such forward-looking statements are based are
believed to be reasonable. The Company can give no assurance that such
expectations and assumptions will prove to have been correct. Reserve estimates
of oil and gas properties are generally different form the quantities of oil and
natural gas that are ultimately recovered or found. This is particularly true
for estimates applied to exploratory prospects. Additionally, any statements
contained in this report regarding forward-looking statements are subject to
various known and unknown risks, uncertainties and contingencies, many of which
are beyond the control of the Company. Such things may cause actual results,
performance, achievements or expectations to differ materially from the
anticipated results, performance, achievements or expectations. Factors that may
affect such forward-looking statements include, but are not limited to, the
Company's ability to generate additional capital, risks inherent in oil and gas
acquisitions, exploration, drilling, development and production, price
volatility of oil and gas, competition, shortages of equipment, services and
supplies, government regulation, environmental matters, financial condition of
the other companies participating in the exploration, development and production
of oil and gas programs and other matters. All written and oral forward-looking
statements attributable to the Company or persons acting on its behalf
subsequent to the date of this report are expressly qualified in their entirety
by this disclosure.
Liquidity and Capital Resources
At March 31, 1997, the Company's cash balance was $2,901,908 with a positive
working capital position of $2,915,170, compared to a cash balance of $1,995,860
and a positive working capital position of $1,907,694 at December 31, 1996. The
change in the Company's cash balance is summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Cash Balance at December 31, 1996 ............................... $1,995,860
Sources of Cash:
Proceeds from the sale of common stock ..................... 3,880,000
Proceeds from the exercise of common stock warrants ........ 2,264,650
Cash provided by operating activities ...................... 148,114
Proceeds from the sale of property and equipment ........... 56,559
----------
Total Sources of Cash ............................... 6,349,323
10
<PAGE>
<CAPTION>
<S> <C>
Uses of Cash:
Acquisition of oil and gas interest in
East Bayou Sorrel ..................................... (3,375,000)
Other Capital Expenditures .................................. (1,184,492)
Costs associated with the sale of common stock and
exercise of common stock warrants ..................... (564,882)
Payments on long term debt ............................... (318,901)
----------
Total uses of cash ................................ (5,443,275)
----------
Cash balance at March 31, 1997 ................................ $ 2,901,908
===========
</TABLE>
Although most of the Company's sources of cash during the first quarter of 1997
were derived from equity transactions (which are discussed more thoroughly later
in this report in Part II below) under Item 2(c), it is important to note that a
portion of the funds were used to acquire a significant interest in the East
Bayou Sorrel Field, located in Iberville Parish, Louisiana. This field includes
a discovery well, the Schwing #1 that accounted for 20% of the Company's oil and
gas production (on a BOE basis), 23% of the Company's oil and gas revenue, and
34% of the Company's operating income from oil and gas activities during the
first quarter of 1997. The operating statistics for this well, along with all
the other oil and gas properties, are more fully illustrated later in this
report under the Results of Operations section under the caption "Oil and Gas".
The exploratory offset to the C.E. Schwing #1, known as the C.E. Schwing #2, was
drilled to a total depth of 13,600 feet during the second quarter of this year.
The Company anticipates it will be completed by the end of May and is awaiting
the results. Should the Schwing #2 ultimately produce at a similar or higher
rate as the rate currently being produced by the Schwing #1, the Company's
future production and cash flow could be enhanced considerably.
The acquisition of the interest in East Bayou Sorrel is indicative of the
Company's commitment to maintain its charted course of action to cultivate its
existing asset base in the Rocky Mountain region and expand into the Gulf Coast
region of Alabama, Southern Louisiana and Texas. However, this course of action
will require the Company to seek a significant amount of additional capital to
fully fund and continue to implement this plan.
On February 4, 1997, the Company signed a definitive agreement with National
Energy Group, Inc. ("NEGX"), a publicly held Company, headquartered in Dallas,
Texas. The agreement provides the Company the right and obligation to
participate with NEGX in various oil and gas exploration projects over the
course of next two years. Essentially, the agreement consists of three main
elements. First, the Company has the right and obligation to participate as a
12.5% working interest owner in NEGX's outlined program which consists of 10
identified projects in Alabama, Southern Louisiana, and Texas. Second, subject
to certain conditions defined in the agreement, the Company has the right and
obligation to participate in any future projects generated under NEGX's
exclusive arrangement with Sandefer Oil and Gas Company, Inc. ("Sandefer").
Sandefer is a private corporation owned and operated by a group of geologists
and geophysicists who generate Gulf Coast, Southern Louisiana and other wildcat
prospects. Third, the Company is entitled to participate in any other third
party generated prospects that NEGX participates in subject to certain
conditions as defined in the agreement.
11
<PAGE>
Pursuant to the terms of the agreement with NEGX, the Company's minimum
obligation is at least $5.0 million per year in dry hole, or drilling, costs.
Additional costs will be incurred for completion and development of successful
projects. Accordingly, the Company anticipates the actual obligation will be
higher assuming that a reasonable amount of success is achieved with the
underlying prospects. If all the prospects prove to be productive (which the
Company believes is unlikely as the drilling program is a wildcat exploration
program), the total obligation to the Company for 1997 could be in excess of
$20.0 million.
If all the contemplated exploratory prospects are successful and the properties
are eventually fully developed, the net reserves attributable to the Company's
interest would be several times the Company's present reserves. The Company's
current reserves are approximately 2 million barrels of oil (or equivalent).
Accordingly, the agreement with NEGX provides the Company with an exploration
program that has the potential to significantly increase its existing reserves
and future cash flow.
The Company's current cash position should cover the Company's working capital
needs, including the anticipated exploration costs associated with the letter
agreement with NEGX, at least through the second quarter of 1997. After that,
the Company will need to seek additional financing. Anticipating the need for
additional financing, in February 1997 the Company signed a non-binding letter
of intent with a brokerage firm setting forth the terms and conditions under
which the broker will attempt to assist the Company with a future private
placement. The letter agreement with the brokerage firm contemplates a future
placement of at least $6.0 million dollars in common stock in the second or
third quarter of 1997. The agreement is subject to several contingencies
including, but not limited to, due diligence and the execution of formal
agreement.
If the Company is unsuccessful in completing the private placement, or if
additional funds are necessary either before or after such a transaction, it is
uncertain at this time what actions the Company will take. Possibilities include
other debt or equity financings or the sale of certain existing assets.
In March 1996 the Company retained Beta Capital Group, Inc. ("Beta") as a
consultant to the Company. Beta is located in Newport Beach, California and
specializes in emerging oil and gas companies that have capital resources needs
and market support requirements. Beta has worked closely with the Company to
structure its financings and meet the Company's expected cash and capital
resources requirements. Beta's President, Steve Antry, was an officer of Benton
Oil and Gas Company between 1989 and 1992. During that time, Mr. Antry was
instrumental in obtaining various sources of capital that Benton Oil and Gas
required during a very significant growth period. Based on Mr. Antry's
background, the Company believes that Beta adds a tremendous value to the
Company because of their network of financial resources. Therefore, the Company
will attempt to utilize Beta's syndication of financial resources to fund future
capital requirements.
12
<PAGE>
Capital Expenditures
During the first quarter of 1997, the Company capitalized or invested $4,559,492
in property and equipment as follows:
<TABLE>
<CAPTION>
<S> <C>
Acquisition of oil and gas interest in East Bayou Sorrel ........ $3,375,000
Drilling Costs -
Exploratory wells in progress ............................... 346,127
Exploratory Dry Hole ........................................ 307,280
----------
Total Drilling Costs ................................... 653,407
Workovers or Recompletions of existing properties ............... 525,974
----------
Total Oil and Gas properties .............................. 4,554,381
Service Equipment and Rolling Stock ............................. 4,620
Office Equipment ................................................ 491
----------
$4,559,492
==========
</TABLE>
The acquisition of the oil and gas interest in East Bayou Sorrel is discussed
above. It is anticipated this field will ultimately be one of the Company's core
properties. NEGX, the operator of the property, has planned a 33-square mile 3-D
seismic program covering the East Bayou Sorrel field and surrounding areas later
this year. The 3-D data will complement an already extensive database of
reprocessed 2-D seismic and a number of existing well logs.
At March 31, 1997, the well in progress and corresponding costs incurred through
the first quarter were as follows:
Costs
Incurred 12/31/96 Total WIP
1st Qtr 1997 Balance at 3/31/97
C.E. Schwing #2 (Bayou Sorrel) ....... $302,391 $ -- $302,391
E. Winn #1 (South Lake Arthur) ....... 43,736 181,312 225,048
-------- -------- --------
Totals ......................... $346,127 $181,312 $527,439
======== ======== ========
As discussed above, the C.E. Schwing #2 is a exploratory well located in East
Bayou Sorrel Field, Iberville Parish, Louisiana, and is expected to be completed
by the end of May 1997. The E. Winn #1, an exploratory well in the South Lake
Arthur Prospect, located in Jefferson Devis Parish, Louisiana, was drilled to a
total depth of 17,800 feet in April 1997. Although the deep objective of a
Miogyp Sand test was dry, a potentially productive zone uphole was found. The
Company expects this upper zone to be completed and tested by June 1997. All the
costs incurred to acquire and drill this well have been capitalized and will
remain that way, along with the future completion costs expected to be incurred,
until the outcome of the completion procedures are known.
Brazos Block 480, an offshore prospect in Texas, was drilled to a total depth of
13,500 feet in May 1997 and found to be dry. The Company's portion of the cost
of this exploratory dry hole was $307,280.
In the first quarter of 1997, the Company spent $525,974 for workovers,
recompletions and equipment acquisitions related to maintaining or
13
<PAGE>
enhancing the current production of its producing oil and gas properties
in the Rocky Mountain region.
RESULTS OF OPERATIONS
Overview
The Company's largest source of operating revenue is from the sale of produced
oil, natural 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 fluctuations as well as changes in
production levels.
Total Revenue
Total Revenue from all operations was as follows:
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
1997 1996
------------- ----------
Amount % Amount %
<S> <C> <C> <C> <C>
Oil and gas sales ............... $ 789,206 65% $ 613,099 26%
Natural gas marketing and trading -- 1,345,955 56%
Gas plant processing ............ 209,510 17% 187,843 8%
Oil field services and supply ... 198,319 16% 201,602 9%
Well administration and other ... 21,805 2% 32,157 1%
---------- ---------- ---------- ----------
Total revenue ................ $1,218,840 100% $2,380,656 100%
========== ========== ========== ==========
</TABLE>
The decrease in total revenue is primarily a result of the expiration of the
Company's natural gas marketing and trading contract with Public Service Company
of Colorado effective July 1, 1996. The Company has not been able to conduct any
natural gas trading activities subsequent to June 30, 1996. As illustrated for
the first three months of 1996, revenues generated from that contract were
$1,345,955, or 56% of the total revenue. The loss of this contract has had a
material negative effect on the Company's results of operations. This
circumstance, 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.
Oil and Gas
Operating statistics for oil and gas production for the periods presented are as
follows:
14
<PAGE>
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
1997 1996
---------- ------
<S> <C> <C>
Production:
Oil (Bbls)
Rocky Mtns ...................................................................... 19,969 26,608
East Bayou Sorrel ............................................................... 7,829 --
--------- ---------
Combined Total ........................................................... 27,798 26,608
========= =========
Gas (Mcf)
Rocky Mtns ...................................................................... 95,443 111,925
East Bayou Sorrel ............................................................... 6,864 --
--------- ---------
Combined Total ........................................................... 102,307 111,925
========= =========
BOE (6:1)
Rocky Mtns ...................................................................... 35,876 45,262
East Bayou Sorrel ............................................................... 8,973 --
--------- ---------
Combined Total ........................................................... 44,849 45,262
========= =========
Average Collected Price:
Oil (per Bbl)
Rocky Mtns ...................................................................... $ 21.35 $ 17.74
East Bayou Sorrel ............................................................... $ 20.87 $ --
--------- ---------
Combined Average ......................................................... $ 21.22 $ 17.74
========= =========
Rocky Mtns ...................................................................... $ 1.86 $ 1.26
East Bayou Sorrel ............................................................... $ 3.17 $ --
--------- ---------
Combined Average ......................................................... $ 1.95 $ 1.26
========= =========
Per BOE (6:1)
Rocky Mtns ...................................................................... $ 16.84 $ 13.55
East Bayou Sorrel ............................................................... $ 20.63 $ --
--------- ---------
Combined Average ......................................................... $ 17.60 $ 13.55
========= =========
Operating Margins:
Rocky Mtns:
Revenue ......................................................................... $ 604,056 $ 613,099
Costs ........................................................................... $(299,336) $(293,916)
--------- ---------
Operating Margin ......................................................... $ 304,720 $ 319,183
========= =========
Operating Margin Percent ................................................. 50% 52%
East Bayou Sorrel:
Revenue ......................................................................... $ 185,150 $ --
Costs ........................................................................... $ (28,463) $ --
--------- ---------
Operating Margin ......................................................... $ 156,687 $ --
========= =========
Operating Margin Percent ................................................. 85% --
Combined Totals:
Revenue ......................................................................... $ 789,206 $ 613,099
Costs ........................................................................... $(327,799) $(293,916)
--------- ---------
Operating Margin ......................................................... $ 461,407 $ 319,183
========= =========
Operating Margin Percent ................................................. 58% 52%
Production Costs per BOE before DD&A:
Rocky Mtn Region ....................................................................... $ 8.37 $ 6.49
Gulf Coast Region ...................................................................... $ 3.17 $ --
--------- ---------
Combined Average ....................................................................... $ 7.33 $ 6.49
========= =========
Change in Revenue Attributable to:
Production ............................................................................. $ 8,972
Price .................................................................................. $ 167,135
---------
Total Increase in Revenue .............................................................. $ 176,107
=========
</TABLE>
Most of the decrease in oil and gas production can be attributed to the
following: 1) the sale of several marginal, uneconomic, or nonstrategic oil and
gas properties in the second quarter 1996 that accounted for 3,900 bbls. of oil
and 4,500 Mcf of gas during the first quarter of 1996; and
15
<PAGE>
2) to a much lesser extent the natural decline in production that is inherent in
oil and gas wells. Both these circumstances were largely offset by an increase
in commodity prices and new production from the East Bayou Sorrel Field in
Louisiana.
Natural Gas Marketing and Trading
Operating statistics for the Company's Marketing and Trading Activities for the
periods presented are as follows:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
1997 1996
---------- --------
<S> <C> <C>
Total Volume Sold (Mcf).............. -- 725,479
Average Price ....................... $ -- $ 1.86
------- -----------
Total Revenue ................. $ -- $ 1,345,955
Costs ............................... -- (1,130,663)
------- -----------
Gross Margin .................. $ -- $ 215,292
======= ===========
</TABLE>
The Company had a "take-or-pay" contract with Public Service Company of Colorado
("PSCo") which called 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 was based on the Colorado Interstate Gas Commission's "spot" price, plus
a fixed price bonus. The natural gas marketing and trading activities represent
natural gas that was purchased from third parties and sold to PSCo under the
terms of the contract.
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 is unlikely to resume marketing and trading activities.
Since the gross margin represents the net cash flow and income generated from
this activity, the loss of this premium contract price has and will have a
material and negative impact on the Company's current and future operations.
Gas Plant Processing Revenues
This category accounts for the natural gas processed and the natural gas liquids
extracted and sold by the Gas Plant facility. Operating statistics for the
periods presented are as follows:
16
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
1997 1996
------- ------
Production:
<S> <C> <C>
Natural Gas Processed (Mcf) .... 78,930 91,590
Liquids Produced -
B-G Mix (gallons) ....... 192,100 226,300
Propane (gallons) ....... 159,100 173,700
--------- ---------
Total .............. 351,200 400,000
========= =========
Average Sales Price of Liquids
(per gallon) .................... $ 0.48 $ 0.42
========= =========
Gross Margin: .................... Amount Amount
--------- ---------
Revenue ................. $ 209,510 $ 187,843
Costs ................... (104,838) (125,241)
--------- ---------
Gross Margin ....... $ 104,672 $ 62,602
========= =========
Gross Margin Percent 50% 33%
</TABLE>
The decrease in processing volumes during 1997 when compared to the same period
in 1996, can be substantially attributed to the normal decline in production
from the two fields owned and operated by the Company that supply the gas plant
with the natural gas. The increase in revenue and gross margin generated in 1997
when compared to the same period in 1996 is a direct result of higher liquid
prices in 1997.
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 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. When compared to 1997, the costs in 1996 were higher in amount
and as a percentage of revenue as a result of processing higher volumes of gas
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:
<TABLE>
<CAPTION>
Service Operations
For the Three Months
Ended March 31,
1997 1996
<S> <C> <C>
Revenue ............................ $ 198,319 $ 201,602
Costs ............................. (153,658) (147,275)
--------- ---------
Net Operating Income $ 44,661 $ 54,327
========= =========
</TABLE>
As expected, there has been no material change in the results of operations for
the periods presented and the Company does not expect any significant changes in
the future.
17
<PAGE>
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 1997 and 1996 and the Company does not expect
any significant change in the future.
General and Administrative
General and administrative expenses increased approximately $100,000 during the
first quarter of 1997 when compared to the same period in 1996 which is
summarized as follows:
$ 25,000 - For consulting services (legal, land and other) associated
with the Company's expansion into the Gulf Coast.
17,000 - Travel costs associated with the Company's expansion into
the Gulf Coast.
17,000 - Payroll costs associated with an increase in base pay and
insurance benefits for virtually all the Company's
officers and employees.
13,000 - A Directors and Officers Liability Insurance Policy
purchased on July 1, 1996.
28,000 - All other, net.
--------
$100,000
Consulting Arrangement - Related Party
In March 1996 the Company entered into a three-year consulting agreement with
Beta Capital Group, Inc. ("Beta"). Beta's president, Steve Antry, has been a
director of the Company since August 1996. The consulting agreement with Beta
provides for minimum monthly cash payments of $17,500 plus reimbursement for
out-of-pocket expenses.
Depreciation, Depletion and Amortization
Depreciation, Depletion and Amortization ("DD&A") for the periods presented,
excluding the amortization of debt issuance costs, consisted of the following:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
1997 1996
<S> <C> <C>
Oil and Gas Properties ...... $139,872 $157,901
Gas Plant and Other Buildings 60,929 62,072
Rolling Stock ............... 27,104 23,048
Other Field Equipment ....... 9,458 7,945
Furniture and Fixtures ...... 12,370 11,682
Non-Compete Agreement ....... 11,499 11,500
-------- --------
Total ................ $261,232 $274,148
======== ========
</TABLE>
DD&A per BOE for oil and gas properties decreased in t e first quarter of 1997
when compared to the same period in 1996 primarily as a result of a decrease in
production from the Rocky Mountain region. However, DD&A per BOE was relatively
constant at $3.11 for the first quarter of 1997 compared to $3.48 for same
period in 1996.
18
<PAGE>
Interest Expense
The higher interest expense incurred in 1996 is reflective of the increase in
the average long-term debt outstanding and amortization of the corresponding
debt issuance costs. Both of these circumstances are directly related to the
convertible debentures sold by the Company pursuant to the private placement
completed in November 1996.
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)and (b): not applicable
(c) Recent sales of unregistered securities. The Company issued and
sold the following securities without registration under the
Securities Act of 1933, as amended ("Securities Act"), during the
quarter ended March 31, 1997 and through the date of this Report.
1. Effective January 10, 1997 the Company issued 315,000 shares of
its common stock to three unrelated entities, Atocha Exploration,
Inc., Potosky Oil and Gas, Inc., and Browning Oil Company, Inc.,
in exchange for an undivided interest in a producing oil and gas
prospect designated as the East Bayou Sorrel Prospect in
Iberville Parish, Louisiana.
2. Between February 1, 1997 and March 10, 1997, the Company issued
1,500,000 shares of its common stock for $3,750,000 to a group of
private investors each of whom qualified as an accredited
investor as such term is defined in Regulation D adopted by the
Securities and Exchange Commission. The Company paid selling
commissions of $300,000. The Company relied upon Section 4(2) of
the Securities Act and Rule 506 of Regulation D in claiming
exemption from the registration requirements of the Securities
Act for the securities sold.
3. Between March 14, 1997 and April 15, 1997, the Company sold
52,000 shares of its common stock for $130,000 to a group of
private investors each of whom qualified as an accredited
investor as such term is defined in Regulation D adopted by the
Securities and Exchange Commission. The Company paid selling
commissions of $10,400. The Company relied upon Section 4(2) of
the Securities Act and Rule 506 of Regulation D in claiming
exemption from the registration requirements of the Securities
Act for the securities sold.
19
<PAGE>
4. Through May 12, 1997 holders of $420,000 of the Company's
outstanding collateralized convertible 10% debentures
("Debentures") surrendered such Debentures to the Company for
conversion into 139,999 shares of the Company's common stock
($350,000 in Debentures were converted through March 31, 1997) in
accordance with conversion provisions of the Debentures. Shares
of common stock issued upon conversion have been registered for
resale by the holders on Registration No. 333- 19589. The Company
relied upon Rule 506 of Regulation D in claiming exemption for
the registration requirements of the Securities Act for issuance
of the securities upon conversion of the Debentures.
5. On March 31, 1997, the Company issued 4,000 shares of its common
stock to two consultants of the Company in lieu of cash for
consulting services rendered to the Company valued at $8,000 for
financial reporting purposes.
6. Between March 1, 1997 and April 15, 1997 the Company issued
2,482,500 shares of its common stock upon exercise of a like
number of warrants upon exercise of such warrants at $1.25 per
warrant for a total proceeds of $3,103,125. Holders of such
warrants acquired the warrants in the Company's 1996 private
placement of Debentures and warrants. The warrants would have
expired if not previously exercised on April 15, 1997. Shares
issued upon exercise of warrants were registered by the Company
for resale by the holders in Registration No. 333- 19589. The
Company relied upon Rule 506 of Regulation D in claiming
exemption for the registration requirements of the Securities Act
for issuance of the securities upon exercise of the warrants.
7. Between March 1, 1997 and May 12, 1997, the Company issued
110,000 shares of its common stock upon exercise of outstanding
stock purchase warrants at $0.75 per share for total proceeds of
$82,500 to the Company. The holder of the warrants is an
affiliate of Beta Capital Group, Inc. with whom the Company has a
consulting agreement and to whom the warrants were issued in
February 1996. Shares of common stock issued upon exercise of the
warrants were registered for resale by the holder in Registration
No. 333-19589.
8. Between January 1997 and May 12, 1997, the Company issued 275,625
shares of its common stock upon exercise of outstanding stock
purchase warrants issued by the Company between 1994 and 1996 to
certain broker/dealers in connection with private placements of
Company securities during such time. The Company received
$363,350 of proceeds upon exercise of the warrants. Shares of
common stock issued upon exercise were registered by the Company
for resale by the holders under Registration Nos. 333-19589 and
33-94536.
20
<PAGE>
As to each issuance of securities identified in paragraphs 1, 5, 7 and 8
above, the Company relied upon Section 4(2) of the Securities Act in claiming
exemption for the registration requirement of the Securities Act. All of the
persons to whom the securities were issued had full information concerning the
business and affairs of the Company and acquired the shares for investment
purposes. Certificates representing the securities issued bear a restrictive
legend and stop transfer instructions have been entered prohibiting transfer of
the securities except in compliance with applicable securities law.
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 forego 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 quarterly
basis and are cumulative. Accordingly, as of March 31, 1997, dividends in
arrears aggregate $307,305 or $2.50 per share.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of Company's security holders during 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) The following exhibits are filed with this report:
(1) Exhibit 27, "Financial Data Schedule".
(b) The following reports on Form 8-K were filed during the quarter
ended March 31, 1997:
Item Reported Date Financial Statement
------------- ---- -------------------
(1) Item 2,7 January 10, 1997 None
(2) Item 5,7 February 4, 1997 None
(3) Item 2,7 March 13, 1997 None
There were no financial statements filed during the quarter ended March 31, 1997
other than the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996.
21
<PAGE>
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: May 12, 1997 By:/s/ Willard H. Pease, Jr.
---------------------------
Willard H. Pease, Jr.
President and Chief Executive Officer
Date: May 12, 1997 By: /s/ Patrick J. Duncan
-------------------------
Patrick J. Duncan
Chief Financial Officer, Treasurer,
and Principal Accounting Officer
22
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,901,908
<SECURITIES> 0
<RECEIVABLES> 615,730
<ALLOWANCES> 24,395
<INVENTORY> 459,304
<CURRENT-ASSETS> 4,041,183
<PP&E> 20,776,745
<DEPRECIATION> 5,541,641
<TOTAL-ASSETS> 20,886,033
<CURRENT-LIABILITIES> 1,126,013
<BONDS> 4,650,000
0
1,229
<COMMON> 1,151,083
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 20,886,033
<SALES> 1,197,035
<TOTAL-REVENUES> 1,218,840
<CGS> 586,295
<TOTAL-COSTS> 893,575
<OTHER-EXPENSES> 977,344
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 189,689
<INCOME-PRETAX> (514,073)
<INCOME-TAX> 0
<INCOME-CONTINUING> (514,073)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (559,058)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
