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 June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-26662
PANACO, Inc.
(Exact name of registrant as specified in its charter)
Delaware 43 - 1593374
(State or other jurisdiction of (I.R.S. EmployerIdentification Number)
incorporation or organization)
1050 West Blue Ridge Boulevard, PANACO Building,
Kansas City, MO 64145-1216
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (816) 942 - 6300
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 _______ .
12,345,361 shares of the registrant's $.01 par value Common Stock were
outstanding as of June 30, 1996.
<PAGE>
<TABLE>
PANACO, INC.
Condensed Balance Sheets (Successful Efforts Method)
(Unaudited)
<CAPTION>
ASSETS As of As of
June 30, 1996 December 31, 1995
------------------------ ------------------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 1,248,000 $ 1,198,000
Accounts receivable 3,913,000 4,386,000
Prepaid expenses 505,000 465,000
------------------------ ------------------------
Total Current Assets 5,666,000 6,049,000
------------------------ ------------------------
OIL AND GAS PROPERTIES, AS DETERMINED BY THE
SUCCESSFUL EFFORTS METHOD OF ACCOUNTING:
Oil and gas properties 106,493,000 103,105,000
Less: accumulated depreciation,
depletion and amortization (77,303,000) (73,620,000)
------------------------ ------------------------
Net Oil and Gas Properties 29,190,000 29,485,000
------------------------ ------------------------
PROPERTY, PLANT AND EQUIPMENT:
Equipment 248,000 196,000
Less: accumulated depreciation (112,000) (92,000)
------------------------ ------------------------
Net Property, Plant and Equipment 136,000 104,000
------------------------ ------------------------
OTHER ASSETS:
Restricted deposits 1,735,000 -
Loan costs, net 362,000 471,000
Certificate of deposit 27,000 26,000
Note receivable 21,000 21,000
Other 13,000 13,000
------------------------ ------------------------
Total Other Assets 2,158,000 531,000
------------------------ ------------------------
TOTAL ASSETS $ 37,150,000 $ 36,169,000
======================== ========================
</TABLE>
<PAGE>
<TABLE>
PANACO, INC.
Condensed Balance Sheets (Successful Efforts Method)
(Unaudited)
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY As of As of
June 30, 1996 December 31, 1995
------------------------ -----------------------
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable $ 6,703,000 $ 4,444,000
Interest payable 239,000 161,000
Current portion of long-term debt - -
------------------------ -----------------------
Total Current Liabilities 6,942,000 4,605,000
------------------------ -----------------------
LONG-TERM DEBT 18,390,000 22,390,000
------------------------ -----------------------
STOCKHOLDERS' EQUITY:
Preferred stock, ($.01 par value,
1,000,000 shares authorized; no
shares issued and outstanding) - -
Common stock, ($.01 par value, 20,000,000 shares authorized and 12,345,361
and 11,504,615 shares issued and outstanding, respectively) 123,000 115,000
Additional paid-in capital 23,090,000 21,155,000
Retained earnings (deficit) (11,395,000) (12,096,000)
------------------------ -----------------------
Total Stockholders' Equity 11,818,000 9,174,000
------------------------ -----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 37,150,000 $ 36,169,000
======================== =======================
</TABLE>
<PAGE>
PANACO, INC.
Statements of Income (Successful Efforts Method)
For the Six Months Ended June 30,
(Unaudited)
1996 1995
REVENUES
Oil and natural gas sales $12,732,000 $9,659,000
Futures contracts (1,924,000) 0
---------- -
Total 10,808,000 9,659,000
----------- ----------
COSTS AND EXPENSES
General & administrative 382,000 314,000
Depletion, depreciation & amortization 3,812,000 4,398,000
Exploration expenses 0 2,174,000
Provision for losses and (gains) on
disposition and write-downs of assets 0 0
Lease operating 4,184,000 3,617,000
Taxes 327,000 626,000
------- -------
Total 8,705,000 11,129,000
--------- ----------
NET OPERATING INCOME (LOSS) 2,103,000 (1,470,000)
--------- ----------
OTHER INCOME (EXPENSE)
Interest expense (net) (902,000) (479,000)
-------- --------
NET INCOME (LOSS) BEFORE INCOME TAXES
& EXTRAORDINARY ITEM 1,201,000 (1,949,000)
INCOME TAXES 0 0
---------- -----------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 1,201,000 (1,949,000)
EXTRAORDINARY LOSS (500,000) 0
-------- -
NET INCOME (LOSS) $701,000 ($1,949,000)
======== ===========
Net income (loss) per share $0.06 ($0.17)
===== ======
<PAGE>
PANACO, INC.
Statements of Income (Successful Efforts Method)
For the Three Months Ended June 30,
(Unaudited)
1996 1995
REVENUES
Oil and natural gas sales $4,387,000 $4,183,000
Futures contracts (918,000) 0
-------- -
Total 3,469,000 4,183,000
--------- ---------
COSTS AND EXPENSES
General & administrative 197,000 134,000
Depletion, depreciation & amortization 1,326,000 1,943,000
Exploration expenses 0 2,174,000
Provision for losses and (gains) on
disposition and write-downs of assets 0 0
Lease operating 1,829,000 2,071,000
Taxes 116,000 246,000
------- -------
Total 3,468,000 6,568,000
NET OPERATING INCOME (LOSS) 1,000 (2,385,000)
----- ----------
OTHER INCOME (EXPENSE)
Interest expense (net) (450,000) (190,000)
-------- --------
NET INCOME (LOSS) BEFORE INCOME TAXES
& EXTRAORDINARY ITEM (449,000) (2,575,000)
INCOME TAXES 0 0
--------- -----------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (449,000) (2,575,000)
EXTRAORDINARY LOSS (500,000) 0
-------- -----------
NET INCOME (LOSS) ($949,000) ($2,575,000)
========= ===========
Net income (loss) per share ($0.08) ($0.22)
====== ======
<PAGE>
<TABLE>
PANACO, INC.
Statement of Changes in Stockholders' Equity
(Unaudited)
<CAPTION>
Amount ($)
Number of Additional Retained
Common Common Paid-in Earnings
Shares Stock Capital (Deficit)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 11,504,615 $115,000 $21,155,000 $(12,096,000)
Net income 0 0 0 701,000
Common shares issued - warrants
exercised and ESOP contributions 840,746 8,000 1,935,000 0
------- ----- --------- -------
Balance, June 30, 1996 12,345,361 $123,000 $23,090,000 $(11,395,000)
========== ======== =========== ============
</TABLE>
<PAGE>
<TABLE>
PANACO, INC.
Statement of Cash Flows
Six Months Ended June 30,
(Unaudited)
<CAPTION>
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) before extraordinary item $1,201,000 ($1,949,000)
Adjustments to reconcile net income (loss) before
extraordinary item to net cash provided by operating
activities:
Depletion, depreciation and amortization 3,703,000 4,248,000
Exploration expenses 0 2,174,000
Amortization of loan costs 109,000 150,000
Changes in operating assets and liabilities:
Certificates of Deposits - escrow (1,000) 21,000
Accounts receivable 473,000 651,000
Prepaid expenses (40,000) (205,000)
Other assets 0 44,000
Accounts payable 2,365,000 1,270,000
Interest payable 78,000 (106,000)
Extraordinary loss - fire loss (500,000) 0
-------- ---------
Net cash provided by operating activities 7,388,000 6,298,000
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of oil and gas properties 0 2,000
Capital expenditures and acquisitions (3,388,000) (2,038,000)
Purchase of other property and equipment (52,000) (2,000)
Increase in restricted deposits (1,735,000) 0
---------- -----------
Net cash used by investing activities (5,175,000) (2,038,000)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (4,000,000) (7,000,000)
Issuance of common stock-exercise of warrants 1,837,000 2,476,000
--------- ---------
Net cash provided (used) by financing activities (2,163,000) (4,524,000)
---------- ----------
NET INCREASE (DECREASE) IN CASH 50,000 (264,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,198,000 1,583,000
CASH AND CASH EQUIVALENTS AT JUNE 30, $1,248,000 $1,319,000
========== ==========
Supplemental disclosures of cash flow information: Cash paid for six months
ended June 30:
Interest $774,000 $587,000
</TABLE>
Disclosure of accounting policies:
1. For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of six months or less
to be cash equivalents.
2. 24,220 Common Shares were issued related to the Company's ESOP in a
non-cash transaction.
<PAGE>
PANACO, INC.
NOTES TO FINANCIAL STATEMENTS
1. In the opinion of management, the accompanying unaudited financial statements
contain all adjustments necessary to present fairly the financial position as of
June 30, 1996 and December 31, 1995 and the results of operations and changes in
stockholders' equity and cash flows for the periods ended June 30, 1996 and
1995. Most adjustments made to the financial statements are of a normal,
recurring nature. Other adjustments, if any, are discussed in later notes.
2. Effective December 31, 1995, the Company changed its method of accounting for
oil and gas operations from the full cost method to the successful efforts
method. Management concluded that the successful efforts method will better
enable investors and others to compare the Company to similar oil and gas
companies, the majority of which follow the successful efforts method.
Under the successful efforts method, lease acquisition costs are
capitalized. Exploratory drilling costs are also capitalized pending
determination of proved reserves. If proved reserves are not discovered, the
exploratory costs are expensed. All development costs are capitalized. Provision
for depreciation and depletion is determined on a field-by-field basis using the
unit-of-production method. The carrying amounts of proven and unproved
properties are reviewed periodically on a property-by-property basis, based on
future net cash flows determined by an independent engineering firm, with an
impairment reserve provided as conditions warrant.
The Company recognizes its ownership interest in oil and gas sales as
revenue. It records revenues on an accrual basis, estimating volumes and prices
for any months for which actual information is not available. If actual
production sold differs from its allocable share of production in a given
period, such differences would be recognized as deferred revenue or accounts
receivable.
Capital costs of oil and gas properties including the estimated costs to
develop proved reserves and estimated future costs of capital expenditures and
plugging offshore wells and removing structures, are amortized on the units of
production method, using the ratio of current production to the calculated
future production from the remaining proved oil and gas reserves.
Reserve determinations are subject to revision due to inherent imprecisions
in estimating reserves and are revised as additional information becomes
available.
3. The results of operations for the six months ended June 30, 1996 are not
indicative of the results to be expected for the full year. On April 24, 1996
the Company experienced an explosion and fire at Tank Battery #3 in West Delta.
Since that time, the fields have been shut-in while repairs are being made. No
revenues for the 67 remaining days in the second quarter of 1996 have been
recorded, while at the same time, a large part of lease operating expenses
associated with West Delta are fixed costs, and have stayed at relatively the
same level as before the fire. Production taxes decreased as a result of the 67
days without production from West Delta in the second quarter, a large part of
which is in Louisiana State waters and is subject to severance taxes. Interest
expense is also up as a result of the fire due to reduced cash flows, coupled
with increased spending to repair Tank Battery #3. The Company did not begin to
receive reimbursement from insurance for repairing the platform until third
quarter, 1996. The Company estimates that the field will begin production again
in September 1996, which will also have an impact on third quarter results.
4. The net income per share for the six months ended June 30, 1996 and 1995 has
been calculated based on 12,345,361 and 11,848,649 weighted average shares
outstanding, respectively and 12,206,886 and 11,509,728 weighted average shares
for the three months ended June 30, 1996 and 1995, respectively.
<PAGE>
5. The reserves presented in the following table are based upon reports of
independent petroleum engineers and are estimates only and should not be
construed as being exact amounts. All reserves presented are proved reserves
that are defined as estimated quantities which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions.
Proved developed and undeveloped reserves Oil Gas
(Bbls) (Mcf)
December 31, 1995 1,900,000 46,711,000
Purchase of minerals-in-place -0- -0-
Production (151,000) (3,666,000)
Sale of minerals-in-place -0- -0-
Revisions of previous estimates -0- -0-
----------- -----------
Estimated reserves at June 30, 1996 1,747,000 43,005,000
=========== ==========
No major discovery or other favorable or adverse event has caused a significant
change in the estimated proved reserves since June 30, 1996. The Company does
not have proved reserves applicable to long-term supply agreements with
governments or authorities. All proved reserves are located in the United
States.
6. The Company's common stock is quoted on the National Market System of
NASDAQ. The last trade on June 28 was at $4.1875 per share.
7. The Company is party to various escrow agreements which provide for
monthly deposits into escrow accounts to satisfy future plugging and abandonment
obligations. The terms of the agreements vary as to deposit amounts, based upon
fixed monthly amounts or percentages of the properties' net income. With respect
to plugging and abandonment operations, funds are partially or completely
released upon the presentation by the Company to the escrow agent of evidence
that the operation was conducted in compliance with applicable laws and
regulations. These amounts are included on the financial statements as
Restricted Deposits.
8. On April 24, 1996 the Company experienced an explosion and fire on Tank
Battery #3 in West Delta. The fire was caused by a service company performing
work on the facility. The extraordinary loss from the fire is management's
estimate of the Company's shortfall on insurance reimbursement of repairing the
facilities, which includes a $225,000 deductible. The Company will seek to
recover these costs, along with lost profits, from the company whose workers
caused the fire.
9. At December 31, 1995 the Company had net operating loss carryforwards
for federal income tax purposes of $15,765,000 which are available to offset
future federal taxable income through the year 2010.
<PAGE>
PART I
Item 2.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The oil and gas industry has experienced significant volatility in recent
years because of the oversupply of most fossil fuels relative to the demand for
such products and other uncertainties in the world energy markets. These
industry conditions should be considered when this analysis of the Company's
operations is read. Accordingly, the energy market has been unsettled, making it
difficult to predict future prices.
Liquidity and Capital Resources
As discussed in notes to the financial statements, the Company experienced
an explosion and fire on April 24, 1996 at Tank Battery #3 in West Delta
resulting in the fields being shut-in to date. The loss of 67 days of
production, a corresponding decrease in expenses and an extraordinary loss on
repairing of the facility caused a ($.08) per share loss, compared to a $.05 per
share gain from previous earnings projections.
The shut-in of West Delta brought about a loss in revenues of $2.4 million.
The decrease in production also brought about a decrease in operating taxes of
$75,000, as a portion of the production from West Delta is in Louisiana State
waters and is subject to State severance taxes. Although production was shut in
for 67 days in the second quarter, resulting in a decrease in West Delta lease
operating expenses of $350,000 from expected levels, a large part of the lease
operating expenses in West Delta are fixed expenses and continue.
The Company is incurring the expenditures of repairing the facility and
being reimbursed by its insurance company. The Company began receiving these
reimbursements during the third quarter of 1996. These repair expenditures,
coupled with the decrease in net operating cash flows discussed above resulted
in higher borrowing levels and interest expense.
The resulting decrease in revenues, net of the corresponding production
taxes, slightly lower lease operating expense levels and higher interest expense
decreased current assets (cash and accounts receivable) by approximately $2.0
million at the end of second quarter of 1996. The repair expenditures on Tank
Battery #3, with no corresponding insurance reimbursement, also decreased cash
and increased accounts payable and long-term debt. Through June 30, 1996 the
Company had paid $500,000 for repairs of Tank Battery #3. Accounts payable
included another $1,747,000 in expenditures that had been accrued but not paid.
These items combined to impact current assets and liabilities as well as limit
the Company's ability to pre-pay its long-term debt.
The price received for natural gas averaged $2.44 per Mcf and $19.50 per
barrel for oil for the three month period ended June 30, 1996. Cash flow is
currently being used to reduce liabilities, pay general and administrative
overhead and drill and rework wells.
At June 30, 1996, 79% of the Company's total assets were represented by oil
and gas properties, net of depreciation, depletion and amortization.
The Company borrowed $21,564,000 in 1991, collateralized by the West Delta
offshore properties and its onshore properties. The lenders received a net
profits interest (NPI) in the West Delta properties. During the three months
ended March 31, 1996, payments with respect to this NPI averaged $53,000 per
month. Due to the explosion and fire at Tank Battery #3, no NPI payments were
made in the three months ended June 30, 1996.
Effective December 31, 1993 the Company entered into a Senior Second
Mortgage Term Loan Agreement with a group of seven lenders represented by Kayne
Anderson Investment Management, Inc. The loan agreement permitted the Company to
borrow $5,000,000 to fund capital projects during 1994 and, at the discretion of
the lenders, a second $5,000,000 which may be borrowed in connection with an
acquisition. The $5,000,000 loaned to the Company under this loan agreement
requires payments of interest only, 45 days after the end of each calendar
quarter, at a rate of 12% per annum. The Company may deliver PIK (payment in
kind) notes in satisfaction of up to $1,000,000 in interest obligations. The
loan agreement contains certain financial covenants including restrictions on
other indebtedness and payment of dividends. The note matures on December 31,
1999 and is secured by a second mortgage on most of the Company's existing
offshore oil and gas properties. The lenders were issued 815,256 (816,256 after
other adjustments) shares of common stock at an exercise price of $2.25 per
share, anytime prior to December 31, 1998. By February 1996 all of these options
had been exercised.
<PAGE>
On July 1, 1994 the Company entered into a Credit Agreement with First
Union National Bank of North Carolina, as the agent for Lenders Signatory
thereto ("Primary Credit Facility"). Initially the only lender was First Union
National Bank of North Carolina. Banque Paribas has become a 35% participant in
this facility. The loan is a reducing revolver designed to provide the Company
up to $30 million depending on the Company's borrowing base. The Company's
borrowing base at June 30, 1996 was $21 million. The principal amount of the
loan is due July 1, 1998. However, at no time may the Company have outstanding
borrowings under the Credit Agreement in excess of its borrowing base. Should
the borrowing base ever be determined to be less than the outstanding principal
owed under the Credit Agreement the Company must immediately pay that difference
to the lenders. Interest on the loan is computed at the bank's prime rate or at
1 to 1 3/4% (depending upon the percentage of the facility being used) over the
applicable London Interbank Offered Rate ("LIBOR") on Eurodollar loans.
Eurodollar loans can be for terms of one, two, three or six months and interest
on such loans is due at the expiration of the terms of such loans, but no less
frequently than every three months. Management feels that this loan arrangement
greatly facilitates its ability to make necessary capital expenditures to
maintain and improve production from its properties and makes available to the
Company additional funds for future acquisitions.
Pursuant to existing agreements the Company is required to deposit funds in
escrow accounts to assure satisfaction of its eventual responsibility to plug
and abandon wells and remove structures when certain fields no longer produce
oil and gas. Commencing in January 1996 the Company deposits $25,000 per month
in escrow until such time as $1,500,000 has been deposited, to satisfy such
obligations with respect to the Bayou Sorrel Field. Each month $25,000 is
deposited, until another $500,000 has been deposited, to satisfy such
obligations with respect to a portion of its West Delta properties. Pursuant to
the Company's agreement to acquire the offshore properties with Zapata
Exploration Company, it agreed to escrow 80% of the net income from the East
Breaks Fields until such time as the Minerals Management Service of the
Department of the Interior, which has jurisdiction over oil and gas operations
in the Outer Continental Shelf, has approved the transfer of East Breaks 109 and
110 to the Company, which approval is expected during third quarter 1996. In
addition, the Company has $8,150,000 in performance bonds to secure its plugging
and abandonment operations.
Under a swap agreement the Company has hedged the price of natural gas by
selling the equivalent of 15,000 MMBTU per day for 1996 at fixed prices which
range from $2.25 for January to $1.75 for July. If the closing price (settlement
price) on NYMEX for natural gas futures is greater than the swap price for a
given month the Company must pay that difference to the bank which effected the
swap. If the settlement price is less than the swap price the bank must pay that
difference to the Company. By entering into the swap in December 1995 the
Company locked in the fixed prices on 15,000 MMBTU per day for each month in
1996. Because settlement prices have been above the fixed prices each month the
Company has been required to pay the difference to the bank which effected the
swap. Since the Company sells its natural gas on the spot market it realizes
prices which approximate the settlement prices on NYMEX, less differences for
transportation due to pipeline locations that are varying distances from Henry
Hub, Louisiana which is the delivery point used for natural gas futures on
NYMEX. Generally these differences are anticipatable and not significant.
However, to the extent that these differences become significant the Company may
realize more or less on its spot sales of gas than was anticipated and may be
impacted beneficially or detrimentally by erratic fluctuations in the natural
gas spot market or the futures market on NYMEX. Both such eventualities have
occurred so far this year. These erratic fluctuations which have characterized
the natural gas market in recent months have exposed the Company to market and
credit risks. In those months in which the spot price is below the settlement
price, the net amount realized by the Company on its total gas sales would be
proportionately reduced by the swap agreements. At present natural gas futures
on NYMEX for the remaining months of 1996 are all above the fixed prices under
the swap agreement and the Company anticipates that this will result in its
realizing less for its natural gas due to amounts required for payments to the
bank under the swap agreement. Management entered into the swap agreement to
assure the Company of not receiving less than the fixed prices established under
the agreement for at least 15,000 MMBTU's of natural gas per day in 1996. This
gave the Company assurance that it would be in a position to timely amortize its
long-term debt. Long-term debt had increased with acquisitions of the Zapata
offshore properties and Bayou Sorrel Field from Shell. Management has generally
used hedge transactions to protect its cash flows when long-term debt has been
higher and refrained from hedge transactions when long-term debt has been lower.
For accounting purposes, gains or losses on swap transactions are recognized in
the production month to which a swap contract relates. The Fair Value of these
remaining swap transactions at June 30, 1996 was ($ 2.6 million) due to the high
natural gas futures market prices on that date.
<PAGE>
Through the six months ended June 30, 1996 the Company had spent $3.4
million in capital expenditures, primarily for development of its oil and gas
properties. The majority of the development costs were incurred to drill
developmental wells in the Bayou Sorrel Field and for the Company's share of
successfully recompleting two wells on Eugene Island Block 372, which is
operated by Unocal.
During 1995 the Company raised $3,173,000 in equity by virtue of the
exercise of options and warrants. Through June 30, 1996 the Company had raised
$1,837,000 in equity as a result of the exercise of warrants.
<PAGE>
Results of Operations
For the six months ended June 30, 1996:
Oil and natural gas sales increased 32% for the first six months of 1996
when compared to the same period in 1995.
Natural gas production decreased 31% to 3,666,000 Mcf for the first six
months of 1996 from 5,284,000 Mcf for the same period in 1995. This decrease is
primarily due to two factors: 67 days of no production from West Delta due to
the April 24, 1996 explosion and fire; and higher production in 1995 from West
Delta (above anticipated 1996 production had the explosion not occurred) from
four horizontal wells drilled in 1994 that had declined significantly by the end
of 1995. These two factors were offset by the production from the Zapata and
Bayou Sorrel properties not owned during the second quarter of 1995.
Oil production was also reduced by the Tank Battery #3 explosion and fire,
however, production for the first six months of 1996 increased 135% to 151,000
barrels from 65,000 barrels in the same period in 1995. Oil production from the
Zapata and Bayou Sorrel properties more than offset the decrease from West
Delta.
On an Mcf equivalent basis, total oil and natural gas production decreased
19% for the first six months in 1996 compared to the same period in 1995.
These reductions in production were more than offset by higher natural gas
prices in 1996 when compared to 1995. Natural gas prices averaged $2.73 per Mcf
for the first six months in 1996 compared to $1.59 for the same period in 1995.
While oil prices decreased to $17.92 per barrel for the first six months in 1996
from $19.10 in 1995, the increased production as noted above offset this price
decline.
Futures contracts resulted in a loss of $1.9 million for the first six
months in 1996. This contract loss averaged $.52 per Mcf, bringing the average
price received per Mcf to $2.21. This average price per Mcf received compares
favorably with the $1.59 received in 1995.
The Company entered into a natural gas swap agreement beginning January 1,
1996 for the sale of 15,000 MMBTU of gas each day in 1996 with contract prices
ranging from $1.75 per MMBTU to $2.25 per MMBTU. Prior to this agreement, the
Company had entered into a natural gas price floor contract that expired
December, 1994 and a natural gas swap agreement that expired September, 1993.
Depletion, depreciation and amortization decreased 13% for the first six
months of 1996 primarily due to the decreased production from West Delta as a
result of the explosion and fire.
Exploration expenses in 1995 were due to two dry exploratory wells drilled
on South Timbalier Block 33 and Eugene Island Block 50 in the second quarter.
The Company has not drilled any exploratory wells in 1996.
Lease operating expenses decreased, in part due to the changes in expenses
associated with the April 24, 1996 explosion and fire at Tank Battery #3 in West
Delta, to 33% of oil and natural gas sales for the first six months of 1996 from
37% for the same period in 1995. A large part of the expenses of West Delta are
fixed in nature and continued, even with the fields being shut-in. Higher oil
and natural gas sales in 1996 also contributed to the decrease as a percentage
of these amounts.
The increase in the dollar amount of lease operating expenses for the first
six months of 1996 is primarily due to the five additional offshore properties
purchased from Zapata Exploration Company in July, 1995 and the Bayou Sorrel
Field purchased from Shell Western E & P, Inc. in December, 1995.
Taxes decreased to 2.5% of oil and natural gas sales in the first six
months of 1996 from 6.9% of oil and natural gas sales for the same period in
1995. A part of the decrease is due to the 67 days of lost production from West
Delta, which has a large percentage of its production in Louisiana State waters
which are subject to severance taxes.
<PAGE>
The decrease is also due to the shift in the Company's production volumes
from properties subject to severance taxes to federal offshore waters (primarily
the Zapata properties) that are not subject to such taxes.
Interest expense (net) increased 56% for the first six months of 1996
compared to the same period in 1995 due to the increase in debt incurred in
December 1995 in connection with the purchase of the Bayou Sorrel Field from
Shell Western E & P, Inc.
The April 24 West Delta explosion and repairs resulting in decreased
discretionary cash flows did not permit the Company to lower its long-term debt
levels as quickly as anticipated, and correspondingly contributed to an increase
in interest expense.
<PAGE>
For the three months ended June 30, 1996:
Oil and natural gas sales increased 5% for the three months ended June 30,
1996 when compared to the same period in 1995.
Natural gas production decreased 33% to 1,348,000 Mcf for the first six
months of 1996 from 2,022,000 Mcf for the same period in 1995. This decrease is
primarily due to two factors: 67 days of no production from West Delta due to
the April 24, 1996 explosion and fire; and higher production in 1995 from West
Delta (above anticipated 1996 production had the explosion not occurred) from
four horizontal wells drilled in 1994 that had declined significantly by the end
of 1995. These two factors are offset by the production from the Zapata and
Bayou Sorrel properties not owned in the second quarter of 1995.
Oil production was also reduced by the Tank Battery #3 explosion and fire,
however, production for the three months ended June 30, 1996 increased 107% to
56,000 barrels from 27,000 barrels in the same period in 1995. Oil production
from the Zapata and Bayou Sorrel properties more than offset the decrease from
West Delta.
On an Mcf equivalent basis, total oil and natural gas production decreased
23% for the three months ended June 30, 1996 compared to the same period in
1995.
The reductions in production were more than offset by higher natural gas
prices in 1996 when compared to 1995. Natural gas prices averaged $2.44 per Mcf
for the three months ended June 30, 1996 compared to $1.77 for the same period
in 1995. While oil prices decreased to $19.50 per barrel for the three months
ended June 30, 1996 from $22.37 in 1995, the increased production as noted above
offset this price decline.
Futures contracts resulted in a loss of $918,000 for the three months ended
June 30, 1996. This contract loss averaged $.68 per Mcf, bringing the average
price received per Mcf to $1.76. This average price per Mcf remained relatively
flat from the $1.77 received in 1995.
Depletion, depreciation and amortization decreased 32% for the three months
ended June 30, 1996 primarily due to the decreased production from West Delta as
a result of the explosion and fire.
Exploration expenses in 1995 were due to two dry exploratory wells drilled
on South Timbalier Block 33 and Eugene Island Block 50 in the second quarter.
The Company has not drilled any exploratory wells in 1996.
Lease operating expenses decreased in part due to some expenses associated
with the April 24, 1996 explosion and fire at Tank Battery #3 in West Delta, to
42% of oil and natural gas sales for the three months ended June 30, 1996 from
46% for the same period in 1995. A large part of the West Delta operating
expenses are fixed in nature and continued, even with the fields being shut-in.
Higher oil and natural gas sales in 1996 also contributed to the decrease as a
percentage of these amounts. The West Delta operating expense decrease was
offset by operating expenses associated with the Zapata and Bayou Sorrel
properties not included in the 1995 lease operating expenses.
Taxes decreased to 2.6% of oil and natural gas sales in the three months
ended June 30, 1996 from 5.9% of oil and natural gas sales for the same period
in 1995. A part of the decrease is due to the 67 days of lost production from
West Delta, which has a large percentage of its production in Louisiana State
waters which are subject to severance taxes.
The decrease is also due to the shift in the Company's production volumes
from properties located in state waters subject to severance taxes to federal
offshore waters (primarily the Zapata properties) that are not subject to such
taxes.
Interest expense (net) increased 137% for the three months ended June 30,
1996 compared to the same period in 1995 due to the increase in debt incurred in
December 1995 in connection with the purchase of the Bayou Sorrel Field from
Shell Western E & P, Inc.
The April 24 West Delta explosion and repairs resulting in decreased
discretionary cash flows and did not permit the Company to lower its long-term
debt levels as quickly as anticipated, which also caused an increase in interest
expense.
The Company currently does not intend to pay dividends with respect to its
Common Shares but rather intends to retain and reinvest its cash flow.
<PAGE>
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A lawsuit has been filed against the Company seeking $700,000, relating to
a gas gathering system in Oklahoma. The Company has filed a counter claim
against the plaintiff alleging fraud, asking that the contract, which is the
subject of the suit, be declared void. Management feels that the suit is without
merit and can be disposed of for less than the amount claimed, although this
amount cannot be reasonably estimated.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On April 24, 1996 the Company experienced a fire, caused by a service
company, which has forced the shut down of Tank Battery #3 in West Delta. There
were no personnel injuries or environmental damage. It is estimated that the
fields will be shut-in until September while repairs are made.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
On March 26, 1996 the Company filed a Current Report, Amendment Number 1 on
Form 8-K/A describing its acquisition, on December 27, 1995, of the Bayou Sorrel
Field in Iberville Parish, Louisiana from Shell Western E & P, Inc.
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.
PANACO, INC.
Date: August 14, 1996 /s/Todd R.Bart
Todd R.Bart, Chief Financial Officer
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