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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 September 30, 1997
[ ] 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. Employer
incorporation or organization) Identification Number)
1050 West Blue Ridge Boulevard, PANACO Building,
Kansas City, Missouri 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 _______ .
23,711,017 shares of the registrant's $.01 par value Common Stock were
outstanding at September 30, 1997.
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<PAGE>
<TABLE>
<CAPTION>
PANACO, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
(Unaudited)
ASSETS As of As of
September 30, 1997 December 31, 1996
------------------------ ------------------------
CURRENT ASSETS
<S> <C>
Cash and cash equivalents $ 1,329,000 1,736,000
Accounts receivable 7,891,000 6,197,000
Investment in common stock 62,000 1,642,000
Prepaid and other 507,000 424,000
------------------------ ------------------------
Total current assets 9,789,000 9,999,000
------------------------ ------------------------
OIL AND GAS PROPERTIES, AS DETERMINED BY THE
SUCCESSFUL EFFORTS METHOD OF ACCOUNTING
Oil and gas properties, proved 180,979,000 125,283,000
Oil and gas properties, unproved 13,487,000 7,128,000
Less: accumulated depreciation, depletion,
amortization and valuation allowances (91,373,000) (81,871,000)
------------------------ ------------------------
Net oil and gas properties 103,093,000 50,540,000
------------------------ ------------------------
PROPERTY, PLANT AND EQUIPMENT
Pipelines and equipment 14,617,000 10,534,000
Less: accumulated depreciation (1,101,000) (327,000)
------------------------ ------------------------
Net property, plant and equipment 13,516,000 10,207,000
------------------------ ------------------------
OTHER ASSETS
Restricted deposits 2,050,000 2,115,000
Loan costs, net 87,000 611,000
Other 779,000 296,000
------------------------ ------------------------
Total other assets 2,916,000 3,022,000
------------------------ ------------------------
TOTAL ASSETS $ 129,314,000 $ 73,768,000
======================== ========================
</TABLE>
The accompanying notes are an intergral part of this statement.
<PAGE>
<TABLE>
<CAPTION>
PANACO, Inc. and Subsudiaries
Consolidated Condensed Balance Sheets
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY As of As of
September 30, 1997 December 31, 1996
------------------------ -------------------------
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable $ 15,935,000 $ 6,246,000
Interest payable 651,000 524,000
Current portion of long-term debt 1,158,000 -
------------------------ -------------------------
Total current liabilities 17,744,000 6,770,000
------------------------ -------------------------
LONG-TERM DEBT 56,002,000 49,500,000
------------------------ -------------------------
STOCKHOLDERS' EQUITY
Preferred Shares, $.01 par value,
5,000,000 shares authorized; no
shares issued and outstanding - -
Common Shares, $.01 par value, 40,000,000 shares authorized; 23,711,017
and 14,350,255 shares issued and outstanding, respectively 237,000 143,000
Additional paid-in capital 68,135,000 31,490,000
Retained earnings(deficit) (12,804,000) (14,135,000)
------------------------ -------------------------
Total stockholders' equity 55,568,000 17,498,000
------------------------ -------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 129,314,000 $ 73,768,000
======================== =========================
The accompanying notes are an intergral part of this statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PANACO, Inc. and Subsidiaries
Consolidated Statements of Income (Operations)
For the Nine Months Ended September 30,
(Unaudited)
1997 1996
------------------- -------------------
REVENUES
<S> <C> <C>
Oil and natural gas sales $ 23,434,000 $ 13,257,000
COSTS AND EXPENSES
Lease operating 8,010,000 6,045,000
Depletion, depreciation & amortization 10,568,000 4,981,000
General and administrative 999,000 573,000
Production and ad valorem taxes 329,000 429,000
Exploration expenses 67,000 -
West Delta fire loss - 500,000
------------------- -------------------
Total 19,973,000 12,528,000
------------------- -------------------
NET OPERATING INCOME 3,461,000 729,000
------------------- -------------------
OTHER INCOME (EXPENSE)
Gain on sale of common stock 75,000 -
Interest expense, net (2,205,000) (1,347,000)
------------------- -------------------
Total (2,130,000) (1,347,000)
------------------- -------------------
NET INCOME BEFORE INCOME TAXES 1,331,000 (618,000)
INCOME TAXES - -
------------------- -------------------
NET INCOME $ 1,331,000 $ (618,000)
=================== ===================
Net income per share $ 0.07 $ (0.05)
=================== ===================
The accompanying notes are an intergral part of this statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PANACO, Inc. and Subsidiaries
Consolidated Statements of Income (Operations)
For the Three Months Ended September 30,
(Unaudited)
1997 1996
------------------- -------------------
REVENUES
<S> <C> <C>
Oil and natural gas sales $ 9,146,000 $ 2,449,000
COSTS AND EXPENSES
Lease operating 2,888,000 1,865,000
Depletion, depreciation & amortization 4,384,000 1,165,000
General and administrative 610,000 191,000
Production and ad valorem taxes 155,000 102,000
Exploration expenses - -
------------------- -------------------
Total 8,037,000 3,323,000
------------------- -------------------
NET OPERATING INCOME (LOSS) 1,109,000 (874,000)
------------------- -------------------
OTHER INCOME (EXPENSE)
Gain on sale of common stock 16,000 -
Interest expense, net (940,000) (445,000)
------------------- -------------------
Total (924,000) (445,000)
------------------- -------------------
NET INCOME (LOSS) BEFORE INCOME TAXES 185,000 (1,319,000)
INCOME TAXES - -
------------------- -------------------
NET INCOME (LOSS) $ 185,000 $ (1,319,000)
=================== ===================
Net income (loss) per share $ - $ (0.11)
The accompanying notes are an intergral part of this statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PANACO, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
Amount ($)
Number of Additional Retained
Common Common Paid-in Earnings
Shares Stock Capital (Deficit)
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Balances, December 31, 1996 14,350,255 $ 143,000 $ 31,490,000 $(14,135,000)
Net Income - - - 1,331,000
Common shares issued - Offering 6,000,000 60,000 21,937,000 -
Common shares issued - ESOP
contribution and stock bonuses 31,832 1,000 149,000 -
Common shares issued - Warrants 90,000 1,000 180,000
exercised
Common shares issued - Goldking 3,238,930 32,000 14,379,000
acquisition
--------------- --------------- --------------- ---------------
Balance, September 30, 1997 23,711,017 $ 237,000 $ 68,135,000 $(12,804,000)
=============== =============== =============== ===============
The accompanying notes are an intergral part of this statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PANACO, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
Nine Months Ended September 30,
(Unaudited)
1997 1996
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 1,331,000 $ (118,000)
Adjustments to reconcile net income to net cash provided by operating
activities:
Depletion, depreciation and amortization 10,568,000 4,981,000
Other, net (28,000) -
Changes in operating assets and liabilities:
Accounts receivable 733,000 (49,000)
Prepaid and other (960,000) 105,000
Accounts payable 4,536,000 4,231,000
Interest payable (72,000) 79,000
West Delta fire loss - (500,000)
---------------- ----------------
Net cash provided by operating activities 16,108,000 8,729,000
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of oil and gas properties 24,000 11,158,000
Accounts receivable - sale of Bayou Sorrel - (11,152,000)
Capital expenditures and acquisitions (27,518,000) (11,856,000)
Sale of investment in common stock 1,717,000 -
Decrease/(increase) in restricted deposits 65,000 (1,886,000)
---------------- ----------------
Net cash used by investing activities (25,712,000) (13,736,000)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock offering proceeds, net 21,997,000 -
Long-term debt proceeds 15,800,000 7,500,000
Repayment of long-term debt (28,600,000) (4,753,000)
Issuance of common stock - exercise of warrants - 1,837,000
Additional loan costs - (9,000)
---------------- ----------------
Net cash used by financing activities 9,197,000 4,575,000
---------------- ----------------
NET INCREASE (DECREASE) IN CASH (407,000) (432,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,736,000 1,198,000
---------------- ----------------
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30 $ 1,329,000 $ 766,000
================ ================
The accompanying notes are an intergral part of this statement.
</TABLE>
<PAGE>
PANACO, Inc. and Subsidiaries
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments necessary to present fairly the financial
position as of September 30, 1997 and December 31, 1996 and the results of
operations and changes in stockholder's equity and cash flows for the periods
ended September 30, 1997 and 1996. Most adjustments made to the financial
statements are of a normal, recurring nature. Although the Company believes that
the disclosures are adequate to make the information presented not misleading,
certain information and footnote disclosures, including significant accounting
policies, normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to the rules and regulations of the Securities and Exchange Commission (the
"SEC"). It is suggested that these financial statements be read in conjunction
with the financial statements and the notes thereto included in the Company's
Annual Report on Form 10-K/A for the year ended December 31, 1996.
Note 2 - ACQUISITIONS
On July 31, 1997 the Company acquired The Goldking Companies, Inc.
("Goldking Acquisition"). The Company entered into the Restated Merger Agreement
with The Union Companies, Inc. ("Union"), Leonard C. Tallerine, Jr. and Mark C.
Licata, (together the "Shareholders"). Prior to the merger, Messrs. Tallerine
and Licata owned all of the capital stock of Union. Union was a holding company
which owned directly or indirectly all of the capital stock of Goldking
Companies, Inc., Goldking Oil and Gas Corp., Goldking Trinity Bay Corp.,
Goldking Production Company, Hill Transportation Co., Inc., and Umbrella Point
Gathering, L.L.C. These companies were merged into a newly formed subsidiary of
PANACO, Goldking Acquisition Corp. ("Goldking"). Goldking will be operated as a
wholly owned subsidiary of PANACO.
The purchase price for the transaction consisted of $7,500,000 in cash,
$6,000,000 in notes and 3,154,930 PANACO common shares. Of the cash portion,
$6,500,000 was advanced on the Company's revolving bank loan. Goldking had
$13,000,000 in net liabilities as of July 31, 1997. A finder's fee was paid to
First Union Capital Markets Corp. with 84,000 PANACO common shares. The
transaction was accounted for as a purchase, with the value of the common shares
issued recorded at $4.45 per share.
The consolidated results of operations for the nine months ended September
30, 1997 include the results of Goldking from August 1 through September 30.
These results also include the results from the former Amoco properties after
their acquisition in October 1996 and do not include the results of the Bayou
Sorrel Field which was sold September 1, 1996. The following pro forma financial
information presents the results as if all of these transactions had occurred
January 1, 1996.
Nine months ended Nine months ended
September 30, 1997 September 30, 1996
Oil and natural gas sales $27,531,000 $27,672,000
Net income (loss) before (1,092,000) (1,151,000)
extraordinary items
Net income (loss) (1,092,000) (1,151,000)
Net income (loss) per share $ (.05) $(.07)
<PAGE>
Note 3 - OIL AND GAS PROPERTIES AND PIPELINES AND EQUIPMENT
The Company utilizes the successful efforts method of accounting for its
oil and gas properties. 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. Interest
on unproved properties is capitalized based on the carrying amount of the
properties. 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 if conditions
warrant.
Pipelines and equipment are carried at cost. Oil and natural gas pipelines
are depreciated on the straight-line method over the useful lives of fifteen
years. Other property is also depreciated on the straight-line method over the
useful lives, which range from five to seven years.
Note 4 - CASH FLOW INFORMATION
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with original maturities of six months
or less to be cash equivalents. Cash payments for interest, net of capitalized
interest, totaled $1,787,000 and $1,180,000 for the first nine months of 1997
and 1996, respectively.
Note 5 - RESTRICTED DEPOSITS
The Company is party to various escrow and trust agreements which provide
for monthly deposits into escrow and trust 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
or trustee of evidence that the operation was or is being conducted in
compliance with applicable laws and regulations. These amounts are included on
the financial statements as Restricted Deposits.
Note 6 - INVESTMENTS IN COMMON STOCK
In connection with the sale of the Bayou Sorrel Field to National Energy
Group, Inc. in 1996, the Company received 477,612 shares of National Energy
Group, Inc. common stock. The Company classified this asset as a trading
security. Over the period of July 25 to August 5 the Company sold all of these
shares for $1,717,000.
With the Goldking Acquisition the Company acquired certain investments in
preferred stock which were sold in October and November with no gains or losses.
Note 7 - NET INCOME PER SHARE
The net income per share for the nine months ended September 30, 1997 and
1996 has been calculated based on 19,735,016 and 12,253,382 weighted average
shares outstanding, respectively and 22,660,702 and 12,345,361 for the three
months ended September 30, 1997 and 1996, respectively. Weighted average shares
outstanding are the only shares included in this calculation. The Company does
not present a fully diluted earnings per share amount as options and warrants
outstanding at September 30, 1997 do not dilute per share amounts by 3% or more
and the shares issuable upon conversion of the 1996 Tranche A Convertible
Subordinated Notes are not considered common stock equivalents and are
anti-dilutive.
The Financial Accounting Standards Board issued FASB Statement 128,
"Earnings Per Share", in February 1997. FASB 128 modifies the way companies
report earnings per share information. The Company will be required to adopt
FASB 128 for the year ending December 31, 1997. All prior periods will be
restated to conform with the statement. The Company does not believe that
adoption of FASB 128 will materially affect earnings per share data previously
reported.
<PAGE>
Note 8 - SUPPLEMENTAL INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES
The reserve information presented in the following table was prepared by
the Company 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, 1996 2,239,000 41,446,000
Purchase of minerals-in-place 2,324,000 23,751,000
Production (336,000) (7,446,000)
Estimated reserves at September 30, 1997 4,227,000 57,751,000
No major discovery or other favorable or adverse event has caused a significant
change in the estimated proved reserves since September 30, 1997. 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.
Note 9 - INCOME TAXES
The Company has not recorded an income tax provision due to net operating
loss carryforwards for federal income tax purposes of $20,400,000 at December
31, 1996 which are available to offset future federal taxable income through
2011.
Note 10 - SUBSEQUENT EVENTS
On October 9, 1997 the Company completed an offering of $100,000,000 of 10
5/8% Senior Subordinated Notes due 2004 (the "Offering"). The net proceeds of
$96,250,000 were used to repay or prepay substantially all of its outstanding
debt in the amount of $55,460,000. The remaining proceeds will be used primarily
for the development of its oil and gas properties. The following pro forma
financial information presents the effects of the Offering as if it had occurred
on September 30, 1997.
September 30, 1997
Actual Pro Forma
Cash and cash equivalents $1,329,000 $ 42,119,000
Total debt, including current maturities 57,160,000 101,700,000
Stockholders' equity:
Preferred shares, $.01 par value,
5,000,000 shares authorized (none
issued or outstanding) - -
Common shares, $.01 par value,
40,000,000 shares authorized
(23,711,017 issued and outstanding) 237,000 237,000
Additional paid in capital 68,135,000 68,135,000
Retained earnings (deficit) (12,805,000) (12,805,000)
------------ ------------
Total stockholders' equity 55,567,000 55,567,000
Total capitalization $112,727,000 $157,267,000
<PAGE>
PART I Item 2.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-looking Statements
Forward-looking statements in this Form 10-Q, future filings by the Company
with the Securities and Exchange Commission, the Company's press releases and
oral statements by authorized officers of the Company are intended to be subject
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Investors are cautioned that all forward-looking statements involve risks
and uncertainty, including without limitation, the risk of a significant natural
disaster, the inability of the Company to insure against certain risks, the
adequacy of its loss reserves, fluctuations in commodity prices, the inherent
limitations in the inability to estimate oil and gas reserves, changing
government regulations, as well as general market conditions, competition and
pricing. The Company believes that forward-looking statements made by it are
based upon reasonable expectations. However, no assurances can be given that
actual results will not differ materially from those contained in such
forward-looking statements. The words "estimate", "anticipate", "expect",
"predict", "believe" and similar expressions are intended to identify
forward-looking statements.
General
The oil and gas industry has experienced significant volatility in recent
years because of the fluctuatory relationship of the supply 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.
On July 31, 1997 the Company acquired Goldking for $27,500,000, consisting
of cash, notes payable to the former shareholders of Goldking, PANACO common
shares plus the assumption of net debt and liabilities of $13,000,000. The
assets acquired included approximately 37.7 Bcfe of Proved Reserves. The
acquisition was accounted for as a purchase and the common shares were valued at
$4.45 per share.
Liquidity and Capital Resources
On October 9, 1997 the Company completed an offering of $100,000,000 10 5/8
% Senior Subordinated Notes due 2004. Interest is payable April 1 and October 1
of each year. The net proceeds of $96,250,000 were used to repay or prepay
substantially all of its outstanding debt in the amount of $55,460,000. The
remaining proceeds will be used primarily for the development of its oil and gas
properties.
On October 9, the Company replaced its existing Bank Facility and entered
into a new, five year $75,000,000 revolving credit facility (the "New Credit
Facility") with First Union National Bank, as administrative agent, and Banque
Paribas. The purpose of the New Credit Facility is to provide funds for working
capital support and general corporate purposes and have available letters of
credit. The initial borrowing base is $40,000,000, subject to a $4,000,000
reduction on April 1, 1998 unless redetermined on an evaluation of the Company's
oil and natural gas assets. The Company may elect to pay interest on the New
Credit Facility at either the Bank's prime rate or at the London Interbank
Offered Rate on Eurodollar loans ("LIBOR") plus 1 to 1.75%, depending upon the
percentage of utilization of the borrowing base. Eurodollar loans can be for
terms of one, two, three or six months and interest is due at the expiration of
the terms of such loans, but no less frequently than three months.
On March 5, 1997 the Company completed an offering of 8,403,305 common
shares at $4.00 per share, $3.728 net of the underwriter's commission. The
offering consisted of 6,000,000 shares sold by the Company and 2,403,305 shares
sold by shareholders, primarily Amoco Production Company (2,000,000 shares) and
lenders advised by Kayne, Anderson Investment Management, Inc. (373,305 shares).
The Company's net proceeds of $22,000,000 from the offering were used to prepay
$13,500,000 of its 12% subordinated debt and the remaining funds were
temporarily paid on the Company's revolving bank loan and ultimately used for
the development of properties.
On October 8, 1996 the Company amended its Bank Facility with First Union
National Bank (60%) and Banque Paribas (40%). The loan was a reducing revolver
designed to provide up to $40,000,000 depending on the borrowing base, as
determined by the lenders. The borrowing base on September 30, 1997 was
$29,200,000. At September 30, 1997 the Company had $28,200,000 outstanding under
the loan. The principal amount of the loan was due July 1, 1999. However, at no
time could the Company have had outstanding borrowings under the Bank Facility
in excess of its borrowing base. Interest on the loan was 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 could be for terms of one, two, three or six
months and interest on such loans was due at the expiration of the terms of such
loans, but no less frequently than every three months.
<PAGE>
From time to time the Company has borrowed funds from institutional lenders
who are represented by Kayne, Anderson Investment Management, Inc. In each case
these loans were due at a stated maturity, require payments of interest only at
12% per annum, 45 days after the end of each calendar quarter, and were secured
by a second mortgage on the Company's offshore oil and gas properties. The loans
were as follows:
(a) 1993 Subordinated Notes. In 1993, $5,000,000 was borrowed, due
December 31, 1999. These Notes were prepaid on March 6, 1997 with a
portion of the proceeds from the common share offering described
above.
(b) 1996 Tranche A Convertible Subordinated Notes. On October 8, 1996,
$8,500,000 was borrowed, due October 8, 2003, but prepayable any time
after May 8, 1998. After August 28, 1997 the Notes are convertible
into 2,060,606 common shares on the basis of $4.125 per share. These
Notes were prepaid on October 9 with a portion of the proceeds of the
Senior Note offering described above. The lenders were given warrants
to acquire 2,060,606 common shares at $4.125 per share, which expire
December 31, 1998, to replace the conversion feature of the prepaid
notes.
(c) 1996 Tranche B Bridge Loan Subordinated Notes. On October 8, 1996,
$8,500,000 was borrowed, due October 8, 2003, but prepayable any time.
These Notes were prepaid on March 6, 1997 with a portion of the
proceeds of the common share offering described above.
At September 30, 1997, 90% of the Company's total assets were represented
by oil and gas properties and pipelines and equipment, net of depreciation,
depletion and amortization.
In 1991 certain lenders received a net profits interest (NPI) in the West
Delta properties. During the nine months ended September 30, 1997, payments with
respect to this NPI totaled $245,000.
The product prices received by the Company, net of the impact of hedge
transactions discussed below, averaged $2.33 per Mcf for natural gas and $18.02
per barrel for oil for the nine months ended September 30, 1997. Cash flow is
currently being used for capital expenditures, to reduce liabilities and to pay
general and administrative overhead. For 1997 the Company's natural gas hedge
transactions are based upon published gas pipeline index prices instead of the
NYMEX. This change has mitigated the risk of price differences due to
transportation. In 1997, 14,000 MMBtu per day has been hedged, reducing to
10,000 MMBtu per day in 1998 and 7,000 MMBtu per day in 1999. The Company is
hedging at a swap price of $1.80 per MMBtu for 1997 with varying levels of
participation (93% in January to 40% in September ) in settlement prices above
the $1.80 per MMBtu swap price level. In 1997 the Company has also hedged its
oil prices on 720 barrels of oil per day at $20.00, with a 40% participation in
prices above the $20.00 swap price level. Management has generally used hedge
transactions to protect its cash flows when the Company's levels of long-term
debt have been higher. For accounting purposes, gains or losses on swap
transactions are recognized in the production month to which a hedge contract
relates.
Pursuant to existing agreements the Company is required to deposit funds in
bank trust and escrow accounts to provide a reserve against satisfaction of its
eventual responsibility to plug and abandon wells and remove structures when
certain fields no longer produce oil and gas. Each month, until November 1997,
$25,000 is deposited in a bank escrow account to satisfy such obligations with
respect to a portion of its West Delta properties. The Company has entered into
an escrow agreement with Amoco Production Company under which the Company
deposits, for the life of the fields, in a bank escrow account ten percent (10%)
of the net cash flow, as defined in the agreement, from the Amoco properties.
The Company has established the "PANACO East Breaks 110 Platform Trust" in favor
of the Minerals Management Service of the U.S. Department of the Interior. This
trust required an initial funding of $846,720 in December 1996, and remaining
deposits of $244,320 due at the end of each quarter in 1999 and $144,000 due at
the end of each quarter in 2000 for a total of $2,400,000. In addition, the
Company has $9,250,000 in surety bonds to secure its plugging and abandonment
operations.
Through the nine months ended September 30, 1997 the Company had made
$27,518,000 in cash capital expenditures, $7,500,000 of which was for the
Goldking Acquisition, approximately $2 million of which was for the completion
of oil and gas pipelines in the West Delta Fields and the remainder was
primarily for development of its oil and gas properties.
<PAGE>
Results of Operations
For the nine months ended September 30, 1997 and 1996:
Production. Natural gas production increased 62% to 7,446,000 Mcf in 1997
from 4,590,000 Mcf in 1996. Oil production increased 66% in 1997 to 336,000
barrels, from 203,000 barrels in 1996. Results for 1997 include production from
the former Amoco properties, purchased in October 1996 and the properties
acquired in the Goldking Acquisition on July 31, 1997. Results for 1997 also
include increased production from the West Delta Fields, which were shut-in from
April 24, 1996 until October 1996. They do not include production from the Bayou
Sorrel Field which was sold September 1, 1996. Bayou Sorrel was primarily an oil
field and produced only a small amount of gas in 1996.
In March, 1997 the federal production from the West Delta Block 58 was
brought back on-line for the first time since the April 1996 fire with the
completion of a dual six inch, eight mile pipeline to the West Delta central
processing facility, Tank Battery #3. This pipeline also allowed Tana Oil and
Gas Corporation and Samedan Corporation to resume production from their wells,
drilled on farm-outs from the Company, on which the Company receives overriding
royalty revenue and fees for processing the oil, gas and water.
Prices. Natural gas prices, net of the impacts of hedging transactions,
increased from $2.07 per Mcf in 1996 to $2.33 in 1997. The 1997 natural gas
hedge program had the effect of reducing gas prices by only ($.07) per Mcf ,
compared to ($.58) per Mcf in 1996. The 1997 hedge program allows the Company
more participation in increases in market prices for natural gas, while
providing the price stability of no less than $1.80 on 14,000 MMBtu per day in
1997. Oil prices decreased slightly in 1997 to $18.02 per barrel from $18.43 per
barrel in 1996.
"Oil and natural gas sales" increased 77% for the first nine months of
1997. Significant increases in both natural gas and oil production were the
primary factor in the increase in revenues. The former Amoco properties,
acquired in October 1996 and the Goldking Acquisition on July 31, 1997, coupled
with the resumption of production from the West Delta Fields have combined to
outweigh the sale of the Bayou Sorrel Field in September 1996. The Company's
development program on the former Amoco properties has increased production from
those fields since the acquisition in October 1996.
"Lease operating expenses" increased $1,960,000, or 32% in 1997 with the
addition of interests in thirteen offshore blocks acquired in October 1996 and
the properties acquired from Goldking. As a percent of oil and natural gas
sales, lease operating expenses decreased to 34% in 1997 from 46% in 1996. On an
Mcf equivalent ("Mcfe") basis, lease operating expenses also decreased to $.85
in 1997 from $1.04 in 1996.
"Depletion, depreciation and amortization" increased $5,587,000, or 112%
primarily due to the increase in 1997 production as discussed above. The amount
per Mcfe also increased from $.86 in 1996 to $1.12 in 1997, due to several
factors. Downward engineering revisions of the West Delta Fields and East Breaks
110 Field at year-end 1996 were a significant contributor to the increase. Also,
$4,000,000 in capital expenditures made during 1996 to rebuild Tank Battery #3,
the central processing facility for the West Delta Fields after the fire,
increased the depletion cost per Mcfe.
"General and administrative expenses" increased $426,000 in 1997 primarily
due to Goldking Acquisition on July 31, 1997. However, as a percentage of oil
and natural gas sales and on an Mcfe basis, these expenses remained flat at 4.3%
of oil and natural gas sales and $.10 per Mcfe.
"Production and ad valorem taxes" decreased 23% in 1997 to 1% of oil and
natural gas sales from 3% of oil and natural gas sales in 1996. The decrease is
due to the Company's primary producing fields being located in federal offshore
waters where there are no state severance taxes. The properties acquired in the
Goldking Acquisition are all currently subject to severance taxes, however, the
production from these properties is included in the Company's results of
operations only from August 1 to September 30, 1997.
"Exploration expenses" incurred in 1997 resulted from an option paid to
participate in an exploratory well in the High Island Area, offshore Texas which
was condemned before the well was drilled because of a dry hole drilled by
another company on an adjacent block. There will be no further exploration
expenses associated with this prospect.
"Gain on sale of common stock" resulted from the sale of the Company's
477,612 shares of National Energy Group, Inc. common stock. These shares were
received in November 1996 in connection with the sale of the Bayou Sorrel Field.
"Interest expense, net" increased 64% in 1997 primarily due to the
increased average borrowing levels in 1997. The average borrowing level
increased to $40,000,000 in 1997 from $21,000,000 in 1996 as a result of the
Amoco acquisition in October 1996 and the debt incurred and assumed in
connection with the Goldking Acquisition on July 31, 1997. On March 6, 1997 the
proceeds from a common stock offering reduced subordinated debt by $13,500,000
and temporarily reduced bank facility debt by $8,500,000.
<PAGE>
For the three months ended September 30, 1997 and 1996:
Production. Natural gas production increased 227% to 3,025,000 Mcf in 1997
from 924,000 Mcf in 1996. Oil production increased 179% in 1997 to 148,000
barrels, from 53,000 barrels in 1996. Results for 1997 include production from
the former Amoco properties, purchased in October 1996 and the properties
acquired in the Goldking Acquisition on July 31, 1997. Results for 1997 also
include increased production from the West Delta Fields, which were shut-in from
April 24, 1996 until October 1996. They do not include production from the Bayou
Sorrel Field which was sold September 1, 1996. Bayou Sorrel was primarily an oil
field and produced only a small amount of gas in 1996.
In March, 1997 the federal production from the West Delta Block 58 was
brought back on-line for the first time since the April 1996 fire with the
completion of a dual six inch, eight mile pipeline to the West Delta central
processing facility, Tank Battery #3. This pipeline also allowed Tana Oil and
Gas Corporation and Samedan Corporation to resume production from their wells,
drilled on farm-outs from the Company, on which the Company receives overriding
royalty revenue and fees for processing the oil, gas and water.
Prices. Natural gas prices, net of the impacts of hedging, increased from
$1.55 per Mcf in 1996 to $2.14 in 1997. The 1997 natural gas hedge program had
the effect of reducing gas prices by only ($.11) per Mcf, compared to ($.78) per
Mcf in 1996. The 1997 hedge program allows the Company more participation in
increases in market prices for natural gas, while providing the price stability
of no less than $1.80 on 14,000 MMBtu per day in 1997. Oil prices decreased in
1997 to $18.09 per barrel, from $19.23 per barrel in 1996.
"Oil and natural gas sales" increased 273% in 1997. Significant increases
in both natural gas and oil production were the primary factor in the increase
in revenues. The former Amoco properties, acquired in October 1996 and the
Goldking Acquisition on July 31, 1997, coupled with the resumption of production
from the West Delta Fields have combined to outweigh the sale of the Bayou
Sorrel Field in September 1996. The Company's development program on the former
Amoco properties has increased production from those fields since the
acquisition in October 1996.
"Lease operating expenses" increased $1,023,000, or 55% in 1997 with the
addition of interests in thirteen offshore blocks acquired in October 1996 and
the Goldking Acquisition on July 31, 1997. As a percent of revenues, lease
operating expenses decreased to 32% in 1997 from 76% in 1996. On an Mcfe basis,
these expenses decreased to $.74 in 1997 from $1.50 in 1996.
"Depletion, depreciation and amortization" increased $3,215,000 primarily
due to the substantial increase in 1997 production as discussed above. The
amount per Mcfe also increased from $.96 in 1996 to $1.12 in 1997, due to
several factors. Downward engineering revisions of the West Delta Fields and
East Breaks 110 Field at year-end 1996 were a significant contributor to the
increase. Also, $4,000,000 in capital expenditures made during 1996 to rebuild
Tank Battery #3, the central processing facility for the West Delta Fields after
the fire, increased the depletion cost per Mcf.
"General and administrative expenses" increased $419,000 in 1997 primarily
due to Goldking Acquisition on July 31, 1997. However, as a percentage of oil
and natural gas sales these expenses decreased to 7% in 1997 from 8% in 1996. On
an Mcfe basis, these expenses remained flat at $.15.
"Production and ad valorem taxes" increased 52% in 1997 primarily due to
the properties acquired in the Goldking Acquisition. These taxes decreased to 1%
of oil and natural gas sales from 4% of oil and natural gas sales in 1996. The
decrease as a percentage of oil and natural gas sales is due to the Company's
primary producing properties being located in federal offshore waters where
there are no state severance taxes. The properties acquired in the Goldking
Acquisition are all currently subject to severance taxes, however, the
production from these properties is included in the Company's results of
operations only from August 1 to September 30, 1997.
"Gain on sale of common stock" resulted from the sale of the Company's
477,612 shares of National Energy Group, Inc. common stock. These shares were
received in November 1996 in connection with the sale of the Bayou Sorrel Field.
"Interest expense, net" increased $495,000 1997 as a result of increased
borrowing levels, primarily as a result of debt incurred and assumed in
connection with the Goldking Acquisition.
<PAGE>
PART II
OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 7, 1997 the Company held its annual meeting of shareholders
in Kansas City, Missouri. With 85.9% of the shareholders voting, Larry
Wright, Mark Barrett and Harold First were elected to serve on the Board
for the next three years.
The choice of Arthur Andersen LLP as independent accountants was
approved by the shareholders.
Item 5. OTHER EVENTS
In connection with his retirement Bob F. Mallory resigned from his
positions as an officer and director effective October 31, 1997. Todd R.
Bart was elected a director by the Board at its meeting on November 13,
1997.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
January 29, 1997 Sale of the Bayou Sorrel Field
August 15, 1997 Purchase of Goldking Companies, Inc.
October 7, 1997 Amended 8-K, purchase of Goldking Companies, Inc.
October 10, 1997 Amended 8-K, purchase of Goldking Companies, 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: November 17, 1997 /s/ Todd R. Bart
Todd R. Bart, Chief Financial Officer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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