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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
[ ] 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
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) Number)
1100 Louisiana Street, Suite 5100
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 970-3100
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 _______ .
23,985,927 shares of the registrant's $.01 par value Common Stock were
outstanding on March 31, 1999.
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<PAGE>
PART 1. ITEM 1
FINANCIAL INFORMATION
PANACO, Inc.
Consolidated Condensed Balance Sheets
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
As of As of
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 7,780,000 $ 3,452,000
Accounts receivable 8,336,000 8,332,000
Accounts receivable-employee 4,000 18,000
Prepaid and other 102,000 268,000
------------- -------------
Total current assets 16,222,000 12,070,000
OIL AND GAS PROPERTIES, AS DETERMINED BY THE
SUCCESSFUL EFFORTS METHOD OF ACCOUNTING
Oil and gas properties, proved 247,499,000 238,377,000
Oil and gas properties, unproved 15,331,000 15,128,000
Less accumulated depletion, depreciation,
and amortization (158,600,000) (152,782,000)
------------- -------------
Net oil and gas properties 104,230,000 100,723,000
------------- -------------
PIPELINES AND EQUIPMENT
Pipelines and equipment 26,286,000 26,252,000
Less accumulated depreciation (4,077,000) (3,415,000)
------------- -------------
Net pipelines and equipment 22,209,000 22,837,000
OTHER ASSETS
Deferred debt costs, net 3,213,000 3,359,000
Employee note receivable 300,000 300,000
Restricted deposits and other 4,332,000 4,083,000
------------- -------------
Total other assets 7,845,000 7,742,000
TOTAL ASSETS $ 150,506,000 $ 143,372,000
============= =============
</TABLE>
The accompanying notes are an integral part of this statement.
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<PAGE>
PANACO, Inc.
Consolidated Condensed Balance Sheets
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
As of As of
March 31, 1999 December 31, 1998
-------------- -----------------
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable $ 17,340,000 $ 16,976,000
Interest payable 5,390,000 2,745,000
Revolving credit facility 23,000,000 13,500,000
-------------- -------------
Total current liabilities 45,730,000 33,221,000
LONG-TERM DEBT 102,249,000 102,249,000
DEFERRED INCOME TAXES - -
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;
23,985,927 and 23,704,955 shares
issued and outstanding, respectively 243,000 240,000
Additional paid-in capital 69,444,000 69,197,000
Treasury stock, held at cost (592,000) (592,000)
Retained deficit (66,568,000) (60,943,000)
-------------- -------------
Total stockholders' equity 2,527,000 7,902,000
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 150,506,000 $ 143,372,000
============== =============
COMMITMENTS AND CONTINGENCIES - -
</TABLE>
The accompanying notes are an integral part of this statement.
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<PAGE>
PANACO, Inc.
Consolidated Statements of Income (Operations)
For the Three Months Ended March 31,
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
REVENUES
Oil and natural gas sales $ 9,171,000 $ 11,195,000
COSTS AND EXPENSES
Lease operating expense 4,120,000 3,836,000
Depletion, depreciation & amortization 6,630,000 6,974,000
General and administrative expense 794,000 516,000
Production and ad valorem taxes 154,000 200,000
Exploratory dry hole expense - 1,013,000
Geological and geophysical expense 387,000 252,000
------------ -------------
Total 12,085,000 12,791,000
------------ -------------
OPERATING LOSS (2,914,000) (1,596,000)
------------ -------------
OTHER INCOME (EXPENSE)
Interest income 12,000 424,000
Interest expense (2,723,000) (2,514,000)
------------ -------------
Total (2,711,000) (2,090,000)
------------ -------------
LOSS BEFORE INCOME TAXES (5,625,000) (3,686,000)
INCOME TAX BENEFIT - (1,273,000)
------------ -------------
NET LOSS $ (5,625,000) $ (2,413,000)
============ =============
Net loss per share $ (0.24) $ (0.10)
============ =============
Basic Shares Outstanding 23,801,734 23,970,962
============ =============
Diluted Shares Outstanding 23,801,734 23,970,962
============ =============
</TABLE>
The accompanying notes are an integral part of this statement.
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<PAGE>
PANACO, Inc.
Consolidated Statement of Cash Flows
For the Three Months Ended March 31,
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (5,625,000) $ (2,413,000)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depletion, depreciation and amortization 6,630,000 6,974,000
Exploratory dry hole expense - 1,013,000
Deferred income tax benefit - (1,273,000)
Changes in operating assets and liabilities:
Accounts receivable 8,000 (1,166,000)
Prepaid and other 164,000 (108,000)
Accounts payable 364,000 6,320,000
Interest payable 2,645,000 (2,416,000)
------------ -------------
Net cash provided by operating activities 4,186,000 6,931,000
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of oil and gas properties - -
Capital expenditures and acquisitions (9,359,000) (17,870,000)
Decrease/(increase) in restricted deposits (249,000) (564,000)
------------ -------------
Net cash used by investing activities (9,608,000) (18,434,000)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common shares 250,000 -
Short-term borrowings 9,500,000 2,500,000
Repayment of long-term debt - -
------------ ------------
Net cash provided by financing activities 9,750,000 2,500,000
------------ ------------
NET INCREASE (DECREASE) IN CASH 4,328,000 (9,003,000)
CASH AT BEGINNING OF YEAR 3,452,000 36,909,000
------------ ------------
CASH AT MARCH 31 $ 7,780,000 $ 27,906,000
============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
-5-
<PAGE>
PANACO, Inc.
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Amount ($)
-------------------------------------------------------------------
Number of Additional
Common Common Paid-in Treasury Accumulated
Shares Stock Capital Stock Deficit
----------- ---------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1998 23,704,955 $ 240,000 $ 69,197,000 $ (592,000) $ (60,943,000)
Net Loss - - - -
Common shares issued to the ESOP 280,972 3,000 247,000 - -
---------- ---------- ----------- ---------- -----------
Balances, March 31, 1999 23,985,927 $ 243,000 $ 69,444,000 $ (592,000) $(66,568,000)
========== ========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of this statement.
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<PAGE>
PANACO, Inc.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
financial position as of March 31, 1999 and December 31, 1998 and the results of
operations and cash flows for the periods ended March 31, 1999 and 1998. 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"). A more complete
description of the accounting policies followed by the Company are set forth in
Note 1 to the Company's financial statements in Form 10-K for the year ended
December 31, 1998. These financial statements should be read in conjunction with
the financial statements and notes included in the Form 10-K.
NOTE 2 - 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.
Non-drilling exploratory costs including geological and geophysical costs and
delay rentals are expensed. Unproved leaseholds with significant acquisition
costs are assessed periodically, on a property-by-property basis, and a loss is
recognized to the extent, if any, that the cost of the property has been
impaired. Unproved leaseholds whose acquisition costs are not individually
significant are aggregated, and the portion of such costs estimated to
ultimately prove nonproductive, based on experience, are amortized over an
average holding period. As unproved leaseholds are determined to be productive,
the related costs are transferred to proved leaseholds. Provision for
depreciation and depletion is determined on a depletable unit basis using the
unit-of-production method. Estimated future abandonment costs are recorded by
charges to depreciation and depletion expense over the lives of the proved
reserves of the properties.
The Company performs a review for impairment of proved oil and gas
properties on a depletable unit basis when circumstances suggest there is a need
for such a review. For each depletable unit determined to be impaired, an
impairment loss equal to the difference between the carrying value and the fair
value of the depletable unit will be recognized. Fair value, on a depletable
unit basis, is estimated to be the present value of expected future cash flows
computed by applying estimated future oil and gas prices, as determined by
management, to estimated future production of oil and gas reserves over the
economic lives of the reserves. Future cash flows are based upon the Company's
estimate of proved reserves. In addition, other factors such as probable and
possible reserves are taken into consideration when justified by economic
conditions and actual or planned drilling. The Company recorded an asset
impairment in 1998 of $20.4 million, primarily due to lower oil and natural gas
prices.
Pipelines and other equipment are carried at cost. Oil and natural gas
pipelines and equipment are depreciated on the straight-line method over their
estimated lives, primarily fifteen years. Other property is also depreciated on
the straight-line method over their estimated lives, ranging from three to ten
years. Fees for processing oil and natural gas for others are treated as a
reduction of lease operating expense related to the facilities and
infrastructure.
-7-
<PAGE>
NOTE 3 - CASH FLOW INFORMATION
For purposes of the statement of cash flows, the Company considers all cash
investments purchased with original maturities of three months or less to be
cash equivalents. Cash payments for interest totaled $269,000 and $4,930,000
during the first three months of 1999 and 1998, respectively. No cash payments
for income taxes were made during the first three months of 1999 or 1998.
NOTE 4 - RESTRICTED DEPOSITS
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. Through November 30, 1997 the
Company funded $900,000 into an escrow account with respect to the West Delta
Fields. At that time, the Company completed its obligation for the funding under
West Delta agreement. 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 $2.4 million. In connection with the BP Acquisition, the
Company deposited $1.0 million into an escrow account on July 1, 1998. On the
first day of each quarter thereafter, the Company will deposit $250,000 into the
escrow account until the balance in the escrow account reaches $6.5 million.
NOTE 5 - 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, 1998 7,454,000 81,249,000
Extensions and discoveries 822,000 1,587,000
Production (262,000) (3,359,000)
--------- ----------
Estimated reserves at March 31, 1999 8,014,000 79,477,000
========= ==========
No major discovery or other favorable or adverse event has caused a
significant change in the estimated proved reserves since March 31, 1999. 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.
-8-
<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.
Liquidity and Capital Resources
- -------------------------------
The Company currently has a $17 million capital budget for 1999, which is
subject to change upon review by management and the board of directors. The
Company anticipated funding this capital budget through cash flows and
borrowings under its line of credit. In conjunction with an amendment to the
loan agreement, on April 13, 1999 the borrowing base under the line of credit
was reduced to $25 million, see "Bank Facility." The amendment provides for $4
million reductions in this borrowing base on June 30, 1999 and September 30,
1999. With these reductions in the borrowing base, and the amount outstanding on
April 16, 1999 of $24 million, the Company will be required to reduce its 1999
capital budget to $11.5 million, which it currently has committed to spend.
These assumptions do not include any external sources of financing or
redeterminations of its borrowing base. The line of credit permits the Company
to request such a redetermination from the bank.
Bank Facility
In April 1999, the Company amended its reducing, revolving line of credit
(the "Bank Facility") which is designed to provide the Company up to $75 million
depending on the Company's borrowing base, as determined by the lenders. The
Company's borrowing base at March 31, 1999 was $40 million, with availability
under the revolver of $17 million. The principal amount of the loan is due
October 22, 2002. However, at no time may the Company have outstanding
borrowings in excess of its borrowing base. At April 1, 1999 the borrowing base
was reduced to $25 million. The borrowing base is subject to $4 million
reductions on June 30, 1999 and September 30, 1999. The balance outstanding
-9-
<PAGE>
under the Bank Facility at April 15, 1999 was $24 million. Interest on the
loan is computed at the bank's prime rate or at 1.5 to 2.25% (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. The Bank Facility is collateralized by a first mortgage on the Company's
offshore properties.
The loan agreement contains certain covenants including a requirement to
maintain a positive indebtedness to cash flow ratio, a positive working capital
ratio, a certain tangible net worth, as well as limitations on future debt,
guarantees, liens, dividends, mergers, and sale of assets. At December 31, 1998
the Company was not in compliance with these covenants, which was remedied by
waivers and an amendment to the Bank Facility. However, the Company has
classified this debt as a current liability since it is probable the Company
will fail to meet these covenants at measurement dates prior to December 31,
1999. The failure to satisfy these covenants, or any of the other covenants in
the Bank Facility would constitute an event of default thereunder and, subject
to grace periods, may permit the lenders to accelerate the indebtedness
outstanding under the Bank Facility and demand immediate payment thereof. In
such event, the Company could be required to sell certain oil and gas assets,
sell equity securities or obtain additional bank financing. No assurance can be
given that such transactions can be consummated on terms acceptable to the
Company or its lenders, whose approval may be required. In this situation, if
the Company is unable to raise the necessary funds, the Company could become in
default on the full amount of its indebtedness, which includes the Senior Notes.
The holders of the Senior Notes have acceleration rights, subject to certain
grace periods, if the Company is in default under the Bank Facility.
Property Acquisition
On May 14, 1998 the Company entered into a definitive agreement with BP
Exploration and Oil, Inc. ("BP") to acquire BP's 100% working interest in East
Breaks Blocks 165 and 209 and 75% working interest in High Island Block 587. The
acquisition was accounted for using the purchase method and closed on May 26,
1998. PANACO became the operator of all three blocks effective June 1, 1998. The
Company acquired the properties for $19.6 million in cash. Included in the
acquisition is the production platform, located in 863 feet of water in East
Breaks Block 165. The Company also acquired 31.72 miles of 12" pipeline, with
capacity of over 20,000 barrels of oil per day, which ties the production
platform to the High Island Pipeline System, the major oil transportation system
in the area. It also acquired 9.3 miles of 12 3/4" pipeline, which ties the
production platform to the High Island Offshore System, the major gas
transportation system in the area.
Senior Note offering
On October 9, 1997, the Company issued $100 million principal amount of 10
5/8% Senior Notes due October 1, 2004. Interest on the Notes is payable
semi-annually in arrears on each April 1 and October 1, commencing April 1,
1998. Of the $96.2 million net proceeds, $55.5 million was used to repay
substantially all of the Company's outstanding indebtedness with the remaining
$40.7 million used for capital expenditures and the BP Acquisition.
Common Stock offering
On March 5, 1997 the Company completed an offering of 8.4 million common
shares at $4.00 per share, $3.728 net of the underwriter's commission. The
offering consisted of 6.0 million shares sold by the Company and 2.4 million
shares sold by shareholders, primarily Amoco Production Company (2.0 million
shares) and lenders advised by Kayne, Anderson Investment Management, Inc.
(373,305 shares). The Company's net proceeds of $22 million from the offering
were used to prepay $13.5 million 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 its properties.
-10-
<PAGE>
Commodity price hedges
In 1999 the Company's natural gas hedge transactions are based upon
published gas pipeline index prices. The Company has natural gas hedged in
quantities ranging from 7,300 to 37,300 MMbtu per day in each month in 1999 for
a total of 8,770,000 MMbtu, at pipeline prices averaging approximately $1.99 per
MMbtu, for a NYMEX equivalent of approximately $2.14 per MMbtu. The Company has
hedged 218 MMbtu for each day in 2000 at an average pipeline index swap price of
$1.87.
The Company has hedged a total of 540,000 bbls of oil in 1999 at an average
NYMEX West Texas Intermediate equivalent floor price of $15.34 per bbl. The
number of hedged bbls per day ranges from 2,800 to 4,800. Of the oil hedged,
1,000 bbls per day have a floor price of $15.00 per bbl and a cap price of
$19.12 per bbl and another 1,000 bbls per day have a floor price of $15.00 per
bbl and a cap price of $17.50 per bbl. If the NYMEX equivalent prices exceed the
cap price for the period in which the Company has a cap price in effect, the
Company must pay the difference to the company that effected the swap for the
total number of bbls hedged. The Company has hedged 232 Bbls of oil for each day
in 2000 at an average price of $17.35 per Bbl.
Based on NYMEX future prices for oil and natural gas on March 31, 1999
these hedge agreements would result in future gains of approximately $1.3
million. Due to an increase in NYMEX future commodity prices, as of May 15,
1999, these hedge agreements would result in future losses of approximately $1.1
million.
The Company produces and sells natural gas, oil and natural gas liquids. As
a result, its financial results can be significantly affected by changes in
these commodity prices. The Company uses derivative financial instruments to
hedge its exposure to changes in the market price of natural gas and oil. While
commodity financial instruments are intended to reduce the Company's exposure to
declines in these market prices, the commodity financial instruments may also
limit the Company's gains from increases in the market price of natural gas and
oil. As a result, gains and losses on commodity financial instruments are
generally offset by similar changes in the realized prices of natural gas and
oil. Gains or losses on these transactions are recognized in the production
month to which a hedge contract relates.
Restricted deposits
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. 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 connection with
the BP acquisition, the Company deposited $1,000,000 into an escrow account on
July 1, 1998. On the first day of each quarter thereafter, the Company will
deposit $250,000 into the escrow account until the balance in the escrow account
reaches $6,500,000. In addition, the Company has $9,250,000 in surety bonds to
secure its plugging and abandonment operations.
-11-
<PAGE>
Capital expenditures
First quarter 1999 capital expenditures totaled $9.4 million which
represents a 48% decrease from the $17.8 capital expenditures incurred in the
comparable period of 1998. The capital expenditures incurred in 1999 were
primarily for the development of the East Breaks 165 Field, which was acquired
in May 1998, and property acquisition costs and developmental work on several
smaller properties operated by the Company. The decrease in capital expenditures
is primarily due to the decrease in availability of capital resources from lower
commodity prices.
Results of Operations
- ---------------------
For the three months ended March 31, 1999 and 1998:
"Oil and natural gas sales" decreased 18% for the first quarter of 1999,
despite production remaining flat, due to a 25% decrease in oil prices and a 19%
decrease in natural gas prices. Production remained flat in 1999 despite the
West Delta Fields being shut in for the majority of the first quarter for
pipeline repairs by Tennessee Gas Pipeline Company. These Fields produced 26,000
bbls of oil in 1998 and 800,000 Mcf of natural gas in 1998. The additional
production from the East Breaks 165 Field acquired in May 1998 and the
subsequent development work offset the decrease from West Delta.
Production. Natural gas production decreased 21%, to 3,359,000 Mcf in 1999,
from 4,257,000 Mcf in 1998. The shut in of the West Delta Fields and reduced
production from the High Island 309 Fields accounted for the largest part of the
decreases. Production from the High Island 309 Fields was reduced during the
first quarter while repair work was being done on the production facilities.
Natural gas production decreased from 2.1 billion cubic feet ("Bcf") in 1998 to
.8 Bcf in 1999 due in part to the facilities work along with the natural decline
of the wells. The West Delta Fields produced 800,000 Mcf of natural gas in 1998
versus 100,000 Mcf in 1999. The BP acquisition in May 1998 added 519,000 Mcf of
production in 1999, which, along with successful drilling in 1998, offset part
of the decreased production.
Oil production increased 127% in 1999 to 262,000 barrels, from 115,000
barrels in 1998. The primary factor in the increased oil production was the
acquisition of the East Breaks 165 Field in May 1998, which is primarily an oil
field.
Prices. Average natural gas prices, including the impacts of hedging
transactions, decreased 19% in 1999, from $2.19 per Mcf in 1998 to $1.77 in
1999. The 1999 natural gas hedge program had the effect of increasing the
natural gas price realized by $0.05 per Mcf during the first quarters of both
1999 and 1998. The Company has natural gas hedged in quantities ranging from
7,300 to 37,300 MMbtu per day in each month in 1999 for a total of 8,770,000
MMbtu, at pipeline prices averaging approximately $1.99 per MMbtu, for a NYMEX
equivalent of approximately $2.14 per MMbtu.
Average oil prices, including the impacts of hedging transactions,
decreased 25%, to $12.26 per barrel, from $16.39 per barrel in 1998. The 1999
oil hedge program had the effect of increasing the average net oil price
realized by $.16 per barrel. The Company has hedged a total of 540,000 bbls of
oil in 1999 at an average NYMEX West Texas Intermediate equivalent floor price
of $15.34 per bbl. The number of hedged bbls per day ranges from 2,800 to 4,800.
Of the oil hedged, 1,000 bbls per day have a floor price of $15.00 per bbl and a
cap price of $19.12 per bbl and another 1,000 bbls per day have a floor price of
$15.00 per bbl and a cap price of $17.50 per bbl. If the NYMEX equivalent prices
exceed the cap price for the period in which the Company has a cap price in
effect, the Company must pay the difference to the company that effected the
swap for the total number of bbls hedged. Depressed commodity prices will
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<PAGE>
continue to have a negative impact on the Company's results of operations.
At current prices, the Company expects to incur an additional loss from
operations for the second quarter of 1999.
"Lease operating expense" increased to 45% of oil and natural gas sales,
from 34% in 1998. On an Mcf equivalent ("Mcfe") basis, lease operating expenses
also increased from $0.77 in 1998 to $0.84 in 1999. These increases are
primarily due to the decreases in production discussed above.
"Depletion, depreciation and amortization" decreased $344,000 primarily due
to a lower unit of production cost in the first quarter of 1999. The amount per
Mcfe decreased from $1.41 in 1998 to $1.34 in 1999.
"General and administrative expense" increased $278,000 in 1999 primarily
due to outside legal fees incurred in connection with various corporate legal
matters.
"Exploratory dry hole expense" decreased $1 million in 1999 as a result of
the Company's limited exploratory well participation in 1999. While the Company
believes that its continued participation in a modest amount of exploratory
activities is an important factor in increasing shareholder value, the amount
budgeted for 1999 is significantly less than that incurred during 1998.
"Geological and geophysical expense" increased in 1999 as a result of
rentals incurred on properties acquired during late 1998 and early 1999.
"Interest income" decreased primarily due to a decrease in cash on hand in
1999 versus the comparable period of 1998. The interest income earned in 1998
related to the excess proceeds from the Company's Senior Note offering completed
in October 1997.
Year 2000 Issue
- ---------------
The various problems that may result from the use of date codes in software
and other machinery is referred to as the "Year 2000 Issue." The once common
practice of using a two-digit identifier for the year in a date may cause a
program or system to become faulty or inoperative on or prior to January 1,
2000. This document serves as an informational disclosure regarding the Y2K
assessment activities for the Company under the Year 2000 Information and
Readiness Disclosure Act of 1998.
The Company established a program during 1998 to ensure that, to the extent
reasonably possible, all systems are or will be Year 2000 ready prior to the end
of 1999. The Year 2000 Program ("Y2K Program"), designed with the assistance of
an outside consultant, consists of five phases: (a) Assessment -which includes
compiling an inventory of assets, including significant third-party supplier and
customer relationships, (b) Repair/Upgrade/Replace -including an analysis of the
assets to determine compliance or non-compliance and repairing, upgrading or
replacing those that are non-compliant, (c) Compliance Testing, (d) Contingency
Planning, and (e) Roll-over Planning.
A team consisting of the Company's managers of Information Technology,
Finance and Operations has been established as the Year 2000 Compliance Project
Team. With the assistance of its outside consultant, the Team has designed an
aggressive schedule to identify information technology ("IT") and non-IT assets
requiring readiness upgrades, and a timetable for performance and testing of the
affected systems. In addition, the Y2K Program calls for validation of
compliance by significant suppliers and customers.
-13-
<PAGE>
Once identified, detailed remediation steps will be scheduled to ensure
that internal systems and significant external suppliers and customers meet Y2K
compatibility requirements, or that sufficient contingency plans are in place.
Current Status
As of May 1999, the Company's Year 2000 assessment is not complete. An
inventory of computing, communications and facility systems has been prepared
and validated. Significant third-party suppliers and customers have also been
identified for validation.
The Company has substantially completed the inventory for both its IT and
non-IT systems and expects to complete the assessment phase for these systems on
or prior to July 2, 1999. The Y2K Program calls for the completion of all phases
for both IT and non-IT systems by year-end 1999.
The Company is also performing a review of significant third party
suppliers and customers and, where available, is surveying the public Year 2000
statements issued by them. Additionally, it has sent questionnaires to certain
third party suppliers and customers requesting information regarding their
vulnerability to Year 2000 issues. The Company intends to pursue appropriate
responses to these inquiries and evaluate the responses it receives to determine
if alternate business actions will be necessary. Management expects to complete
the third party assessment phase by July 2, 1999, at which time contingency
plans will be developed.
Costs
The estimated total costs for Y2K readiness has been nominal. It is
anticipated that such costs for complete Y2K readiness will continue to be
nominal. In addition, there have been no material capital expenditures for Y2K
and there is not anticipated to be material capital expenditures, as it is
believed at this point that most major critical field operations do not have
date sensitive equipment. The company does not separately track the internal
costs incurred for the Y2K project as such costs are principally the related
payroll costs for its information systems group. Remediation and testing is
scheduled to be completed during the 3rd quarter of 1999.
Contingency Plans
Should any systems, customers or significant suppliers be determined to
have questionable remediation potential, the Year 2000 Compliance Project Team
will establish a contingency plan to address the at-risk area. This will be
decided during the analysis phase of the overall project now underway. The
Company is unable at this time to determine what contingency plans, if any,
should be implemented. As the Company progresses through the Y2K Program and
identifies specific risk areas, it intends to timely implement appropriate
remedial actions and contingency plans.
Risks
The failure to correct a Year 2000 problem could result in the interruption
or failure of certain normal business activities or operations. The Company
believes that the greatest risks lie in its (a) financial systems applications,
(b) embedded chips in field equipment, (c) and third parties. A significant Year
2000-related disruption in these systems could disrupt financial and accounting
functions, crude oil and natural gas production, transportation, and marketing
activities. This disruption could have a material adverse effect on the
Company's operating results and liquidity.
-14-
<PAGE>
The Company is not presently aware of any vendor related Year 2000 issue
that is likely to result in any disruption of this type. Although there is
inherent uncertainty in the Year 2000 issue, it expects that as it progresses in
its Y2K Program, the level of uncertainty about the impact of the Year 2000
issue will be reduced significantly.
Conclusion and Disclaimers
These estimates and conclusions contain forward-looking statements and are
based on management's best estimates of future events. PANACO's expectations
about risks, future costs, and the timely completion of its Year 2000
remediation are subject to uncertainties that could cause actual results to
differ materially from the statements made in this readiness disclosure.
PART II OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
January 14, 1999 Other events-change in ownership and board of
directors
February 11, 1999 Other events-change in ownership and board of
directors
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: May 19, 1999 /s/ Todd Bart
-------------------------- -------------------------------------
Todd R. Bart, Chief Financial Officer
-15-
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