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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-10652
CONVEST ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 76-0312028
(State or jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
2401 FOUNTAIN VIEW DRIVE, SUITE 700
HOUSTON, TEXAS 77057
(Address of principal executive offices) (Zip Code)
(713) 780-1952
Registrant's telephone number, including area code:
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares of the Registrant's Common Stock, par value $.01
per share, outstanding at May 12, 1997, was 10,505,284.
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CONVEST ENERGY CORPORATION
Quarterly Report on Form 10-Q
for the Quarter Ended March 31, 1997
INDEX
I. FINANCIAL INFORMATION
Item 1.Financial Statements of Convest Energy Corporation:
Consolidated Balance Sheets................................... 3
Consolidated Statements of Operations......................... 4
Consolidated Statements of Stockholders' Equity............... 5
Consolidated Statements of Cash Flows......................... 6
Notes to Consolidated Financial Statements.....................7
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................12
II. OTHER INFORMATION
Item 1.Legal Proceedings.............................................17
Item 6.Exhibits and Reports on Form 8-K..............................17
Signature............................................................17
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CONVEST ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
March 31, December 31,
1997 1996
--------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 6,045 $ 3,678
Restricted cash ..................................... 333 333
Accounts receivable:
Oil and gas production - less allowance
for doubtful accounts of $625 and $657,
respectively ................................... 5,288 7,908
Other ............................................ 185 598
Other current assets ................................ 581 2,267
--------- ---------
Total current assets ............................. 12,432 14,784
--------- ---------
Property and equipment:
Oil and gas properties, successful efforts
method .............................................. 117,417 117,307
Other ............................................... 513 478
Less accumulated depreciation and depletion ......... (61,167) (63,061)
--------- ---------
56,763 54,724
--------- ---------
Other noncurrent assets ................................ 2,762 2,704
--------- ---------
$ 71,957 $ 72,212
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Oil and gas production ........................... $ 9,645 $ 8,521
Affiliates ....................................... 423 667
Accrued liabilities and other ....................... 5,285 6,041
Deferred revenue .................................... 2,076 2,113
--------- ---------
Total current liabilities ........................ 17,429 17,342
--------- ---------
Long-term liabilities:
Long-term debt ...................................... 3 4,003
Deferred revenue .................................... 561 559
Other noncurrent liabilities ........................ 6,296 7,170
--------- ---------
6,860 11,732
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par value; authorized 5
million shares; none issued or outstanding ........ -- --
Common stock $.01 par value; 20,000,000 shares
authorized, 10,446,402 and 10,428,602 issued
and outstanding at March 31, 1997 and
December 31, 1996, respectively ................... 104 104
Additional paid-in capital .......................... 47,907 47,849
Retained deficit .................................... (343) (4,815)
--------- ---------
47,668 43,138
--------- ---------
$ 71,957 $ 72,212
========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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CONVEST ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Data)
Three Months Ended
MARCH 31,
-------------------
1997 1996
------ ------
(Unaudited)
Revenues:
Oil and gas sales ................................. $13,062 $11,159
Gas plant revenues ................................ 602 361
Gain on asset sale ................................ 122 813
Other, net ........................................ 105 103
------- -------
13,891 12,436
------- -------
Expenses:
Production:
Lease operating expense ........................ 2,955 3,961
Gas plant operating expense .................... 174 123
Production taxes ............................... 293 310
Abandonment and exploration costs ................. 1,091 42
General and administrative expenses ............... 1,130 1,239
Interest expense .................................. 56 367
Depreciation, depletion and amortization .......... 3,623 4,138
------- -------
9,322 10,180
------- -------
Net income before income taxes ....................... 4,569 2,256
Income tax provision ................................. 97 169
------- -------
Net income ........................................... $ 4,472 $ 2,087
======= =======
Net income per share ................................. $ 0.43 $ 0.20
======= =======
Weighted average common shares outstanding ........... 10,436 10,413
======= =======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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CONVEST ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Common Common Additional
Shares Stock, Paid-In Retained
OUTSTANDING $.01 PAR CAPITAL DEFICIT TOTAL
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 .......................... 10,428 $104 $47,849 $(4,815) $43,138
Exercised employee stock options ...................... 18 -- 58 -- 58
Net income ............................................ -- -- -- 4,472 4,472
------- ------- ------- -------- -------
Balance at March 31, 1997 ............................. 10,446 $ 104 $47,907 $ (343) $47,668
======= ======= ======= ======== =======
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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CONVEST ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Three Months Ended
MARCH 31,
------------------
1997 1996
-------- --------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................. $ 4,472 $ 2,087
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and amortization ............ 3,623 4,138
Gain on sale of oil and gas properties .............. (122) (813)
Abandonment and exploration costs ................... 691 --
Decrease (increase) in accounts receivable .......... 2,619 (411)
Decrease in accounts payable and accrued
liabilities ......................................... (424) (476)
Other ............................................... 24 180
-------- -------
Net cash flow provided by operating activities .. 10,883 4,705
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition, exploration and development of
oil and gas properties ................................ (6,045) (1,756)
Proceeds from sales of oil and gas properties .......... 268 2,207
(Purchase) sale of short-term investments .............. 1,281 (203)
Increase in other current and noncurrent assets ........ (78) (8)
-------- -------
Net cash provided by (used in)
investing activities ............................ (4,574) 240
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt ............................. (4,000) (5,000)
Exercised employee stock options ....................... 58 --
-------- -------
Net cash used in financing activities ........... (3,942) (5,000)
-------- -------
Net increase (decrease) in cash and
cash equivalents .......................................... 2,367 (55)
Cash and cash equivalents, beginning of period ............ 4,011 1,007
-------- -------
Cash and cash equivalents, end of period .................. $ 6,378 $ 952
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest ............... $ 185 $ 419
======== =======
Cash paid during the period for taxes .................. $ 97 $ 248
======== =======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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CONVEST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
GENERAL
Convest Energy Corporation ("Convest" or the "Company"), a Texas
corporation whose common stock is traded on the American Stock Exchange, is an
active independent oil and gas exploration and production company. On June 26,
1995, Convest acquired all of the outstanding capital stock of Edisto
Exploration & Production Company, a Delaware corporation ("Edisto E&P"), from
Edisto Resources Corporation ("Edisto") in exchange for 6,185,400 newly issued
shares of Convest's common stock and $10,000 in cash (the "Edisto Transaction").
The newly issued shares of Convest common stock increased Edisto's interest in
Convest from 31% to 72%. During April, 1996, Edisto increased its interest in
Convest to 73% through the purchase of 92,000 additional shares of Convest
common stock on the open market.
These financial statements should be read in conjunction with the
audited financial statements and the notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996. Reference also
is made to the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this report. The information
presented in this Form 10-Q is unaudited, but in the opinion of management
reflects all adjustments (all of which were normal and recurring) necessary to
fairly present such information. Interim results are not necessarily indicative
of a full year of operations.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. All significant intercompany accounts and
activities have been eliminated.
RESTRICTED CASH. Restricted cash consists of $333,000 of certificates of
deposit held by various financial institutions. The certificates of deposit are
held in escrow as collateral for letters of credit issued for (i) lease payments
on certain offshore platforms and (ii) estimated plugging and abandonment costs
expected to be incurred on certain onshore oil and gas properties.
PROPERTY AND EQUIPMENT. The Company follows the successful efforts
method of accounting for its oil and gas properties. Costs of productive wells,
developmental drilling expenditures, including developmental dry holes, and
productive leases are capitalized. Exploratory drilling costs, including
stratigraphic test wells, are initially capitalized, but charged to expense if
and when the well is determined to be unsuccessful. The capitalized costs of oil
and gas properties are charged to operations as depreciation, depletion and
amortization using the unit-of-production method based on the ratio of current
production to proved recoverable oil and gas reserves (as defined by the
Securities and Exchange Commission) on a lease by lease basis. Reserve estimates
for the Company's properties were prepared or audited by independent petroleum
engineering firms at year end. Gas is converted to equivalent barrels of oil on
an energy content basis of 6 Mcf of gas to 1 barrel of oil. Depreciation,
depletion and amortization per equivalent unit of oil production was $4.99 and
$5.07 for the three month periods ended March 31, 1997 and 1996, respectively.
Oil and gas leasehold costs are capitalized when incurred. Unproved properties
are assessed periodically on a property-by-property basis and impairments in
value are charged to expense. Exploratory expenses, including geological and
geophysical expenses and annual delay rentals, are charged to expense as
incurred.
Under Statement of Financial Accounting Standards No. 121 ("SFAS 121")
regarding accounting for the impairment of long-lived assets, the Company is
required to recognize an impairment loss for its proved oil and gas properties
if the carrying value of such properties (i.e., total capitalized costs less
accumulated depreciation and depletion) exceeds the undiscounted expected future
cash flows attributable to such properties. Convest must assess the need for an
impairment of capitalized costs of oil and gas properties on a
property-by-property basis. If an impairment is indicated based on undiscounted
expected future cash flows, then an impairment loss is recognized to the extent
that net capitalized costs exceed expected future cash flows. No such provision
was required for the three month periods ended March 31, 1997 and March 31,
1996.
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CONVEST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OTHER PROPERTY, PLANT AND EQUIPMENT. Other fixed assets are recorded at
cost and depreciated over their estimated useful lives using the straight-line
method of depreciation.
ABANDONMENT RESERVE. The Company records its estimate of future
abandonment costs of offshore properties. Such costs are accrued using a
unit-of-production method based upon estimated proved recoverable reserves.
Abandonment costs are estimated under current regulations using current costs
and are reviewed periodically and adjusted as new information becomes available.
Abandonment costs on onshore properties are typically nominal due to the salvage
value of well equipment.
Edisto E&P is a party to a settlement with the United States Minerals
Management Service relating to estimated plugging and abandonment costs for 14
Gulf of Mexico OCS leases. Pursuant to this settlement, the operator of the
leases, Edisto E&P and other co-lessees were required to provide security for
payment of such costs through quarterly payments to an Abandonment Fund. During
the first quarter of 1997, the Company made its final scheduled payment under
the Abandonment Fund, and accordingly, is no longer subject to additional future
payments.
As of March 31, 1997 and December 31, 1996, the Company had made
payments totaling approximately $4.3 million and $4.2 million to the Abandonment
Fund, respectively. These payments were applied to the total long-term
abandonment reserve of $7.5 million and $7.7 million, as of March 31, 1997 and
December 31, 1996, respectively, resulting in a net long-term abandonment
reserve of $3.2 million and $3.5 million as of those dates. The current portion
of the abandonment reserve was $2.0 million and $2.3 million as of March 31,
1997 and December 31, 1996, respectively. The current portion of the abandonment
reserve is included in "Accrued Liabilities and Other" and the noncurrent
portion is included in "Other Noncurrent Liabilities" in the consolidated
financial statements.
LEASE OPERATING EXPENSES. In connection with a 1992 sale of certain
future production volumes of oil to Enron Reserve Acquisition Corp., the Company
established a reserve for the expenses associated with the volumes sold and
amortizes this reserve as the volumes are delivered. As of March 31, 1997 and
December 31, 1996, the current balance of this reserve was $1.6 million,
respectively, and the long-term balance was $3.1 million and $3.7 million,
respectively, and were presented in "Accrued Liabilities and Other" and "Other
Noncurrent Liabilities," respectively, in the consolidated financial statements.
GAS BALANCING. The Company uses the entitlement method of accounting for
gas imbalances. Receivables resulting from undertakes of gas production at March
31, 1997 and December 31, 1996 were $2.2 million and $2.3 million, respectively,
and are included in "Accounts Receivable - Oil and Gas Production" and "Other
Noncurrent Assets" in the consolidated financial statements. Deferred revenue
and payables resulting from overtakes of gas production at March 31, 1997 and
December 31, 1996 were $2.4 million and $2.7 million, respectively, and are
included in "Current Liabilities - Deferred Revenue" and "Long-Term Liabilities
- - Deferred Revenue" in the consolidated financial statements.
ACCOUNTING FOR INCOME TAXES. The Company records income taxes in
accordance with the Financial Accounting Standards Board - Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." SFAS 109 requires the balance sheet approach of income tax accounting
whereby deferred income taxes are provided at the balance sheet date for the
differences existing in the tax basis of assets and liabilities and their
financial statement carrying amounts.
CONCENTRATION OF CREDIT RISK. The Company's oil and gas production
revenues are derived principally from uncollateralized sales to customers in the
oil and gas industry. The concentration of credit risk in a single industry
affects the Company's overall exposure to credit risk because customers may be
similarly affected by changes in economic and other conditions. The Company has
not experienced significant credit losses on receivables from such sales.
NET INCOME PER SHARE. Net income per share is computed based on the
weighted average number of shares outstanding which were 10,435,685 and
10,412,722 for the three months ended March 31, 1997 and 1996, respectively.
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CONVEST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
No effect has been given to options outstanding under the Company's stock option
plans because their effect is antidilutive or immaterial.
RISK MANAGEMENT/HEDGING ACTIVITIES. The Company from time to time
engages in commodity hedging activities to minimize the risk of market
fluctuations associated with the price of crude oil and natural gas production.
The hedging objectives include assurance of stable and known cash flows and
fixed favorable prices. The hedges are effected through the purchase and sale of
futures contracts on the New York Mercantile Exchange ("NYMEX") and over the
counter price swap agreements. The credit risk of futures contracts is limited
due to the daily cash settlement of the net change in the value of open
contracts and because of certain NYMEX procedures. Gains or losses on the
Company's hedging agreements are deferred and recognized as oil and gas sales
revenue when the hedged transaction occurs.
STATEMENT OF CASH FLOWS. For purposes of the consolidated statements of
cash flows, the Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
All significant estimates are discussed herein.
(3) RELATED PARTY TRANSACTIONS
During December 1996, Edisto sold substantially all of the assets of its
wholly owned gas marketing subsidiary, Energy Source, Inc. , to an unrelated
third party. From January 1995 until its sale in December 1996, Energy Source
had marketed a substantial portion of the Company's gas production. Under the
gas marketing arrangement, Convest received a minimum price of 98% of the index
for the applicable pipeline. In connection with the sale of Energy Source,
Convest and Energy Source agreed to extend the gas marketing arrangement to
December 31, 1997. Effective January 1, 1997, the gas marketing arrangement was
amended to increase the price received by the Company from 98% to 100% of the
index price for the applicable pipeline.
In connection with the Energy Source sale, all Edisto employees other
than Michael Y. McGovern, the Chairman and Chief Executive Officer of Convest
and Edisto, became employees of the purchaser. Subsequently, Edisto's corporate
headquarters were moved to Convest's offices, and Mr. McGovern and four other
employees of Convest have divided their time between Edisto and Convest.
Effective December 1, 1996, Mr. McGovern's base salary and benefits have been
apportioned 70% to Convest and 30% to Edisto. The base salary and benefits of
the other Convest employees who perform work for Edisto are also apportioned
based on the approximate amount of time they work for each company.
Prior to the sale of Energy Source, Edisto had provided Convest with
access to an AS400 computer system to run its accounting system and had provided
MIS support. The monthly cost to Convest was approximately $12,555 per month. In
connection with the sale of Energy Source, Edisto sold the AS400 computer system
and its MIS personnel became employees of the purchaser of Energy Source. Since
Convest continued to need an AS400 computer system to run its accounting system,
the Energy Source purchaser agreed to provide Convest with access to the AS400
computer system and MIS support through December 31, 1997. The cost to Convest
is $12,645 per month. This agreement may be terminated by Convest at any time
after June 30, 1997 upon 90 days notice.
In addition, the Company and Edisto have a directors' and officers'
fiduciary insurance policy that covers both companies. The annual insurance
premium was allocated 32% to the Company, for a cost of $96,000 based on the
relative percentage that the assets of the Company bear to the total assets of
both the Company and Edisto.
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CONVEST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Each of the affiliated party transactions described above was approved
by either a special committee of the Company's Board, which was composed of
outside directors with no affiliation to Edisto, or the unanimous consent of the
Company's Board.
(4)HEDGING ACTIVITIES
As previously stated, the Company conducts its hedging activities
through major financial institutions. Set forth below is the contract amount and
term of all futures contracts held for price risk management purposes by the
Company at March 31, 1997 and December 31, 1996:
MARCH 31, 1997 DECEMBER 31, 1996
------------------------- -------------------------
OIL GAS OIL GAS
-------- ---------- --------- ----------
Quantity Sold 60 Mbbls 2,460 Mmcf 90 MBbls 3,300 Mmcf
Maximum Term 6 Months 7 Months 9 Months 10 Months
Average Price $21.72 $2.33 $22.50 $2.53
The Company will continue its hedging activities during 1997 in order to
mitigate the volatility of its crude oil and natural gas prices. Gains and
losses realized upon the settlement of the Company's hedge positions are
deferred and recognized as oil and gas sales revenue in the month of the
underlying physical production being hedged. The fair value of the Company's
open positions at March 31, 1997 were $918,950. As a result of fluctuations in
the price of crude oil and natural gas subsequent to March 31, 1997, the stated
fair value of the Company's open positions is not indicative of the value which
would be received if the positions were closed at current prices. The fair value
of the Company's hedges was based on the cost that would have been incurred to
buy out those hedges in a loss position and the consideration that would have
been received to terminate those hedges in a gain position. The cash margin
required by the counterparties to the Company's hedging activities totaled
$67,000 and $1.0 million as of March 31, 1997 and December 31, 1996,
respectively, and are included in other current assets.
(5) INCOME TAXES
The Company records current income taxes based on its estimated actual
tax liability for the year. The Company provides for deferred income taxes under
SFAS No. 109 based upon differences between the tax basis of the Company's
assets and liabilities and their financial statement carrying amounts multiplied
by the Company's expected future effective tax rate.
For the three months ended March 31, 1997 and 1996, the Company recorded
current income tax expense of $97,000 and $169,000, respectively. The Company
has provided a valuation allowance against substantially all of its net deferred
tax assets as the "more-likely-than-not" criteria for recognition under SFAS No.
109 was not met. During 1995, the Company purchased approximately $3.3 million
of NOL tax benefits from Edisto for $550,000 which is included in "Other
Noncurrent Assets" in the accompanying balance sheets. No valuation allowance
was taken against such amount under SFAS No. 109 since the Company anticipates
that the purchased NOLs will be utilized against the Company's current income
tax.
(6) CREDIT FACILITY AND LONG-TERM DEBT
The Company has a revolving credit facility with Bank One, Texas, N.A.
("Bank One"), and Compass Bank- Houston which terminates on January 1, 1999.
Bank One serves as agent bank of the facility. The facility is secured by a
first lien on all of the Company's assets, including its oil and gas properties
and gas plant. The borrowing base is redetermined semi-annually on May 31 and
November 30 of each year by the lending banks based on engineering criteria
established by the banks. Interest on borrowings under the facility is computed
at (i) the agent bank's prime lending rate (the "Base Rate") plus 3/4% or (ii)
the London InterBank Offering Rate ("LIBOR") plus 2-3/4%. In addition, the
Company pays a commitment fee equal to 1/2% on any commitment amount in excess
of outstanding borrowings.
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CONVEST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective December 1, 1996, the borrowing base was $19.2 million and
will reduce by $1.0 million monthly beginning January 1, 1997 based on the
lending banks' estimate of production. Effective January 28, 1997, the borrowing
base was reduced by $300,000 to give effect to the sale of an oil and gas
property securing the credit facility. After giving effect to the monthly
borrowing base reductions and the reduction resulting from the property sale,
the Company's borrowing base under the credit facility was $15.9 million on
March 31, 1997. The Company had no outstanding borrowings under its credit
facility at March 31, 1997 and $4.0 million outstanding at December 31, 1996. In
addition, the Company had an additional $200,000 of letters of credit
outstanding at March 31, 1997 and December 31, 1996, primarily related to
performance bonds issued for oil and gas operations. As of March 31, 1997,
borrowings under the credit facility were subject to Base Rate interest at an
effective rate of 9.25% per annum.
(7) COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS. ELIZABETH HOLT, ET AL. V. SUN E & P COMPANY, ET AL.,
No. 3,217 in the 84th District Court, Hansford County, Texas. This suit was
originally filed in August 1984, seeking to cancel a 13-section lease because
there was no gas production for a period of approximately 120 days in 1983 when
the gas purchaser's pipeline was shutdown for repairs. The plaintiff sought to
terminate the lease by reason of non-production as of September 23, 1983. If the
plaintiff is successful, the Company would be liable for damages on past
production in the range of $300,000 to $350,000, plus pre-judgment interest and
attorneys fees, which would total approximately $400,000 to $450,000. The court
entered a judgment on December 20, 1996 denying all relief sought by the
plaintiffs against Convest. This judgment is being appealed by the plaintiffs.
The predecessor in interest to Convest has indemnified Convest to a maximum of
$357,000 in value for the well provided that total damages exceed $250,000.
In addition, the Company is named as defendant in several lawsuits
arising in the ordinary course of business. While the outcome of lawsuits and
other proceedings against the Company cannot be predicted with certainty,
management does not expect these matters to have a material adverse effect on
the Company's financial position or results of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and the notes thereto.
OVERVIEW AND SIGNIFICANT DEVELOPMENTS
The significant events during the first quarter of 1997 are described
below:
RESULTS OF OPERATIONS. The Company had net income of approximately $4.5
million for the quarter ended March 31, 1997 compared to $2.1 million for the
corresponding quarter of 1996. SEE "Results of Operations" below.
HIGH ISLAND BLOCK 195 DRILLING. During January 1997, the Company
participated in the drilling of an exploratory well on Block 195 of the High
Island area of the Gulf of Mexico to test a prospect identified by 3-D seismic.
The 195 #3 well was directionally drilled to approximately 13,000' and
discovered productive gas sands in the Upper Rob "M". The well was briefly
tested at rates in excess of 9 MMcf of gas per day and shut-in to await further
drilling and flowline hookup. Total cost of the well was approximately $1.1
million net to the Company's 23.4% working interest.
During March 1997, the Company participated in an additional exploratory
test well on Block 195 to test a deeper prospect on the block. The 195 #4 well
was directionally drilled to approximately 15,200' and encountered productive
gas sands in the Lower Rob "M". A brief production test yielded rates in excess
of 12 MMcf of gas per day, and the well was shut-in to install facilities and a
gas flowline. Total cost of the well was approximately $1.3 million net to the
Company's 23.4% working interest.
The Company anticipates that the flowline installation will be complete
and production will commence by July 1, 1997. Gross production from the four
wells on the block is projected to increase from the current 15 MMcf of gas per
day to in excess of 70 MMcf of gas per day. The Company has a net revenue
interest of 19.5% in the production from the block.
WEST CAMERON BLOCK 607 DRILLING. In March 1997, the Company participated
in the drilling of an exploratory test well which was drilled from the existing
platform on Block 607 of the West Cameron area of the Gulf of Mexico. The block
had previously produced in excess of 30 billion cubic feet of gas from the three
existing wells on the block, all of which had ceased producing. The 607 A-4
exploratory well successfully discovered gas reserves in three new sands and was
dually completed. Gross production from the well is currently averaging
approximately 20 MMcf of gas per day and is being processed through the existing
facilities on the platform. The Company owns a 49.6% working interest in the
block and a 36.0% net revenue interest. Total cost of the well was approximately
$2.2 million net to the Company's working interest.
REPAYMENT OF OUTSTANDING DEBT. During the first quarter of 1997, the
Company repaid the remaining $4.0 million of outstanding debt under its
long-term credit facility. Following the debt repayment, the credit facility
will continue to be available for future borrowings if needed. As of March 31,
1997, borrowings available under the credit facility totaled approximately $15.9
million. SEE "Liquidity and Capital Resources - Credit Facility and Long-Term
Debt" below.
ENGAGEMENT OF INVESTMENT BANKER FOR CONVEST AND EDISTO. As previously
announced Convest and Edisto jointly engaged the investment banking firm of
Petrie Parkman & Co., Inc. to make recommendations for strategic alternatives to
enhance shareholder value for both Convest and Edisto. Petrie Parkman is
currently evaluating sale or merger opportunities within the oil and gas
industry which merit consideration by Convest and Edisto.
-12-
<PAGE>
RESULTS OF OPERATIONS
The following table highlights the production volumes, average oil and
gas prices and revenues received by the Company and production and operating
expenses for the three month periods ended March 31, 1997 and 1996.
For the Three Months
Ending March 31,
--------------------
(in thousands except
per BOE data) Percentage
1997 1996 Change
---- ---- ----------
(Unaudited)
PRODUCTION VOLUMES:
Oil (Mbbls) ............................ 236 217 9%
Gas (including NGL's)(Mmcf) ............ 2,902 3,572 (19%)
BOE (Mbbls)(1) ......................... 719 812 (11%)
PRICES:
Oil ($/Bbl) ............................ $ 21.05 $ 17.37 21%
Gas ($/Mcf) ............................ 2.79 2.07 35%
GROSS OIL AND GAS REVENUE:
Oil .................................... $ 4,959 $ 3,760 32%
Gas (including NGL's) .................. 8,103 7,399 10%
------- -------
Total Oil and Gas Revenue ............ $13,062 $11,159 17%
======= =======
PRODUCTION EXPENSES:
Lease Operating Expenses ............... $ 2,955 $ 3,961 (25%)
Production Taxes ....................... 293 310 (5%)
------- -------
Total Production Expenses ............ $ 3,248 $ 4,271 (24%)
======= =======
ABANDONMENT AND EXPLORATION COSTS ......... $ 1,091 $ 42 2,498%
======= =======
GENERAL AND ADMINISTRATIVE EXPENSE ........ $ 1,130 $ 1,239 (9%)
======= =======
INTEREST EXPENSE .......................... $ 56 $ 367 (85%)
======= =======
DEPRECIATION, DEPLETION AND
AMORTIZATION OF OIL AND
GAS PROPERTIES .......................... $ 3,586 $ 4,112 (13%)
======= =======
PRODUCTION COSTS PER BOE .................. $ 4.52 $ 5.26 (14%)
======= =======
DEPRECIATION, DEPLETION AND
AMORTIZATION PER BOE .................... $ 4.99 $ 5.07 (2%)
======= =======
OPERATING CASH FLOW, BEFORE
CHANGES IN WORKING CAPITAL .............. $ 8,664 $ 5,412 60%
======= =======
- ----------------------------
(1) Natural gas is converted into oil equivalents at a rate of six thousand
cubic feet per each barrel of oil.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996.
REVENUES. Oil and gas revenue increased by approximately $1.9 million or
17% between the three months ended March 31, 1997 and 1996. The average price
the Company received for its oil and gas sales increased by 21% and 35%,
respectively, between the corresponding periods. Oil production increased by 9%
between the periods while gas production decreased by 19%. During 1996 and early
1997, the Company participated in 20 new exploratory and
-13-
<PAGE>
development wells of which 16 were successful. As a result of this drilling,
production from several of the Company's properties increased substantially. The
additional production associated with the Company's drilling success was
partially offset by the sale or abandonment of a number of marginal properties
during 1996 and early 1997 and the effects of depletion on the Company's
offshore Gulf of Mexico gas producing properties. The Company's offshore gas
properties are subject to inherent steep production declines. These declines
were partially offset during 1996 and early 1997 by the aforementioned drilling
success. In order to minimize the future effects of such declines, the Company
must replace its reserves through its exploratory and development drilling and
acquisition activities. The Company's gas plant revenue increased by $241,000 or
67% between the corresonding periods due primarily to higher prices received for
output from the plant.
PRICE RISK MANAGEMENT/HEDGING. The Company uses a combination of futures
contracts traded on the NYMEX and over the counter price swaps with major
financial institutions to hedge against the volatility of natural gas and oil
prices. Gains and losses recognized upon settlement of the Company's hedge
positions are deferred and recognized as oil and gas sales revenue in the month
of the underlying physical production being hedged. As a result of the Company's
hedging activities, the Company recorded hedging losses of approximately $92,700
and $1.7 million for the three month periods ended March 31, 1997 and 1996,
respectively. Such amounts were recorded as oil and gas sales revenue in the
accompanying statements of operations, and accordingly, such amounts are
reflected in the per unit price the Company received for its oil and gas sales.
PRODUCTION EXPENSES. Production expenses decreased by approximately $1.0
million or 24% between the corresponding periods. The decrease in lease
operating expenses was primarily due to the aforementioned sale or abandonment
of a number of marginal producing properties during 1996 and early 1997 which
tended to have high operating expense. Production expenses per barrel of oil
equivalent ("BOE") was $4.52 for the three months ended March 31, 1997 compared
to $5.26 for the corresponding period of 1996.
ABANDONMENT AND EXPLORATION COSTS. Abandonment and exploration costs
increased by approximately $1.0 million due to the aforementioned abandonment of
several offshore properties during the first quarter of 1997 and the write off
of two unsuccessful exploratory wells drilled during the first quarter of 1997.
Neither of the exploratory wells proved to be commercially viable and
accordingly, the drilling cost associated with the wells was written off in
accordance with the successful efforts method of accounting.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
decreased by approximately 9% between the corresponding periods due primarily to
the resignation of the former President and Chief Operating Officer and the
former Chief Financial Officer during late 1996. Subsequent to the resignation
of the two former executive officers, neither position has been replaced
resulting in lower salary expense for 1997.
INTEREST EXPENSE. Interest expense decreased by $311,000 or 85% between
the corresponding periods due to the repayment of all outstanding borrowing
under the Company's credit facility during early 1997.
DEPRECIATION, DEPLETION AND AMORTIZATION ("DD&A"). DD&A on oil and gas
properties decreased by approximately $525,000 or 13% between the corresponding
periods. The decrease in DD&A was primarily due to 11% decline in overall
production volumes on a per BOE basis. DD&A per BOE was $4.99 for the three
months ended March 31, 1997 compared to $5.07 for the corresponding period of
1996.
GAIN ON ASSET SALES. In January 1996, the Company completed the sale of
an offshore oil and gas property for sale proceeds of approximately $2.0
million. As a result of the sale, the Company recorded a gain on the property
sale of approximately $620,000 during the first quarter of 1996. The Company has
continued to review its properties with a focus on profitability and as a result
has sold several non-strategic properties with marginal profitability during the
first quarter of 1997. Aggregate sale proceeds totaled approximately $268,000
and resulted in a gain of approximately $122,000 for the three months ended
March 31, 1997.
OPERATING CASH FLOW. As a result of the aforementioned changes, the
Company had operating cash flow, before changes in working capital, of $8.6
million for the three months ended March 31, 1997 compared to $5.4 million for
the corresponding period of 1996. The increase in operating cash flow enabled
the Company to fund its expanded exploratory and development program and repay
the remaining outstanding balance under its long-term credit facility.
-14-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CREDIT FACILITY AND LONG-TERM DEBT
On June 26, 1995, the Company entered into a new credit agreement which
terminates January 1, 1999. This facility is secured by a first lien on
substantially all of the Company's assets, including its oil and gas properties
and gas plant. The borrowing base under the credit facility is subject to
redetermination semi-annually (on May 31 and November 30) using engineering
determinations and pricing and other assumptions designated by the bank group.
Effective December 1, 1996, the new borrowing base under the credit facility was
$19.2 million, based on the lending banks' semi-annual redetermination, which
began reducing by $1.0 million per month beginning January 1, 1997. Effective
January 28, 1997, the borrowing base was reduced by $300,000 to give effect to
the sale of an oil and gas property securing the credit facility. After giving
effect to the monthly borrowing base reductions and the reduction resulting from
the property sale, the Company's borrowing base under the credit facility was
approximately $15.9 million on March 31, 1997. The Company's borrowing capacity
will be substantially reduced over the next year (by at least $12.0 million)
unless there is substantial improvement in oil and gas prices or the Company is
successful in proving up additional reserve quantities.
During 1997, the Company repaid $4.0 million of debt under the credit
facility. Subsequent to the repayment made during 1997 there were no borrowings
outstanding under the Company's credit facility, however, the credit facility
will remain available for future credit needs.
WORKING CAPITAL
At March 31, 1997, the Company had a working capital deficit of
approximately $5.0 million. This working capital deficit was caused primarily by
the inclusion in current liabilities of an aggregate of approximately $5.4
million of accrued liabilities for abandonment, operating expenses attributable
to the sale of a production payment on two properties and gas imbalance
liabilities (deferred revenues). There is no offsetting current asset for any of
these current liabilities since they will be repaid from the operating cash flow
from the oil and gas properties, which are reflected as a long-term asset on the
balance sheet in accordance with generally accepted accounting principles.
The Company's ability to reduce the existing working capital deficit
while maintaining an active drilling program and normal operations will depend
upon the net cash flows generated from its oil and gas properties. In this
regard, the Company's net revenues from its oil and gas properties are expected
to decline significantly, although the drilling success in 1996 and early 1997
has mitigated the steep production decline from the Company's offshore gas
properties.
Based on the cash flow from the Company's existing properties coupled
with the aforementioned incremental production capacity added on High Island
Block 195 and West Cameron Block 607, management believes that the Company has
the financial capability to satisfy its working capital deficit, while
sustaining its 1997 capital expenditures program and meeting operating needs
arising in the ordinary course of business.
CAPITAL EXPENDITURES
The Company has budgeted capital expenditures totaling $12.4 million for
the remainder of 1997, primarily related to the drilling activities conducted on
High Island Block 195 and new drilling on other offshore properties. In
addition, it is anticipated that an additional well will be proposed on High
Island Block 195 for which no costs are currently included in the Company's
budgeted capital expenditures. As previously stated, management believes that
the cash flow generated from the Company's properties coupled with the available
borrowings under the Company's credit facility will be adequate to fund the
anticipated capital expenditures for 1997.
VOLATILITY OF NATURAL GAS AND OIL PRICES
The revenues generated from operations are highly dependant upon the
prices of oil and natural gas. Historically, the markets for natural gas and oil
have been volatile and are likely to continue to be volatile in the future.
Prices for natural gas and oil are subject to wide fluctuation in response to
relatively minor changes in the supply of and demand for natural gas and oil,
market uncertainty and a variety of additional factors that are beyond the
control of the Company. These factors include the level of consumer product
demand, weather conditions, domestic and foreign governmental regulations, the
price and availability of alternative fuels, political conditions in the Middle
East, the foreign supply of natural gas and oil, the price of foreign imports
and overall economic conditions. It is impossible to predict
-15-
<PAGE>
future natural gas and oil price movements with any certainty. Declines in
natural gas and oil prices may adversely affect the Company's financial
condition, liquidity and results of operations. Lower natural gas and oil prices
also may reduce the amount of the Company's natural gas and oil that can be
produced economically.
-16-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Note 7 of the "Notes to the Consolidated Financial Statements" is
incorporated herein by reference.
ITEM 6. (a) EXHIBITS.
None.
(b) REPORTS ON FORM 8-K
None.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
CONVEST ENERGY CORPORATION
(Registrant)
By:/s/ STEVEN G. IVES
Steven G. Ives
Assistant Controller - Finance
(Principal Accounting Officer)
Date: May 14, 1997
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM CONVEST ENERGY CORPORATION'S 1997 FORM 10-Q FOR THE QUARTER ENDED MARCH 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 6,378
<SECURITIES> 0
<RECEIVABLES> 5,473
<ALLOWANCES> (625)
<INVENTORY> 97
<CURRENT-ASSETS> 12,432
<PP&E> 117,930
<DEPRECIATION> (61,167)
<TOTAL-ASSETS> 71,975
<CURRENT-LIABILITIES> 17,429
<BONDS> 0
0
0
<COMMON> 104
<OTHER-SE> 47,564
<TOTAL-LIABILITY-AND-EQUITY> 71,957
<SALES> 13,664
<TOTAL-REVENUES> 13,891
<CGS> 3,422
<TOTAL-COSTS> 9,266
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56
<INCOME-PRETAX> 4,569
<INCOME-TAX> 97
<INCOME-CONTINUING> 4,472
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,472
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.43
</TABLE>
