<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-19136 (COMMON STOCK)
AND 333-9045 (SERIES B SENIOR NOTES)
AND 333-38075 (SERIES D SENIOR NOTES)
NATIONAL ENERGY GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 58-1922764
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
</TABLE>
1400 ONE ENERGY SQUARE
4925 GREENVILLE AVENUE
DALLAS, TEXAS 75206
(Address of principal executive offices)
(214) 692-9211
(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) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
11,190,650 shares of the registrant's Common Stock, $0.01 par value, were
outstanding on November 10, 2000.
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<PAGE> 2
NATIONAL ENERGY GROUP, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1999 and
September 30, 2000 (Unaudited)............................ 3
Consolidated Statements of Operations for the three and nine
months ended September 30, 1999 and 2000 (Unaudited)...... 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 2000 (Unaudited)............. 5
Consolidated Statement of Stockholders' Equity (Deficit) for
the nine months ended September 30, 2000 (Unaudited)...... 6
Notes to Consolidated Financial Statements (Unaudited)...... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 10
Item 3. Quantitative and Qualitative Disclosure about Market Risk... 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 15
Item 2. Changes in Securities and Use of Proceeds................... 15
Item 5. Other Information........................................... 15
Item 6. Exhibits and Reports on Form 8-K............................ 16
</TABLE>
2
<PAGE> 3
NATIONAL ENERGY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 29,216,751 $ 43,157,630
Marketable securities..................................... 342,937 --
Accounts receivable -- oil and natural gas sales.......... 5,057,904 7,022,015
Accounts receivable -- joint interest and other........... 490,339 752,723
Other..................................................... 1,411,783 1,330,571
------------- -------------
Total current assets.............................. 36,519,714 52,262,939
Oil and natural gas properties, at cost (full cost method):
Subject to ceiling limitation............................. 327,330,494 334,196,293
Accumulated depreciation, depletion, and amortization..... (266,282,860) (274,287,862)
------------- -------------
Net oil and natural gas properties........................ 61,047,634 59,908,431
Other property and equipment................................ 2,495,606 2,682,908
Accumulated depreciation.................................... (1,361,349) (1,722,200)
------------- -------------
Net other property and equipment.......................... 1,134,257 960,708
Other assets and deferred charges, net...................... 1,656,521 1,604,646
------------- -------------
Total assets...................................... $ 100,358,126 $ 114,736,724
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable -- trade................................. $ 4,437,802 $ 4,246,683
Accounts payable -- trade (subject to compromise)......... 2,154,158 240,039
Accounts payable -- revenue............................... 2,545,610 3,161,408
Accounts payable -- revenue (subject to compromise)....... 2,879,469 2,116,907
Accrued interest on senior notes.......................... -- 2,813,206
Accrued interest on senior notes (subject to
compromise)............................................ 10,537,601 --
Credit facility........................................... 25,000,000 25,000,000
Other..................................................... 23,341 12,437
------------- -------------
Total current liabilities......................... 47,577,981 37,590,680
Long term liabilities:
Senior notes.............................................. 165,000,000 165,000,000
Gas balancing............................................. 1,096,414 1,096,414
Gas prepayments (subject to compromise)................... 1,589,231 --
Commitments and contingencies
Stockholders' equity (deficit):
Convertible preferred stock, $1.00 par:
Authorized shares -- 1,000,000; Issued and outstanding
shares -- 171,187 at December 31, 1999
Aggregate liquidation preference -- $17,118,700 at
December 31, 1999.................................... 171,187 --
Common stock, $.01 par value:
Authorized shares -- 100,000,000; Issued and
outstanding shares -- 5,819,475 at December 31, 1999
and 6,533,761 at September 30, 2000.................. 58,195 65,338
Additional paid-in capital................................ 113,436,952 113,600,996
Unrealized loss on marketable securities, net............. (172,407) --
Accumulated deficit....................................... (228,399,427) (202,616,704)
------------- -------------
Total stockholders' equity (deficit).............. (114,905,500) (88,950,370)
------------- -------------
Total liabilities and stockholders' equity
(deficit)....................................... $ 100,358,126 $ 114,736,724
============= =============
</TABLE>
See accompanying notes.
3
<PAGE> 4
NATIONAL ENERGY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Oil and natural gas sales.............. $11,208,832 $13,895,191 $27,798,898 $36,942,889
Cost and expenses:
Lease operating........................ 1,520,589 1,423,250 4,417,165 4,179,696
Oil and natural gas production taxes... 484,002 794,946 1,381,007 2,305,059
Depreciation, depletion, and
amortization........................ 4,132,029 2,707,149 12,886,651 8,486,919
General and administrative............. 900,985 1,100,517 3,024,045 3,346,238
----------- ----------- ----------- -----------
Total costs and expenses....... 7,037,605 6,025,862 21,708,868 18,317,912
----------- ----------- ----------- -----------
Operating income......................... 4,171,227 7,869,329 6,090,030 18,624,977
Other income (expense):
Interest expense....................... (482,166) (3,436,145) (1,405,246) (4,598,311)
Interest income and other, net......... -- 409,496 -- 409,496
----------- ----------- ----------- -----------
Income before reorganization items and
income taxes........................... 3,689,061 4,842,680 4,684,784 14,436,162
Reorganization items:
Professional fees and other............ (709,863) (440,366) (1,853,468) (1,015,712)
Interest earned on accumulating cash
resulting from Chapter 11
proceedings......................... 187,280 198,272 445,330 1,064,688
----------- ----------- ----------- -----------
Income before income taxes............... 3,166,478 4,600,586 3,276,646 14,485,138
Provision for income taxes............... -- -- -- --
----------- ----------- ----------- -----------
Income before extraordinary item......... 3,166,478 4,600,586 3,276,646 14,485,138
Extraordinary gain on discharge of
indebtedness........................... -- 11,297,585 -- 11,297,585
----------- ----------- ----------- -----------
Net income............................... $ 3,166,478 $15,898,171 $ 3,276,646 $25,782,723
=========== =========== =========== ===========
Earnings per common share, basic and
diluted:
Income before extraordinary item....... $ .54 $ .73 $ .56 $ 2.43
Gain on discharge of indebtedness...... -- 1.80 -- 1.89
----------- ----------- ----------- -----------
Net income per common share............ $ .54 $ 2.53 $ .56 $ 4.32
=========== =========== =========== ===========
Weighted average number of common shares
outstanding............................ 5,819,475 6,269,786 5,819,475 5,970,674
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
4
<PAGE> 5
NATIONAL ENERGY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 2000
----------- -----------
<S> <C> <C>
Operating Activities
Income from operations.................................... $ 4,684,784 $14,436,162
Chapter 11 proceeding reorganization costs, net........... (1,408,138) 48,976
Gain on discharge of indebtedness......................... -- 11,297,585
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, depletion, and amortization.............. 12,886,651 8,486,919
Amortization of issuance premium....................... (118,582) --
Amortization of deferred compensation.................. 34,078 38,167
Common stock, options, and warrants issued for
services.............................................. 11,248 3,515
Other.................................................. (109,903) 52,428
Changes in operating assets and liabilities:
Accounts receivable.................................. 874,449 (2,285,578)
Other current assets................................. 717,637 43,046
Accounts payable and accrued liabilities............. 1,887,685 (11,351,196)
----------- -----------
Net cash provided by operating activities......... 19,459,909 20,770,024
----------- -----------
Investing Activities
Purchases of other property and equipment................. -- (187,303)
Oil and gas acquisition, exploration, and development
expenditures........................................... (3,036,672) (7,841,295)
Proceeds from sales of oil and gas properties............. 597,907 1,012,856
Purchases of other long-term assets....................... (529,295) (226,550)
Proceeds from sale of marketable securities............... -- 413,147
Other..................................................... 3,810 --
----------- -----------
Net cash used in investing activities............. (2,964,250) (6,829,145)
----------- -----------
Increase in cash and cash equivalents....................... 16,495,659 13,940,879
Cash and cash equivalents and beginning of period........... 2,542,235 29,216,751
----------- -----------
Cash and cash equivalents at end of period.................. $19,037,894 $43,157,630
=========== ===========
Supplemental cash flow information
Interest paid in cash..................................... $ 1,788,761 $ 1,971,055
=========== ===========
</TABLE>
See accompanying notes.
5
<PAGE> 6
NATIONAL ENERGY GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
CONVERTIBLE UNREALIZED TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL LOSS ON STOCKHOLDERS'
----------------------- ------------------- PAID-IN MARKETABLE ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL SECURITIES DEFICIT (DEFICIT)
----------- --------- --------- ------- ------------ ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1999............ 171,187 $ 171,187 5,819,475 $58,195 $113,436,952 $(172,407) $(228,399,427) $(114,905,500)
Preferred stock
conversion
pursuant to
reorganization.... (171,187) (171,187) 714,286 7,143 164,044 -- -- --
Unrealized loss on
marketable
securities........ -- -- -- -- -- 172,407 -- 172,407
Net income.......... -- -- -- -- -- -- 25,782,723 25,782,723
-------- --------- --------- ------- ------------ --------- ------------- -------------
Balance at September
30, 2000............ -- $ -- 6,533,761 $65,338 $113,600,996 $ -- $(202,616,704) $ (88,950,370)
======== ========= ========= ======= ============ ========= ============= =============
</TABLE>
See accompanying notes.
6
<PAGE> 7
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000
1. BACKGROUND AND CONFIRMATION OF JOINT PLAN OF REORGANIZATION
Background
On February 11, 1999, the United States Bankruptcy Court for the Northern
District of Texas, Dallas Division ("Bankruptcy Court") entered an order
involuntarily placing the Company under protection of the Bankruptcy Court
pursuant to Title 11, Chapter 11 of the United States Bankruptcy Code. On July
24, 2000 the Bankruptcy Court entered a subsequent order confirming a Plan of
Reorganization (the "Joint Plan") jointly proposed by the Company and the
official committee of unsecured creditors (the "Committee"). The Joint Plan
became effective on August 4, 2000 (the "Effective Date"). The confirmed Joint
Plan provided for (i)continuation of the Company's oil and gas operations, (ii)
satisfaction of all allowed secured claims, including the credit facility with
Arnos Corp., an affiliate of the Company's former Series D preferred stockholder
("Arnos") (See Note 3), (iii) cash payments to certain tort claimants who
accepted the Joint Plan in an amount equal to 2.0% of such allowed claims or,
alternatively, if rejected, an amount equal to 75% of the allowed claim as
determined by the Bankruptcy Court, (iv) payment by Arnos to senior noteholders,
in an amount equal to 56 1/2% of the face value of each note, less a pro-rata
share of $1.0 million to fund a creditor's trust, plus a pro-rata share of any
net recoveries from any potential litigation brought by the creditor's trust,
(v) cash payment to trade creditors in an amount equal to 75% of the allowed
claim, plus a pro-rata share of any net recoveries from any potential litigation
brought by the creditor's trust, (vi) conversion of all existing preferred stock
into 714,286 shares of newly issued common stock of the reorganized Company,
(vii) retention of all existing common stock subject to cancellation and
reissuance at a ratio of one share in the reorganized Company for every seven
shares of existing common stock held (the "Reverse Stock Split), (viii)
cancellation of existing options, warrants or other equity interests in the
Company and (ix) amendment of the senior note indenture.
Confirmation
As prescribed in the Joint Plan, the Company made payment to tort claimants
and trade creditors for all nondisputed allowed claims and Arnos caused
distribution of funds held in the registry of the Bankruptcy Court to be paid to
the other senior noteholders. Certain other claims disputed by the Company were
set for hearings.
Pursuant to the Joint Plan, Arnos and its affiliates are now the only
holders of the senior notes and Arnos is the current holder of the credit
facility. The senior notes and the credit facility shall remain outstanding and
will be paid either under the existing terms or under terms which are to be
agreed between the Company and Arnos. Also, in accordance with the Joint Plan,
after the Effective Date the reorganized Company will contribute all or
substantially all of its operating properties to a limited liability company,
not yet formed, in exchange for a 50% interest in such limited liability company
and as such, will become a holding company. Arnos will also contribute cash or
other assets to this limited liability company in exchange for the remaining 50%
equity interest in such limited liability company. Arnos shall be the sole
manager of the limited liability company.
Subsequent to September 30, 2000, in compliance with the terms and
conditions of the Joint Plan, the Company's transfer agent, Wells Fargo Bank
Minnesota, N.A. ("Transfer Agent"), has effective the seven for one reverse
stock split and commenced delivery of new stock certificates in the reorganized
Company and has also completed the cancellation and exchange of the Company's
preferred stock for 714,286 newly issued common shares of the reorganized
Company. Additionally, pursuant to the Joint Plan, Arnos has paid the Company
$2.0 million to purchase additional common stock such that, together with its
affiliates, its ownership in the reorganized Company now equals 49.9% of the
newly issued and outstanding common stock. Also, as of the Effective Date, all
existing stock options and warrants were cancelled.
7
<PAGE> 8
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As noted above, substantially all of the requirements under the Joint Plan
have been satisfied and all distributions have been made with the exception of
payment of (i) certain disputed claims for which hearings have been set in the
Bankruptcy Court and (ii) certain administrative claims awaiting Bankruptcy
Court approval. As a result, the Company has successfully emerged from Chapter
11 and shall operate its business in the ordinary course.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, these financial statements
contain all adjustments, consisting of normal recurring accruals, necessary to
present fairly the financial position, results of operations and cash flows for
the periods indicated. The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results may differ from these
estimates. The Company's quarterly financial data should be read in conjunction
with the consolidated financial statements of the Company for the year ended
December 31, 1999 (including the notes thereto), set forth in the Company's
Annual Report on Form 10-K.
The accompanying financial statements as of and for the nine months ended
September 30, 2000 have been presented in accordance with Statement of Position
90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy
Code ("SOP 90-7"), which provides guidance for financial reporting by entities
operating under Chapter 11 and which have been reorganized in accordance with
the Bankruptcy code. In accordance with SOP 90-7, for periods prior to
confirmation of the Joint Plan, no interest was accrued on unsecured debt, no
dividends were accrued on preferred stock, and unamortized premiums and debt
issuance costs relating to unsecured debt were expensed. Costs relating to the
bankruptcy proceeding, and interest earned on accumulating cash during the
bankruptcy proceeding have been reported as reorganization items in the
Company's statement of operations. Liabilities subject to compromise have been
separately reported in the balance sheet. Upon confirmation of the Joint Plan,
liabilities subject to compromise were reduced to the amount of the claim
allowed by the Joint Plan. Due to this reduction, the Company recognized an
extraordinary gain on the discharge of indebtedness of approximately $11,298,000
during the three months ended September 30, 2000.
Common stock and per share data for all periods presented have been
restated to reflect the Reverse Stock Split.
The results of operations for the nine months ended September 30, 2000, are
not necessarily indicative of the results expected for the full year. Certain
prior year amounts have been reclassified to correspond with the current
presentation.
The Company capitalizes internal general and administrative costs that can
be directly identified with acquisition, exploration, and development
activities. Such capitalized costs include salary and related benefits of
individuals directly involved in the Company's acquisition, exploration and
development activities based on the percentage of their time devoted to such
activities. These costs totaled approximately $679,000 and $393,000,
respectively, for the nine months ended September 30, 1999 and 2000. These costs
totaled approximately $186,000 and $138,000, respectively, for the three months
ended September 30, 1999 and 2000.
Overhead reimbursements received from joint interest partners which are
included as a reduction of general and administrative expense totaled
approximately $673,000 and $431,000, respectively, for the nine months ended
September 30, 1999 and 2000. These costs totaled $271,000 and $150,000,
respectively, for the three months ended September 30, 1999 and 2000.
8
<PAGE> 9
NATIONAL ENERGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. CREDIT FACILITY
The Company has an outstanding secured credit facility with Arnos, with a
borrowing base of $25 million. The credit facility matured on August 29, 2000.
However, pursuant to the Joint Plan, as confirmed, the credit facility will
remain in place and be paid based on terms to be agreed between the Company and
Arnos. Until such time, Arnos has agreed to keep the existing credit facility in
place. The Company had $25 million outstanding under the credit facility as of
December 31, 1999 and September 30, 2000. The Company is currently paying
interest under the credit facility at the base rate, as defined. At September
30, 2000, the Company was in compliance with the covenants, as defined, under
the Arnos credit facility.
4. SENIOR NOTES
The Joint Plan provided for Arnos and its affiliates to acquire all of the
senior notes which they did not otherwise hold and that the $165.0 million
principal amount shall remain outstanding and not be discharged by confirmation
of the Joint Plan. As such, Arnos and its affiliates are now the only holders of
the Company's senior notes. Following confirmation of the Joint Plan, payment of
monies due on the senior notes will be made pursuant to either the existing
Indenture or an amended Indenture, or such other terms as agreed between the
Company and Arnos. To date, there has been no amendment to the Indenture.
Interest on the senior notes did not accrue during the term of the Chapter
11 proceeding, but did begin to accrue subsequent to the Effective Date of the
Joint Plan. Accordingly, a $4.3 million interest payment due November 1, 2000
was paid on November 6, 2000 pursuant to an agreement between the Company and
Arnos.
5. HEDGING ACTIVITIES
On September 7, 2000, the Company entered into a six month no-cost
commodity price collar with Torch Energy Marketing, Inc. ("TEMI") covering 1,500
barrels of oil a day from the effective date of October 1, 2000 through March
31, 2001 ("TEMI Hedge"). Based on terms of the TEMI Hedge, at the end of each
month, if the actual average price, as defined, is less than the floor price,
TEMI will pay the difference to the Company. If the actual average price is
greater than the ceiling price, the Company will pay the difference to TEMI. No
payments are required by either party when the actual average price is between
the floor and ceiling. Physical delivery of crude oil shall not take place or be
required of either party and all transactions will be cash settled. In
connection with entrance into the TEMI Hedge, the Company elected early adoption
of FASB Statement 133, Accounting for Derivative Instruments and Hedging
Activities ("FAS 133") which requires the recognition of all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. In accordance with FAS 133, the Company assessed the
fair market value of the TEMI Hedge as of September 30, 2000 and determined
there was no adjustment required and therefore no asset or liability is required
on the balance sheet.
6. ASSET SALES
In September 2000, the Company sold its interest in the Mustang Island
areas producing and non-producing leases along with all facilities and platforms
for $350,000 and a right to make a one time election at the casing point of the
first exploration well drilled to take a 10% proportionately reduced working
interest in the property sold. The purchase price is inclusive of 100% of the
Company's plugging and abandonment liability for the Mustang Island area. The
sale of this property did not have a significant impact on the Company's results
of operations for 2000.
7. SUBSEQUENT EVENTS
In October 2000, the Company sold its interest at an oil and gas auction in
39 non-strategic or marginal oil and gas properties to various purchasers. Net
proceeds from this sale approximated $1.5 million.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Financial Statements and respective notes thereto, included elsewhere herein.
The information below should not be construed to imply that the results
discussed herein will necessarily continue into the future or that any
conclusion reached herein will necessarily be indicative of actual operating
results in the future. Such discussion only represents the best present
assessment by management of the Company.
The revenues generated by the Company's operations are highly dependent
upon the prices of, and demand for, oil and natural gas. The price received by
the Company for its oil and natural gas production depends on numerous factors
beyond the Company's control, including seasonal price fluctuation, the
condition of the U.S. economy, foreign imports, political conditions in other
oil and natural gas producing countries, the actions of the Organization of
Petroleum Exporting Countries and domestic governmental regulations, legislation
and policies.
BACKGROUND AND CONFIRMATION OF JOINT PLAN OF REORGANIZATION
Background
On February 11, 1999, the United States Bankruptcy Court for the Northern
District of Texas, Dallas Division ("Bankruptcy Court") entered an order
involuntarily placing the Company under protection of the Bankruptcy Court
pursuant to Title 11, Chapter 11 of the United States Bankruptcy Code. On July
24, 2000 the Bankruptcy Court entered a subsequent order confirming a Plan of
Reorganization (the "Joint Plan") jointly proposed by the Company and the
official committee of unsecured creditors (the "Committee"). The Joint Plan
became effective on August 4, 2000 (the "Effective Date").
Confirmation
Substantially all of the requirements under the Joint Plan have been
satisfied and all distributions have been made with the exception of payment of
(i) certain disputed claims for which hearings have been set and (ii) certain
administrative claims awaiting court approval. As a result, the Company has
successfully emerged from Chapter 11 and shall operate its business in the
ordinary course. See Note 1 to Consolidated Financial Statements for further
discussion of the bankruptcy proceedings.
RECENT DRILLING ACTIVITY
The Company has initiated drilling activity on its existing property base.
During 2000, the Company has drilled 2 gross (.97 net) nonoperated development
wells in the Company's Mid-Continent area. These development wells were
successfully completed as commercially productive. In addition, the Company has
drilled 6 gross (5.51 net) operated development wells at its Goldsmith Adobe
Unit located in West Texas, all of which were completed as commercially
productive. The Company is currently drilling 2 gross (.47 net) nonoperated
exploratory wells in the Gulf Coast Region, 2 gross (1.84 net) operated
development wells in the Goldsmith Adobe Unit and 2 gross (.26 net) development
wells in the Mid-Continent area, one of which is operated.
10
<PAGE> 11
RESULTS OF OPERATIONS
Overview of Production, Sales and Unit Economics
The following table sets forth certain information regarding the production
volumes, oil and natural gas sales, average sales prices, and unit economics per
Mcfe for revenues and expenses related to the Company's oil and natural gas
production for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
1999 2000 1999 2000
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Net production:
Oil (Mbbls).................................. 280 203 865 640
Natural gas (Mmcf)........................... 2,291 1,758 7,188 5,469
Natural gas equivalent (Mmcfe)............... 3,971 2,976 12,380 9,309
Oil and natural gas sales (in thousands):
Oil.......................................... $ 5,734 $ 6,398 $13,628 $18,329
Natural gas.................................. 5,475 7,497 14,171 18,614
------- ------- ------- -------
Total................................ $11,209 $13,895 $27,799 $36,943
======= ======= ======= =======
Average sales price:
Oil (per Bbl)................................ $ 20.49 $ 31.54 $ 15.75 $ 28.64
Natural gas (per Mcf)........................ 2.39 4.27 1.97 3.40
Unit economics (per Mcfe):
Average sales price.......................... $ 2.82 $ 4.67 $ 2.25 $ 3.97
Lease operating expenses..................... .38 .48 .36 .44
Oil and natural gas production taxes......... .12 .27 .11 .25
Depletion rate............................... 1.04 .86 1.04 .86
General and administrative................... .23 .37 .24 .36
</TABLE>
Three Months Ended September 30, 1999, Compared with Three Months Ended
September 30, 2000
Revenues. Total revenues increased $2.7 million (24.1%) from $11.2 million
for the third quarter of 1999 to $13.9 million for the third quarter of 2000.
The increase in revenues was due to the significant increase in oil and natural
gas prices during the third quarter of 2000 offset, in part, by the decrease in
production from the same period in 1999. Average oil prices increased $11.05 per
barrel from $20.49 per barrel for 1999 to $31.54 per barrel for 2000 while
average natural gas prices increased $1.88 per Mcf from $2.39 per Mcf for 1999
to $4.27 per Mcf for 2000.
The Company produced 280 Mbbls of oil during the third quarter of 1999 and
203 Mbbls of oil in the third quarter of 2000, a decrease of 27.5%. The Company
produced 2,291 Mmcf of natural gas during the third quarter of 1999 and 1,758
Mmcf of natural gas during the third quarter of 2000, a decrease of 23.3%. The
decline in production is primarily due to natural production declines combined
with the loss of production from properties sold at an oil and gas auction in
December 1999. During the bankruptcy proceeding, the Company's ability to offset
natural production declines through drilling and exploration was limited due to
the Bankruptcy Court restrictions. However, the Company has emerged from Chapter
11 and shall operate its business in the ordinary course.
The Company has initiated drilling activity on its existing property base.
During 2000, the Company has drilled 2 gross (.97 net) nonoperated development
wells in the Company's Mid-Continent area. These development wells were
successfully completed as commercially productive. In addition, the Company has
drilled 6 gross (5.51 net) operated development wells at its Goldsmith Adobe
Unit located in West Texas, all of which were completed as commercially
productive. The Company is currently drilling 2 gross (.47 net) nonoperated
exploratory wells in the Gulf Coast Region, 2 gross (1.84 net) operated
development wells in the Goldsmith Adobe Unit and 2 gross (.26 net) development
wells in the Mid-Continent area, one of which is operated.
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<PAGE> 12
Costs and Expenses. Lease operating expenses decreased $.1 million (6.7%)
from $1.5 million for the three months ended September 30, 1999 to $1.4 million
for the same period in 2000. Lease operating expenses per Mcfe increased $.10
from $.38 for 1999 to $.48 in 2000 due to the decline in overall production.
Oil and natural gas production taxes increased $.3 million (60.0%) from $.5
million for the three months ended September 30, 1999 to $.8 million for the
same period in 2000. This increase is the direct result of the increased oil and
gas revenue in 2000 combined with various severance tax refunds received in the
third quarter of 1999.
Depreciation, depletion and amortization ("DD&A") decreased $1.4 million
(34.1%) from $4.1 million for the three months ended September 30, 1999 to $2.7
million for the same period in 2000. This decrease was due to the decrease in
the average depletion rate per Mcfe which was $1.04 for 1999 compared to $.86
for 2000 combined with the decline in production in 2000. The decrease in the
depletion rate is due primarily to upward revisions in the Company's estimated
oil reserves arising from the significant increase in oil prices during 1999
that were used in computing the Company's depletion rate for 2000.
General and administrative costs remained relatively constant at $.9
million for the three months ended September 30, 1999 compared to $1.1 million
for the same period in 2000. As discussed in Note 2 to the Consolidated
Financial Statements, the Company capitalizes internal general and
administrative costs that can be directly identified with acquisition,
exploration and development activities. These capitalized general and
administrative costs totaled $.2 million and $.1 million for the three months
ended September 30, 1999 and 2000, respectively.
Other Income and Expenses. The $2.9 million increase in interest expense
from $.5 million for the three months ended September 30, 1999 to $3.4 million
for the same period in 2000 was due primarily to interest expense on the senior
notes subsequent to the effective date of the Joint Plan. During the Bankruptcy
proceeding, no interest was accrued on the senior notes. Pursuant to the Joint
Plan, the senior notes and credit facility will remain outstanding.
Approximately $4.4 million and $1.6 million additional interest expense would
have been recognized by the Company for the three months ended September 30,
1999 and 2000, respectively, if not for the discontinuation of the interest
accrual, through the effective date of the Joint Plan, on the Company's senior
notes due to the bankruptcy proceeding. The weighted average interest rate for
the three months ended September 30, 1999 was 8.35% compared to 10.65% for the
same period in 2000.
Reorganization Items. The Company incurred $.7 million and $.4 million for
professional fees and other expenses associated with the bankruptcy proceeding
for the three months ended September 30, 1999 and 2000, respectively. The
Company earned $.2 million in interest income on cash accumulating during the
bankruptcy proceeding for the three months ended September 30, 1999 and 2000.
Net Income. Net income of $3.2 million was recognized for the three months
ended September 30, 1999, compared with net income of $15.9 million for the
comparable 2000 period. Net income for the third quarters of 1999 and 2000 (i)
excludes $4.4 million and $1.6 million, respectively, in additional interest
expense on the Company's senior notes not accrued during the Bankruptcy
proceeding , (ii) includes expenses of $.7 million and $.4 million,
respectively, relating to the bankruptcy proceeding (iii) includes $.2 million
in interest income on cash accumulating during the bankruptcy proceeding. The
third quarter of 2000 includes $11.3 million extraordinary gain on discharge of
indebtedness in connection with the confirmation of the Joint Plan. This $11.3
million discharge of indebtedness primarily consists of $10.5 million of
pre-petition accrued interest payable previously accrued on the senior notes
which was discharged without liability by the Joint Plan. Excluding the effects
of these amounts, a net loss of $.7 million would have been recognized for the
three months ended September 30, 1999 compared to net income of $3.2 million for
the same period in 2000.
Nine Months Ended September 30, 1999, Compared with Nine Months Ended
September 30, 2000
Revenues. Total revenues increased by $9.1 million (32.7%) from $27.8
million for the nine months ended September 30, 1999 to $36.9 million for the
same period of 2000. The increase in revenues was due to the significant
increase in oil and natural gas prices during the first nine months of 2000
offset, in part, by the decrease in production from the same period in 1999.
Average oil prices increased $12.89 per barrel from
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<PAGE> 13
$15.75 per barrel for 1999 to $28.64 per barrel for 2000 while average natural
gas prices increased $1.43 per Mcf from $1.97 per Mcf for 1999 to $3.40 per Mcf
for 2000.
The Company produced 865 Mbbls of oil during the nine months ended
September 30, 1999 and 640 Mbbls of oil during the same period of 2000, a
decrease of 26.0%. The Company produced 7,188 Mmcf of natural gas during the
nine months ended September 30, 1999 and 5,469 Mmcf of natural gas during the
same period of 2000, a decrease of 23.9%. The decline in production is primarily
due to natural production declines combined with the loss of production from
properties sold at an oil and gas auction in December 1999. During the
bankruptcy proceeding, the Company's ability to offset natural production
declines through drilling and exploration was limited due to the Bankruptcy
Court restrictions. However, the Company has emerged from Chapter 11 and shall
operate its business in the ordinary course.
The Company has initiated drilling activity on its existing property base.
During 2000, the Company has drilled 2 gross (.97 net) nonoperated development
wells in the Company's Mid-Continent area. These development wells were
successfully completed as commercially productive. In addition, the Company has
drilled 6 gross (5.51 net) operated development wells at its Goldsmith Adobe
Unit located in West Texas, all of which were completed as commercially
productive. The Company is currently drilling 2 gross (.47 net) nonoperated
exploratory wells in the Gulf Coast Region, 2 gross (1.84 net) operated
development wells in the Goldsmith Adobe Unit and 2 gross (.26 net) development
wells in the Mid-Continent area, one of which is operated.
Costs and Expenses. Lease operating expenses decreased $.2 million (4.4%)
from $4.4 million for the nine months ended September 30, 1999 to $4.2 million
for the same period in 2000. Lease operating expenses per Mcfe increased $.08
from $.36 for 1999 to $.44 in 2000 due to the decline in overall production.
Oil and natural gas production taxes increased $.9 million (64.3%) from
$1.4 million for the nine months ended September 30, 1999 to $2.3 million for
the same period in 2000. This increase is the direct result of the increased oil
and gas revenue in 2000 combined with severance tax refunds received during
1999.
Depreciation, depletion and amortization ("DD&A") decreased $4.4 million
(34.1%) from $12.9 million for the nine months ended September 30, 1999 to $8.5
million for the same period in 2000. This decrease was due to the decrease in
the average DD&A rate per Mcfe which was $1.04 for 1999 compared to $.86 for
2000 combined with the decline in production in 2000. The decrease in the DD&A
rate is due primarily to upward revisions in the Company's estimated oil
reserves arising from the significant increase in oil prices during 1999 that
were used in computing the Company's DD&A rate for 2000.
General and administrative costs remained relatively constant at $3.0
million for the nine months ended September 30, 1999 compared to $3.3 million
for the same period in 2000. As discussed in Note 2 to the Consolidated
Financial Statements, the Company capitalizes internal general and
administrative costs that can be directly identified with acquisition,
exploration and development activities. These capitalized general and
administrative costs totaled $.7 million and $.4 million, respectively, for the
nine months ended September 30, 1999 and 2000.
Other Income and Expenses. The $3.2 million increase in interest expense
from $1.4 million for the nine months ended September 30, 1999 to $4.6 million
for the same period in 2000 was primarily due to interest expense on the senior
notes subsequent to the effective date of the Joint Plan. During the Bankruptcy
proceeding, no interest was accrued on the senior notes. Pursuant to the Joint
Plan, the senior notes and credit facility will remain outstanding.
Approximately $13.3 million and $10.5 million additional interest expense would
have been recognized by the Company for the nine months ended September 30, 1999
and 2000 if not for the discontinuation of the interest accrual, through the
effective date of the Joint Plan, on the Company's senior notes due to the
bankruptcy proceeding. The weighted average interest rate for the nine months
ended September 30, 1999 was 8.1% compared to 10.23% for the same period in
2000.
Reorganization Items. The Company incurred $1.9 million and $1.0 million
for the nine months ended September 30, 1999 and 2000, respectively, for
professional fees and other expenses associated with the bankruptcy proceeding.
The Company earned $.4 million and $1.1 million in interest income on cash
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<PAGE> 14
accumulating during the bankruptcy proceeding for the nine months ended
September 30, 1999 and 2000, respectively.
Net Income. Net income of $3.3 million was recognized for the nine months
ended September 30, 1999, compared with net income of $25.8 million for the
comparable 2000 period. Net income for the nine months ended September 30, 1999
and 2000 (i) excludes $13.3 million and $10.5 million, respectively, in
additional interest expense on the Company's senior notes not accrued during the
Bankruptcy proceeding, (ii) includes expenses of $1.9 million and $1.0 million,
respectively, relating to the bankruptcy proceeding (iii) includes $.4 million
and $1.1 million in interest income on cash accumulating during the bankruptcy
proceeding. The nine months ended September 30, 2000 includes $11.3 million
extraordinary gain on discharge of indebtedness in connection with the
confirmation of the Joint Plan. This $11.3 million discharge of indebtedness
primarily consists of $10.5 million of pre-petition accrued interest payable
previously accrued on the senior notes which was discharged without liability by
the Joint Plan. Excluding the effects of these amounts, a net loss of $8.5
million would have been recognized for the nine months ended September 30, 1999
compared to net income of $3.9 million for the same period in 2000.
LIQUIDITY AND CAPITAL RESOURCES
Nine Months Ended September 30, 1999, Compared with Nine Months Ended
September 30, 2000
Net cash provided by operating activities was $19.5 million for 1999,
compared to net cash provided by operating activities of $20.7 million for 2000.
The increase in cash flows from operating activities is primarily due to
increased income from operations before non-cash charges, resulting from
increased oil and gas revenues from higher commodity prices.
Net cash used in investing activities was $3.0 million for 1999 compared
with $6.8 million for 2000. The cash used by investing activities for 1999
included $3.0 million of expenditures related primarily to workovers,
recompletions and other ordinary course production enhancement activities
compared with $7.8 million for 2000. In addition, the Company resumed its
drilling activities during 2000.
There was no cash provided by financing activities during either 1999 or
2000.
FUTURE CAPITAL AND FINANCING REQUIREMENTS
The Company's existing credit facility matured on August 29, 2000. However,
pursuant to the Joint Plan and with the agreement of Arnos, the credit facility
will remain in place and be paid based on either its existing terms or terms to
be agreed to between the Company and Arnos. Until such time, Arnos has agreed to
keep the existing credit facility in place.
If the Company's existing credit facility remains outstanding the Company
currently expects that existing cash and cash flows from operations will be
sufficient to fund planned capital expenditures for its existing properties. If
the Company's credit facility is paid in its entirety, the Company could require
additional capital from traditional reserve base borrowings, equity, and debt
offerings or joint ventures to further develop and explore its properties and to
acquire additional properties. There is no assurance that the Company would be
able to access additional capital or that, if available, it will be at prices or
on terms acceptable to the Company.
Should the Company be unable to access the capital markets or should
sufficient capital not be available, the development and exploration of the
Company's properties could be delayed or reduced and, accordingly, oil and
natural gas revenues and operating results could be adversely affected.
CHANGES IN PRICES
Oil and gas prices are subject to numerous factors that are beyond the
Company's ability to control or predict, including seasonal price fluctuation,
the condition of the U.S. economy, foreign imports, political conditions in
other oil and natural gas producing countries, the actions of the Organization
of Petroleum Exporting Countries and domestic governmental regulations,
legislation and policies.
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<PAGE> 15
INFLATION
Although certain of the Company's costs and expenses are affected by the
level of inflation, inflation did not have a significant effect on the Company's
results of operations during the nine months ended September 30, 1999 and 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company from time to time utilizes derivative instruments to hedge
commodity prices. Based on the type of instrument the Company is currently
entered into along with risk assessment procedures and internal controls,
management believes that its use of derivative instruments does not expose the
Company to material risk. The current derivative instrument limits the downside
risk of adverse price movements, but it may also limit the Company's ability to
benefit from favorable price movements.
On September 7, 2000, the Company entered into a six month no-cost
commodity price collar with Torch Energy Marketing, Inc. ("TEMI") covering 1,500
barrels of oil a day from the effective date of October 1, 2000 through March
31, 2001 ("TEMI Hedge"). Based on terms of the TEMI Hedge, at the end of each
month, if the actual average price, as defined, is less than the floor price,
TEMI will pay the difference to the Company. If the actual average price is
greater than the ceiling price, the Company will pay the difference to TEMI. No
payments are required by either party when the actual average price is between
the floor and ceiling. Physical delivery of crude oil shall not take place or be
required of either party and all transactions will be cash settled. In
accordance with FAS 133, the Company assessed the fair market value of the TEMI
Hedge as of September 30, 2000 and determined there was no adjustment required
and therefore no asset or liability is required on the balance sheet.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a defendant in any additional material pending legal
proceedings. On August 4, 2000, the Company's Joint Plan became effective and
the Company emerged from bankruptcy. See Note 1 to the Consolidated Financial
Statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Under the terms of the Joint Plan, each holder of common stock received one
share of stock in the reorganized Company for every seven shares canceled as a
result of the reorganization. The Company's Transfer Agent, Wells Fargo Bank
Minnesota, NA, has effected the reverse split and has commenced mailing new
certificates to the Company's shareholders of record as of August 4, 2000
representing their post-bankruptcy common equity interest in the reorganized
Company. Upon receipt of the new certificates, each shareholder is requested to
surrender their old certificates to the Transfer Agent. The new certificates are
being issued pursuant to a registration exemption under Section 1145 of the
United States Bankruptcy Code and will include a restrictive legend mandated by
the Joint Plan which prohibits transactions in the Company's common stock by
anyone who is or will become, as a result of any such transaction, a "5 percent
shareholder" within the meaning of Section 382 of the Internal Revenue Code.
Pursuant to the Joint Plan all existing preferred stock has been cancelled
and converted into 714,286 newly issued shares of common stock of the
reorganized Company and all existing warrants and options have been cancelled.
Also, Arnos has paid the Company $2.0 million to purchase additional common
stock such that, together with its affiliates, its ownership in the reorganized
Company now equals 49.9% of the newly issued and outstanding common stock.
Additionally, as of the Effective Date, all existing stock options and warrants
are cancelled.
The senior notes and current credit facility shall remain outstanding and
shall be paid either under the existing terms or under terms which are to be
agreed to between the Company and Arnos. The Joint Plan provides for amendment
of the senior notes indenture. To date there has been no amendment of the senior
note indenture.
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ITEM 5. OTHER INFORMATION
The Company's common stock currently trades on the OTC Bulletin Board.
Effective October 19, 2000, the Company's stock began trading under the new
symbol "NEGI" and trading under the previous symbol "NEGXQ" was discontinued.
The new symbol applies to trading of the Company's recently authorized common
stock issued pursuant to the Joint Plan.
The Company's Certificate of Incorporation was restated as of the effective
date of the Joint Plan (i) to satisfy provisions of the Joint Plan, (ii) to
prohibit the issuance of nonvoting equity securities as required by section 1123
(a)(b) of the Bankruptcy Code and (iii) to prohibit the transfer of any equity
interest to or by any person who was or would become as a result of such
transfer, a "5% shareholder" within the meaning of 26 U.S.C.sec.382. The
Restated Certificate of Incorporation has been attached as Exhibit 3.1 included
in the Index to Exhibits.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The list of exhibits required by Item 601 of Regulation S-K and filed as
part of this report is set forth in the Index to Exhibits.
(b) Reports on Form 8-K
None.
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<PAGE> 17
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.
NATIONAL ENERGY GROUP, INC
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ BOB G. ALEXANDER President and Chief November 14, 2000
----------------------------------------------------- Executive Officer
Bob G. Alexander
/s/ MELISSA H. RUTLEDGE Vice President, Controller November 14, 2000
----------------------------------------------------- and Chief Accounting
Melissa H. Rutledge Officer
</TABLE>
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<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Agreement and Plan of Merger, dated June 6, 1996, among
the Company, NEG-OK, Inc. ("NEG-OK"), and Alexander
Energy Corporation ("Alexander")(1)
2.2 -- First Amendment to Agreement and Plan of Merger, dated as
of June 20, 1996, among the Company, NEG-OK, and
Alexander(2)
2.3 -- Mutual Waiver Agreement dated as of August 29, 1996 by
and among the Company, NEG-OK and Alexander(3)
2.4 -- Joint Plan of Reorganization Under Chapter 11 of the
Bankruptcy Code for National Energy Group, Inc. and
Boomer Marketing Corporation dated May 12, 2000(10)
2.5 -- Debtors' and Official Committee of Unsecured Creditors'
Joint Disclosure Statement under Section 1125 of the
Bankruptcy Code Regarding Debtors' and Official Committee
of Unsecured Creditors' Joint Plan of Reorganization
Under Chapter 11 of the Bankruptcy Code, Dated May 12,
2000(10)
3.1 -- Restated Certificate of Incorporation filed with the
Secretary of the State of Delaware on October 16,
2000(13)
3.2 -- By-laws of the Company(4)
4.1 -- Indenture dated as of November 1, 1996, among the
Company, National Energy Group of Oklahoma, Inc.,
formerly NEG-OK, and BankOne, Columbus, N.A.(5)
4.2 -- Indenture dated August 21, 1997, among the Company and
Bank One, N.A.(6)
4.3 -- Instrument of Resignation, Appointment and Acceptance,
dated October 23, 1998, between the Company, Bank One,
Texas, N.A. and Norwest Bank Minnesota, N.A.(7)
27.1 -- Financial Data Schedule(12)
99.1 -- Order of Bankruptcy Court Granting Relief on Involuntary
Petition(8)
99.2 -- Order of Bankruptcy Court Implementing Auction Sale
Closing(9)
99.3 -- Order of Bankruptcy Court Confirming Joint Plan of
Reorganization and Fixing Deadlines for Filing
Administrative Claims, Fee Claims and Rejections
Claims(11)
</TABLE>
---------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-4 (No. 333-9045), dated July 29, 1996.
(2) Incorporated by reference to Amendment No. 1 to the Company's Registration
Statement on Form S-4 (No. 333-9045), dated August 7, 1996.
(3) Incorporated by reference to the Company's Current Report on Form 8-K, dated
August 29, 1996.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-4 (No. 33-38331), dated April 23, 1991.
(5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996.
(6) Incorporated by reference to the Company's Form S-4 (No. 333-38075), filed
October 16, 1997.
(7) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1998.
(8) Incorporated by reference to the Company's Current Report on Form 8-K, dated
February 8, 1999.
(9) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1999.
<PAGE> 19
(10) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000.
(11) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000.
(12) The Financial Data Schedule is filed herewith for EDGAR filings only.
(13) Filed herewith.
