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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1996 or
------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to _______________
Commission File No. 0-22782
FRONTIER NATURAL GAS CORPORATION
(Exact name of Small Business Issuer as specified in its Charter)
OKLAHOMA 73-1421000
(State or Other Jurisdiction of (I.R.S. Employer I.D. No.)
Incorporation or organization)
500 DALLAS, SUITE 2920, HOUSTON, TEXAS 77002-4708
(Address of Principal Executive Offices)
(713) 739-7100
(Issuer's Telephone Number)
Check 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 ____
The number of shares of Common Stock, par value $.01, outstanding at November
11, 1996 was 9,865,906.
Transitional small business disclosure format:
Yes ____ No X
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FRONTIER NATURAL GAS CORPORATION
REPORT INDEX
PAGE
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PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
Item 1. Financial Statements - General Information 3
Condensed Balance Sheets as of September 30, 1996 and
December 31, 1995 4
Condensed Statements of Income for the three and nine months
ended September 30, 1996 and 1995 5
Condensed Statements of Cash Flows for the nine months
ended September 30, 1996 and 1995 6
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION 15
</TABLE>
2
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PART I, FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
GENERAL INFORMATION
The Condensed Consolidated Financial Statements herein have been prepared
by the Company without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). As applicable under such
regulations, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The Company believes that the
presentation and disclosures herein are adequate to make the information not
misleading, and the financial statements reflect all elimination entries and
normal adjustments which are necessary for a fair statement of the results for
the nine and three months ended September 30, 1996 and 1995.
Operating results for interim periods are not necessarily indicative of the
results for full years. It is suggested that these condensed consolidated
financial statements be read in conjunction with the consolidated financial
statements for the year ended December 31, 1995 and the related notes thereto
included in the Company's Annual Report on Form 10-K filed with the SEC.
3
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FRONTIER NATURAL GAS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1996 1995
------------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,174,271 $ 63,908
Accounts receivable, net 761,821 612,876
Prepaid expenses and other 185,815 178,737
Receivable from affiliates 182,901 210,016
----------- -----------
Total current assets 7,304,808 1,065,537
----------- -----------
PROPERTY AND EQUIPMENT:
Gas and oil properties, at cost 5,577,499 11,109,678
Other property and equipment 942,796 906,453
----------- -----------
6,520,295 12,016,131
Less accumulated depletion, depreciation and amortization (1,791,512) (2,895,159)
----------- -----------
4,728,783 9,120,972
----------- -----------
OTHER ASSETS 231,529 252,966
----------- -----------
Total assets $12,265,120 $10,439,475
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable $ 574,258 $ 2,065,341
Revenue distribution payable 317,412 493,072
Current portion of long-term debt 536,970 227,302
Deferred gas revenues --- 828,000
Accrued and other liabilities 270,896 222,778
----------- -----------
Total current liabilities 1,699,536 3,836,493
----------- -----------
DEFERRED GAS REVENUES --- 1,113,977
LONG-TERM DEBT 852,779 150,271
OTHER LONG-TERM LIABILITIES 218,435 275,298
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Cumulative convertible preferred stock $.01 par value; 5,000,000
shares authorized; 85,961 shares issued and outstanding 860 860
Common stock, $.01 par value; 20,000,000 shares authorized;
9,865,906 and 5,058,406 issued and outstanding at September 30,
1996 and December 31, 1995, respectively 98,659 50,584
Unamortized value of warrants issued (61,116) ---
Common stock subscribed 45,000 45,000
Common stock subscription receivable (45,000) (45,000)
Additional paid-in capital 14,599,326 7,866,879
Deficit (5,143,359) (2,854,887)
----------- -----------
Total stockholders' equity 9,494,370 5,063,436
----------- -----------
Total liabilities and stockholders' equity $12,265,120 $10,439,475
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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FRONTIER NATURAL GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September, 30 September 30,
------------------------ -------------------------
1996 1995 1996 1995
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Gas and oil revenues $ 632,074 $ 503,320 $ 2,573,635 $ 1,977,931
Gain (loss) on sale of assets (24,067) 149,075 246,504 638,549
Gain on sale of seismic data --- --- --- 601,100
Operating fees 50,356 95,915 195,471 332,233
Other revenues 48,899 48,813 141,318 170,166
----------- ---------- ----------- -----------
Total revenues 707,262 797,123 3,156,928 3,719,979
----------- ---------- ----------- -----------
COSTS AND EXPENSES:
Lease operating expense 157,203 183,553 478,604 628,831
Transportation and marketing 64,884 --- 255,139 ---
Production taxes 46,509 35,727 185,927 138,885
Gas purchases under deferred
contract --- 111,613 82,461 350,645
Depletion, depreciation and
amortization 352,163 179,223 1,163,008 692,630
Exploration costs 111,477 187,686 330,148 919,734
Interest expense 576,610 --- 774,920 ---
Deferred gas contract settlement --- --- 368,960 ---
Loss on settlement of futures contract 212,000 --- 212,000 ---
General and administrative costs 484,046 583,967 1,594,232 1,726,981
----------- ---------- ----------- -----------
Total costs and expenses 2,004,892 1,281,769 5,445,399 4,457,706
----------- ---------- ----------- -----------
NET LOSS (1,297,630) (484,646) (2,288,471) (737,727)
Cumulative preferred stock dividend (25,788) (25,788) (77,365) (369,593)
Value of common stock issued for
cumulative preferred stock in excess
of original terms, net of relieved
preferred stock dividend --- --- --- (2,183,471)
----------- ---------- ----------- -----------
NET LOSS AVAILABLE TO COMMON
STOCKHOLDERS' SHARES $(1,323,418) $ (510,434) $(2,365,836) $(3,290,791)
=========== ========== =========== ===========
NET LOSS PER COMMON AND
EQUIVALENT SHARE $ (.19) $ (.13) $ (.33) $ (.83)
=========== ========== =========== ===========
NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES
(in thousands) 7,142 3,970 7,142 3,970
=========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
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FRONTIER NATURAL GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
--------------------------------
1996 1995
------------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,288,471) $ (737,727)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depletion, depreciation and amortization 1,163,008 692,630
Deferred gas contract settlement 368,960 ---
Gain on sale of assets (246,504) (638,549)
Deferred revenues under gas contract (74,400) (625,650)
Amortization of financing costs 691,700 ---
Non-cash compensation benefit attributable to SAR's --- (107,509)
Exploration Costs 330,148 919,734
Changes in assets and liabilities;
Accounts receivable (121,830) 271,489
Prepaid expenses and other (7,078) (234,092)
Other assets 21,400 (18,055)
Accounts payable (430,083) 605,312
Revenue distribution payable (175,660) 14,647
Accrued and other liabilities (8,745) 298,586
----------- -----------
Net cash provided by (used in) operating activities (777,555) 440,816
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures - gas and oil properties (2,831,912) (2,572,824)
Capital expenditures - other property and equipment (71,877) (115,551)
Proceeds from sale of assets 4,671,088 1,821,713
----------- -----------
Net cash provided (used in) investing activities 1,767,299 (866,662)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 4,732,309 428,633
Repayments of long-term debt (3,677,461) (217,499)
Debt issue costs (183,387) ---
Payment for settlement of deferred gas contract (2,181,489) ---
Redemption of preferred stock of a subsidiary --- (99,540)
Preferred stock dividend --- (234,108)
Proceeds from issuance of common stock 6,430,647 202,500
----------- -----------
Net cash provided by financing activities 5,120,619 79,986
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,110,363 (345,860)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 63,908 615,256
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,174,271 $ 269,396
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
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FRONTIER NATURAL GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Condensed Consolidated Financial Statements include the accounts of
Frontier Natural Gas Corporation and its subsidiaries (the "Company"). There
have been no significant changes in the accounting policies of the Company
during the periods presented. For a description of these policies, see Note 1
of Notes to Consolidated Financial Statements in the Company's Annual Report on
Form 10-K for the year ended December 31, 1995. Certain prior period amounts
have been reclassified to conform with the current period presentation.
2. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---------- ----------
<S> <C> <C>
Note payable pursuant to a credit agreement with a bank of
$548,888, interest at LIBOR rate (reserve adjusted),
plus one and seven-eighths percent (1.875%) (7.3125%)
at September 30, 1996), principal payable in installments
of $45,000 per month for July 1996 through September 1996;
$70,000 per month for October 1996 through December 1996;
$76,000 in January 1997 and the balance of $13,215 in February,
1997, collateralized by producing oil and gas properties; net of
original discount of $307,237: amortized on the interest method $ 506,215 $ ---
Non-recourse loan, payable out of an 8% ORRI on the
Starboard Prospect, interest at 15% 696,647 ---
Note payable to bank, interest at a New York bank prime
plus 1% (9.75% at December 31, 1995), paid off
January 9, 1996 by producing oil and gas properties --- 180,554
Notes payable to bank, interest at 7.49% to 12.5%,
payable in monthly installments, due in various
amounts through 2001, collateralized by other
property and equipment 86,887 97,019
Note payable, interest at 12%, payable monthly,
principal due December 31, 1997 100,000 100,000
---------- ---------
1,389,749 377,573
Less current portion 536,970 227,302
---------- ---------
$ 852,779 $150,271
========== =========
</TABLE>
On January 3, 1996, the Company entered into a $15,000,000 credit agreement
with a bank. The agreement provided for the immediate funding of $4,000,000.
The company repaid $3,316,112 on September 25, 1996 and reduced its 62,500 MMBTU
natural gas swap agreement related to the credit agreement to 31,250 MMBTU,
with proceeds from the sale of its N.E. Cedardale field in Major County,
Oklahoma. Frontier recorded a $212,000 loss on reduction of the swap agreement.
Due to the early repayment of the borrowing, the Company has reduced debt
issuance costs by $293,000 and discount on notes payable by $207,000 in
accordance with the interest method. Said non-cash amounts have been expensed
as additional interest expense. The Company is currently negotiating the
repayment terms of the remaining balance of the initial borrowing under the
credit agreement. The Bank reduced the monthly payment to $25,000 subject to
the final renegotiation of the payment terms. It is anticipated that the
payments will be reduced from the previous requirements. See footnote 5 -
Disposition of Oil and Gas Properties. The remaining funds will be available
for specific future drilling activities of the Company subject to the approval
of the bank. The loan is secured by a mortgage on all of the Company's
significant producing properties. As part of the credit agreement, the Company
is subject to certain covenants and restrictions, among which are limitations on
additional borrowing,
7
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and sales of significant properties, working capital, cash, and net worth
maintenance requirements and a minimum debt to net worth ratio. The required
covenants escalate during 1996 as follows:
<TABLE>
<CAPTION>
As of
Covenant, as defined Initial December 31, 1996
-------------------- ---------- -----------------
<S> <C> <C>
Tangible Net Worth $ 4,000,000 $ 5,000,000
Current Ratio 0.8 1.0
Debt to Capitalization 0.6 0.6
Cash Flow Ratio 2.0 3.0
Cash on Hand $ 200,000 $ 200,000
</TABLE>
The Company has entered into an interest rate swap with the bank to
guarantee a fixed interest rate of 8.28% for the life of the loan. In addition,
the Company will pay fees of one-eighth of 1% (0.125%) on the unused portion of
the commitment amount.
On March 12, 1996, the Company completed a financing package to evaluate
and develop a project in Terrebonne Parish, Louisiana. Under the terms of the
agreement, the Company conveyed a 48% working interest in all exploration and
development of the project area for cash consideration of $495,455. In
addition, the acquirer agreed to provide a non-recourse loan to fund the
Company's share of the leasehold and seismic evaluation costs of the project.
The loan is secured by a mortgage on the Company's interest in the project.
Through September, 1996, the Company received advances on the non-recourse loan
of $696,647. The non-recourse loan is to be paid solely by the assignment of an
8% overriding royalty interest in the future revenues of the financed project
payable from the Company's interest in the project. Future funding will be
provided as costs are incurred up to a maximum of $864,000.
3. GAS SALES AGREEMENT:
On January 5, 1996, the Company entered into an agreement with an end user
to terminate a Gas Sales Agreement as of January 31, 1996. The Company paid the
end user $2,181,489 which represents a return of its $.75 per MMBTU advance on
2,490,103 MMBTU's of gas, the balance remaining as of January 31, 1996, plus a
settlement payment of $313,912. Approximately $55,048 in deferred charges
relating to the contract were expensed.
4. EQUITY OFFERING
On August 14, 1996, the Company closed the sale of a public offering of
1,350,000 Units of its securities. Subsequently, the Company sold an additional
overallotment of 202,500 units. Each Unit consisted of three shares of Common
Stock and three Series B Redeemable Common Stock Purchase Warrants ("Series B
Warrants"). The price for each Unit was $5.0625. The net proceeds after the
underwriter's commission and expenses was approximately $6,431,000. Each Series
B Warrant issued in the offering entitles the holder to purchase one share of
Common Stock for $2.025 commencing August 8, 1997 and ending August 8, 2001.
Each Series B Warrant is redeemable by the Company with the prior consent of the
underwriter at a price of $0.01 per Series B Warrant, at any time after the
Series B Warrants become exercisable, upon not less than 30 days notice, if the
last sale price of the Common Stock has been at least 200% of the then exercise
price of the Series B Warrants for the 20 consecutive trading days ending on the
third day prior to the date on which the notice of redemption is given.
5. DISPOSITION OF OIL AND GAS PROPERTIES
On September 27, 1996, the Company completed the sale of its N.E. Cedardale
field located in Major County, Oklahoma to OXY USA Inc., for consideration
totaling $3,550,000. The properties sold represent a substantial portion of
Frontier's production.
The sale proceeds from OXY USA, Inc. included cash of $2,840,000 and
certain exchange properties which were concurrently sold to a third party for
$710,000, netting the Company $3,550,000. The sale was effective September 1,
1996 and the Company incurred a loss of $10,523. In connection with the sale,
the Company recorded a loss of $212,000 on the settlement of a portion of a
futures contract. Due to the early repayment of the borrowing, the Company has
reduced debt issuance costs by $293,000 and discount on notes
8
<PAGE>
payable by $207,000 in accordance with the interest method. Said non-cash
amounts have been expensed as additional interest expense.
6. PREFERRED DIVIDENDS
The Board of Directors of the Company declared a quarterly dividend of $.30
per share on the Company's outstanding Convertible Preferred Stock. The
dividend was paid October 25, 1996, to stockholders of record at the close of
business October 15, 1996.
7. COMPANY RELOCATION
Frontier moved its corporate headquarters to Houston, Texas in September
1996, to allow the Company to more effectively exploit opportunities in their
primary areas of exploration, which are focused along the Gulf Coast, and in
particular, the transition zones of South Louisiana. The Company has estimated
moving expenses of approximately $50,000.
8. COMMITMENTS AND CONTINGENCIES:
As part of the financing obtained by the Company during the first quarter
of 1996, the Company, pursuant to an agreement with a financial advisor, agreed
to pay a combination of cash, stock and warrants in consideration for assisting
with obtaining the financing. As part of the agreement, the Company paid
$200,000 in cash as compensation for the financing of the project in Terrebonne
Parish, Louisiana and issued 150,000 shares of the Company's common stock to the
advisor on June 6, 1996. These shares have been valued at $234,375, the fair
market value at the date granted. The Company agreed to guarantee a minimum of
$200,000 in proceeds, net of commission or selling costs, if these shares are
sold (or attempted to be sold and there is no market for such sale over a
reasonable period of time) prior to December 31, 1996. The Company has also
issued a warrant to purchase 250,000 shares of the Company's common stock at
$2.00 per share to its financial advisor. The warrant has a five year term and
provides for anti-dilution protection, registration rights, and permits partial
exercise at the election of the holder by exchanging the warrants with
appreciated value equal to each exercise price in lieu of cash. If additional
funds are not borrowed from the bank, a portion of the warrants will be
returned. The Company has recorded the warrants which are not subject to return
at their fair value of approximately $33,000. The warrants subject to return
will be recorded when additional funds are borrowed.
The Company also issued to the bank providing financing during the quarter
ended March 31, 1996, a warrant to purchase up to 250,000 shares of common stock
for a period of five years at an exercise price of the highest average of the
daily closing bid prices for thirty (30) consecutive trading days between
January 1, 1996 and June 30, 1996. The Company will be required to register the
common shares underlying the warrants at the holder's request. The Company has
recorded the warrants at a value of approximately $82,500 as unamortized value
of warrants issued. The warrants are being amortized using the interest method
with an unamortized value of $61,116 at September 30, 1996.
Pursuant to the credit agreement with the bank, the Company entered into a
natural gas swap agreement on 62,500 MMBTU of natural gas per month at $1.566
per MMBTU for mid-continent gas for the period from April 1, 1996 through
January 31, 1999. The swap was reduced to 31,250 MMBTU on September 25, 1996,
with proceeds from the sale of the N.E. Cedardale field. Frontier recorded a
loss of $212,000 in connection with this transaction. The Company has also
entered into another natural gas swap agreement on 45,000 MMBTU of natural gas
per month at $2.03 per MMBTU for Mobile Bay gas for the period from January 24,
1996 through December 24, 1996.
The Company is party to various other lawsuits arising in the normal course
of business. Management believes that the ultimate outcome of these matters
will not have a material effect on the Company's consolidated financial position
or results of operations.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis reviews the Company's operations for
the three and nine month periods ended September 30, 1996 and should be read in
conjunction with the Company's Consolidated Financial Statements and related
notes thereto. Certain statements contained herein that set forth management's
intentions, hopes, plans, beliefs, expectations or predictions of the future are
forward-looking statements. It is important to note that actual results could
differ materially from those projected in such forward-looking statements. The
risks and uncertainties include, but are not limited to, potential unfavorable
or uncertain results of 3-D seismic surveys not yet completed, drilling cost and
operational uncertainties, dry holes, risks associated with quantities of total
reserves and rates of production from existing gas and oil reserves and product
pricing, potential delays in the timing of planned operations, competition and
other risks associated with permitting seismic surveys and with leasing gas and
oil properties, potential cost overruns, regulatory uncertainties and the
availability of capital to fund planned expenditures and general industry and
market conditions.
OVERVIEW
During the three and nine months ended September 30, 1996, the Company's
exploration activities continued to center around furthering its Gulf Coast
Projects which it initiated in 1995. The Company also continued locating and
developing new prospects in the region for 1996 and beyond during the quarter.
The Mobile Bay wells completed their first nine months of production generating
gross revenues to the Company of approximately $1,679,000 for the period. The
impact of this production was partially offset by a swap agreement entered into
in January 1996. Natural gas prices averaged $2.19 per Mcf and $2.18 per Mcf
for these wells during the three and nine months ended September 30, 1996 before
effect of the swap agreement. The combined gross production from these wells
has recently declined significantly. As of the date hereof, the wells are
undergoing a detailed reservoir engineering review to determine appropriate
action to be taken. The wells have been producing from the Miocene formation,
and the recent developments do not effect the Company's plans to drill an
Oligocene test in the area. Said Oligocene test will be drilled upon completion
of permitting and retention of the drilling contractor.
The Company has continued to review its Garvin County, Oklahoma properties
the with its working interest partners and is participating in the drilling of
its fourth well in the area this year. One well was completed with initial
production of approximately 100 barrels per day in the Oil Creek which is part
of the Simpson Sands. The Company owns a 7.75% interest in the well. Two wells
were unsuccessful and expensed and the fourth well is in the drilling stage.
The Company finalized two major financing transactions during the first
quarter, the first of which provides for the costs of the 3-D seismic and the
development and drilling of its Terrebonne Parish, Louisiana project and the
second allowed the Company to increase working capital and retire an existing
prepaid gas agreement.
In August 1996, the Company closed the sale of a public offering of
1,552,500 Units of its securities. Each unit consisted of three shares of
Common Stock and three Series B Redeemable Stock Purchase Warrants. The net
proceeds after the underwriter's commission and expenses were approximately
$6,431,000. The Company intends to use seventy percent (70%) of the proceeds to
fund exploration, developmental and acquisition projects in Southern Louisiana,
along the Gulf Coast of Alabama, Mississippi and Texas and in Garvin County,
Oklahoma. The remaining funds will be used for working capital, general
corporate purposes and to service the debt repayment requirements for the next
twelve months under the credit agreement.
The Company has entered into a joint exploration agreement with Fina Oil
and Chemical Company ("Fina") and other parties to acquire and utilize 3-D
seismic and other joint data to explore for gas and oil in a contract area of
more than 20 square miles in Terrebonne Parish, Louisiana. Fina etal agreed to
pay for 100% of the 3-D seismic data acquisition costs in return for certain
deep acreage rights, which deep rights had a limited affect on the Company's
primary exploration objectives in this project. Included within the contract
area is Frontier's previously announced Starboard Project. The agreement
preserves 100% of Frontier's interest in proven undeveloped reserves while
expanding its potential exploratory drilling opportunities in terms
10
<PAGE>
of both number of potential wells and net exploratory reserve potential. The new
agreement includes all of Frontier's prior industry partners in the Starboard
Project, as well as Fina and certain of its industry partners. Field acquisition
of the 3-D Seismic is underway with the field survey scheduled for completion by
November 30, 1996. Processing of the 3-D data already acquired in the shoot has
begun with processing expected to be completed by January, 1997. Interpretation
of the data is currently anticipated to lead to the location of drill sites in
the first quarter of 1997 and the commencement of drilling, subject to rig
availability, either late in the first quarter of 1997 or, more likely, in the
second quarter. Actual drilling will be subject to prospect confirmation by the
3-D seismic data.
On September 27, 1996, the Company completed the sale of its N.E. Cedardale
field located in Major County, Oklahoma to OXY USA Inc., for consideration
totaling $3,550,000. The properties sold represent a substantial portion of
Frontier's Oklahoma production. The sale was based on an offer deemed favorable
by management. The divestiture of the Oklahoma properties further facilitates
the Company's focus of its resources on its Gulf Coast projects and reduces debt
service requirements over the next three years in an amount greater than the
anticipated net revenues from the properties sold. The sale to OXY USA, Inc.
included cash of $2,840,000 and certain exchange properties which were
concurrently sold to a third party for $710,000, netting the Company $3,550,000.
The sale was effective September 1, 1996 and the Company incurred a loss of
$10,523. In connection with the sale, the Company incurred a loss of $212,000
on the reduction of a portion of a futures contract. Due to the early repayment
of the borrowing, the Company has reduced debt issuance costs by $293,000 and
discount on notes payable by $207,000 in accordance with the interest method.
Said non-cash amounts have been expensed as additional interest expense.
The Company has what it considers an aggressive drilling schedule over the
next six months. In addition to the Garvin County well currently drilling, it
intends to participate in three additional tests scheduled to be drilled prior
to December 31, 1996. This includes a 50% working interest in a 7,000' test in
Lafourche Parish, Louisiana, referred to as the "Allan Ranch Prospect", which
Prospect will be operated by Frontier; approximately a 40% working interest in a
9,550' test in Iberia Parish, Louisiana referred to as the "Iberia Dome N.W.
Prospect", which is also operated by Frontier; and approximately a 22.5% working
interest in a third party operated low-risk sidetrack operation in a proven
reservoir referred to as "Bayou Tortillion" in Plaquemines Parish, Louisiana.
Scheduled for drilling not later than February of 1997, is a 15,000' test on the
Company's Schooner Prospect in Plaquemines Parish, Louisiana, a Company operated
well in which it owns approximately a 35-40% working interest, and the
previously mentioned test of the Oligocene sands in the Company's Mobile Bay
Project. This is anticipated to be followed by drilling on the Starboard
Project in which the 3-D seismic data acquisition will be completed prior to
November 30, 1996. Processing of said data is done a portion at a time and has
already begun on the data collected to date. Initial drilling sites are
anticipated to be identified in February, 1997 and developmental and exploratory
drilling commenced in the late first quarter or early second quarter of 1997.
Drilling on the Starboard Project is subject to 3-D seismic confirmation of
drilling potential.
The Company's Osprey Prospect is delayed pending the State of Mississippi
Regulatory Agency's determination of environmental protests which seek to stop
or restrict all exploration in Mississippi State waters. The outcome of said
issues cannot currently be determined.
RESULTS OF OPERATIONS
The following discussion of the results of operations, including revenues,
costs and expenses, and net income, centers around a comparison of such results
for the three and nine months ended September 30, 1996 and September 30, 1995.
The historical results do not necessarily reflect anticipated future
performance.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1995
The Company incurred a net loss of $1,297,630 for the three months ended
September 30, 1996 as compared to net loss of $484,646 for the three months
ended September 30, 1995. The Company's loss per share increased from $(0.13)
per share for the three months ended September 30, 1995 to $(0.19) per share in
the comparable period in 1996. The largest factor in the loss arose from issues
related to the sale of the Company's Cedardale properties to Oxy USA, Inc. In
this regard, the Company suffered a non-cash book loss of $10,523. Two
additional issues arose from said sale. First, the Company reduced its gas
futures hedge position due to decreased production volumes resulting from said
sale. The hedge reduction resulted in a cash
11
<PAGE>
loss of $212,000. Finally, the Company was required to presently expense
previously amortizing financing costs associated with its Bank of America,
Illinois ("Bank of America") facility in an amount of $500,000, which was a non-
cash charge. The expensing of said costs related to the reduced amounts
outstanding to the bank without regard for the remaining credit availability not
yet utilized by the Company.
REVENUE. Revenue from gas and oil sales increased $128,754, or 26%, for
the three months ended September 30, 1996 as compared to the three months ended
September 30, 1995. The increase was largely due to the Mobile Bay wells which
contributed approximately 170,000 Mcf of net production during the quarter.
These wells began production in December 1995. This increase is offset by a
decrease due to the sale of producing properties during 1995 and 1996. The
average price for all gas sold during the three months ended September 30, 1996
was $2.11 per Mcf as compared to $1.50 per Mcf for the three months ended
September 30, 1995. The extent to which future gas and oil prices will affect
revenues cannot be determined. The increase in revenues from gas and oil sales
was partially offset by a loss on sale of assets of $24,067 in the quarter ended
September 30, 1996 compared to a gain on sale of assets $149,075 for the same
period of 1995.
COSTS AND EXPENSES. Costs and expenses increased $723,123, or 56%, for the
three months ended September 30, 1996 as compared to September 30, 1995 largely
due to a $212,000 loss on the reduction of a portion of a gas futures contract
related to the sale of the Cedardale properties, and a $500,000 non-cash charge
for expensing financing costs which arose out of debt reduction associated with
the Cedardale property sale, and an increase in interest costs which are a
result of the Company's new financing arrangements. Other factors include a
reduction in capitalized interest as a result of reduced drilling activity, and
an increase in transportation and marketing costs and depletion, depreciation
and amortization due to production from the Mobile Bay wells. Exploration costs
declined due to a reduction in costs related to the impairment of gas and oil
leases. The 1996 costs included approximately $11,000 in dry hole costs and
approximately $100,000 in impaired gas and oil leases.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1995
The Company's net loss increased to $2,288,471 for the nine months ended
September 30, 1996 from $737,727 for the nine months ended September 30,
1995. The primary reasons for the increased loss include a one-time charge
relating to the settlement of a long-term prepaid gas sales agreement totaling
$368,900, the previously discussed loss of $212,000 related to the settlement of
hedge contracts related to the Cedardale sale, and the previously discussed
$500,000 one time non-cash charge related to expensing of previously amortizing
financing costs which resulted from loan repayments related to said property
sale. In addition, a gain on the sale of seismic data in Garvin County,
Oklahoma of $601,100 in 1995 was not present in 1996, as well as a $392,045
decline in the gain on sale of assets in 1996 as compared to 1995. The effects
on net loss were partially offset by a $589,586 decline in exploration costs.
REVENUE. Revenue from gas and oil sales increased by $595,704 or 30%, for
the nine months ended September 30, 1996 as compared to the nine months ended
September 30, 1995. The increase was largely due to production from the Mobile
Bay wells which contributed 772 ,000 Mcf of production during the nine month
period. This increase is offset by a decrease due to the sale of producing
properties during 1995 and 1996. The average price for all gas sold during the
nine months ended September 30, 1996 was $2.12 per Mcf as compared to $1.56 per
Mcf for the nine months ended September 30, 1995. The extent to which future
gas and oil prices will affect revenues cannot be determined. The increase in
oil and gas sales was partially offset by a decline in the gain on sale of
assets and by lower operating fee revenue due to fewer operated wells in the
nine months ended September 30, 1996 as compared to the same period of 1995.
COSTS AND EXPENSES. Costs and expenses increased $987,693, or 22%, for the
nine months ended September 30, 1996 as compared to September 30, 1995 largely
due to $368,960 in expenses related to the settlement on the termination of the
deferred gas contract, the previously discussed $212,000 loss on the reduction
of a portion of a gas futures contract, and the previously discussed $500,000
non-cash charge of financing costs, all related to the Cedardale sale.
Transportation and marketing costs, production taxes and depletion, depreciation
and amortization costs all increased due to production from the Mobile Bay
wells. The transportation and marketing costs represent costs for pipeline
transportation on the Mobile Bay wells. Exploration costs declined due to a
reduction in seismic and drilling activity in the first quarter of 1996 as
compared with 1995. Exploration costs in 1996 were largely due to the
impairment of leases. Interest costs
12
<PAGE>
increased due to the Company's new financing arrangements as well as a reduction
in capitalized interest as a result of the reduced drilling activity were also
factors.
LIQUIDITY AND CAPITAL RESOURCES
The Company, largely through several major financing transactions,
increased its working capital by approximately $8,376,000 during the nine months
ended September 30, 1996. The four financing transactions included a credit
facility with Bank of America, in January, 1996, a project financing in March,
1996 related to the Starboard Project, a secondary offering of common stock
effective in August of 1996, and a sale of the Companies Cedardale properties in
Major County, Oklahoma to OXY USA, Inc. in September of 1996.
During January 1996, the Company entered into a $15,000,000 credit
agreement with the Bank of America, to provide $4,000,000 in immediate cash to
the Company. This portion of the loan is collateralized by the most significant
proved developed gas and oil properties of the Company and is payable in monthly
installments over a five year period. The cash was used to (i) terminate the
Gas Sales Agreement by repaying the deferred gas revenues remaining under the
Agreement of $1,867,577 plus a settlement payment of $313,912, (ii) pay off a
note to a bank which was collateralized by gas and oil properties of $180,554,
(iii) pay off approximately $1,061,000 in infrastructure costs relating to the
Company's Mobile Bay properties, (iv) pay approximately $150,000 in bank and
legal fees relating to the loan with (v) the remainder used to pay current
liabilities.
The bank credit facility provides for an additional $2,500,000, subject to
bank prospect approval, to be used for the Company's share of developmental
drilling costs in the Starboard Project, a developmental and exploratory
drilling project in Tennebonne Parish, Louisiana, and an additional $8,500,000
will be available contingent upon the company's reserve base meeting the bank's
lending parameters. Under the terms of the loan, the Company is subject to
certain restrictions and covenants which escalate in 1996. The covenants
include current ratio, cash on hand and tangible net worth requirements among
other requirements. Bank financing costs associated with the facility were
expensed in the quarter just ended.
The second financing transaction occurred in March 1996 when the Company
entered into an agreement whereby it conveyed a 48% working interest in the
Company's working interest in the Starboard Project. The acquirer provided
funding through a non-recourse loan to the Company to cover all the costs in
obtaining the leasehold and seismic data on the Starboard Project. The loan was
originally anticipated to be approximately $1,728,000 at its conclusion and it
will be repaid solely by the assignment of an 8% overriding royalty interest in
the Starboard Project payable from the Company's interest in the project until
such time as the lender has received an amount equal to the loan plus closing
costs and a 15% internal rate of return. The loan is secured by a mortgage on
the Starboard Prospect. The Company received a reimbursement of costs of
approximately $255,000 from the third party and a $240,000 prospect fee as part
of the agreement. Approximately $697,000 was advanced on the non-recourse loan
as of September 30, 1996.
In August, the Company closed a joint exploration agreement with Fina Oil
and Chemical Company and certain of its partners wherein Fina etal will pay for
100% of the 3-D Seismic costs related to the Starboard Project in return for
certain deep acreage rights, which deep rights had a limited affect on the
Company's primary exploration objectives in this project. The agreement
preserves 100% of Frontier's interest in proven undeveloped reserves while
expanding its potential exploratory drilling opportunities in terms of both
number of potential wells and net exploratory reserve potential. The new
agreement includes all of Frontier's prior industry partners in the Starboard
Project, as well as Fina and certain of its industry partners. Field
acquisition of the 3-D Seismic data is underway with the field survey scheduled
for completion in November 1996. In conjunction with said Fina agreement, the
total loan amount for borrowing pursuant to the second financing was reduced
from $1,728,000 to $864,000. Expenditures in excess of the remaining funds are
anticipated to be incurred.
The third financing occurred when, on August 14, 1996, the Company closed
the sale of a public offering of 1,350,000 Units of its securities.
Subsequently, the Company sold an additional overallotment of 202,500 units.
Each unit consisted of three shares of Common Stock and three Series B
Redeemable Stock Purchase Warrants. The net proceeds after the underwriter's
commission and expense were approximately $6,431,000. The Company intends to
use seventy percent (70%) of the proceeds to fund the Company's
13
<PAGE>
exploration, developmental and acquisition projects in Southern Louisiana, along
the Gulf Coast of Alabama, Mississippi and Texas and in Garvin County, Oklahoma.
The remaining funds will be used for working capital, general corporate
purposes, and to service the debt repayment requirement for the next twelve
months under the credit agreement.
On September 27, 1996, the Company completed the fourth financial
transaction which was the sale of its N.E. Cedardale field located in Major
County, Oklahoma to OXY USA Inc., for consideration totaling $3,550,000. The
properties sold represent a substantial portion of Frontier's Oklahoma
production. The sale was pursued for three basic reasons. The first was an
offer management deemed as favorable; second, the divestiture of the Oklahoma
properties help to facilitate the Company's focus of its resources on its Gulf
Coast projects, and finally, the result was a reduction in debt service
requirements over the next three years in an amount greater than the anticipated
net revenues from the properties sold. The sale did result in previously
discussed hedge transaction losses and non-cash charges related to the early
recognition of previously amortizing financing costs.
The Company's business philosophy has been to seek to minimize natural gas
price volatility by marketing reserves through the use of long-term end-user gas
contracts and utilizing the purchase of short-term commodity futures. During
January 1996, the Company terminated the long-term contracts as discussed. The
Company has replaced the contracts with two swap agreements on natural gas
production to minimize price volatility. The first agreement is effective for
the period from April 1, 1996 through January 31, 1999 on 62,500 MMBTU per month
of mid-continent natural gas at a price of $1.566 per MMBTU. The swap was
reduced to 31,250 MMBTU on September 25, 1996, with proceeds from the sale of
the N.E. Cedardale field. The second agreement is effective from January 1996
through December 31, 1996 on 45,000 MMBTU per month of Mobile Bay natural gas at
a price of $2.03 per MMBTU. During the nine months ended September 30, 1996,
the price for natural gas exceeded the swap price and resulted in a charge
against gas and oil revenues of approximately $316,000. As of September 30,
1996, spot market prices exceeded the swap price. As of the date hereof, the
Company has hedges in place for amounts in excess of its current production.
45,000 MMBTU per month will expire in December 1996, at which time current
production volumes would exceed the then current hedge volumes. Losses over the
remaining life of the hedges which expire in December are estimated to be
approximately $20,000.
The Company moved its headquarters from Oklahoma City, Oklahoma to Houston,
Texas September 1, 1996. The Company has entered into a five-year lease at an
annual rate of approximately $106,000. The Company estimates total move costs
will net approximately $50,000.
It is management's belief that with the funds raised in the public
offering, along with the Company's other financing arrangements, the Company
currently has adequate cash available from its current assets, and from other
likely third party sources as set forth herein to adequately fund its planned
exploration and other activities for the next twelve months. Conversely, the
sale of the Cedardale properties, coupled with 1996 production declines and
minimal drilling, will result in reduced near term oil and gas sales.
Management is addressing this issue with an aggressive drilling program (see
overview) on lower risk and on higher potential prospects which is intended to
lead to substantially increasing revenues over the next twelve months.
The Company does not believe it will need additional funds beyond its
capital and credit lines over the next twelve months. However, in the event it
develops currently unknown prospects and/or acquisition opportunities, it may
seek additional exploration and/or acquisition capital. Options available to
the Company to raise any additional funds for exploration and/or acquisitions
include, but are not limited to, (a) additional outside partners, (b) additional
private borrowing, and (c) the further sale of 3-D seismic data and (d) the
exercise of the Company's currently outstanding warrants should the stock prices
rise by August of 1997 to levels necessary to allow said warrants to be called.
14
<PAGE>
FRONTIER NATURAL GAS CORPORATION
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
------------------
The Company's 1992 federal income tax return was previously examined by
the Internal Revenue Service. The IRS had proposed a change to income of
$4,994,759 (a portion of which was recognized years subsequent to 1992)
which would result in a tax liability of $1,553,338 plus penalty and
interest. The Company filed a response to the proposed change and
defended its position. On October 18, 1996, the Internal Revenue Service
closed its case finding no deficiency or overassessment.
The Company is a defendant from time to time in lawsuits incidental to
its business. The Company believes that none of such current
proceedings, individually or in the aggregate, will have a materially
adverse effect on the Company.
ITEM 2. Changes in Securities.
----------------------
None.
ITEM 3. Defaults Upon Senior Securities.
--------------------------------
The Company paid a quarterly dividend of 30 cents per share on its
Convertible Preferred Stock on October 25, 1996 to stockholders of
record at the close of business October 15, 1996. The Company has
undeclared and unpaid dividends in the amount of $120,345 in its
cumulative Preferred Stock for the period from May 1, 1995 to June 30,
1996.
ITEM 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
None.
ITEM 5. Other Information.
------------------
None.
ITEM 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits.
(11) Computation of Net Income Per Common and Common Equivalent
Share
(27) Financial Data Schedule
(b) Reports on Form 8-K
Frontier Natural Gas Corporation (the "Company") Current Report on
Form 8-K dated September 27, 1996, filed on October 11, 1996,
related to the sale of the Company's interest in nineteen oil and
gas properties in Major County, Oklahoma to OXY, Inc.
15
<PAGE>
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 of the
undersigned thereunto duly authorized.
FRONTIER NATURAL GAS CORPORATION
Date: November 13, 1996 By: /s/ David W. Berry
------------------- -----------------------------------
David W. Berry,
President
(Principal Executive Officer)
Date: November 13, 1996 By: /s/ David B. Christofferson
------------------- -----------------------------------
David B. Christofferson,
Executive Vice President and Chief Financial
Officer
(Principal Financial Officer)
16
<PAGE>
EXHIBIT 11 TO FORM 10-QSB
FRONTIER NATURAL GAS CORPORATION
COMPUTATION OF NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Common shares outstanding beginning 5,058,406 2,418,050
Add:/1/
Shares purchased under common stock
subscription agreement --- 90,450
Cumulative preferred stock conversion 1,456,954
Stock issued for services 87,500 5,000
Secondary Offering 1,996,150 ---
------------- -------------
Total equivalent common shares 7,142,056 3,970,454
============= =============
Net loss $ (2,288,471) $ (737,727)
Cumulative Preferred Stock dividend (77,365) (369,593)
Value of common stock issued for
cumulative preferred stock in excess
of original terms, net of relieved
preferred stock dividend --- (2,183,471)
------------ -------------
Net loss available to common and common
equivalent shares $ (2,365,836) $ (3,290,791)
============= =============
Net loss per common and common equivalent
share $ (.33) $ (.83)
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
- --------------------------------
/1/ Common stock equivalents were determined based on the "Treasury Stock
Method" as set forth in Accounting Principals Board Opinion No. 15.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 6,174,271
<SECURITIES> 0
<RECEIVABLES> 956,555
<ALLOWANCES> (11,833)
<INVENTORY> 0
<CURRENT-ASSETS> 7,304,808
<PP&E> 6,520,295
<DEPRECIATION> (1,791,512)
<TOTAL-ASSETS> 12,265,120
<CURRENT-LIABILITIES> 1,699,536
<BONDS> 852,779
0
860
<COMMON> 98,659
<OTHER-SE> 9,394,851
<TOTAL-LIABILITY-AND-EQUITY> 12,265,120
<SALES> 2,573,635
<TOTAL-REVENUES> 3,156,928
<CGS> 2,495,287
<TOTAL-COSTS> 2,495,287
<OTHER-EXPENSES> 2,175,192
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 774,920
<INCOME-PRETAX> (2,288,471)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,288,471)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,288,471)
<EPS-PRIMARY> (.33)
<EPS-DILUTED> (.33)
</TABLE>
