<PAGE>
UNITED STATES 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 March 31, 2000
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number: 1-12530
ESENJAY EXPLORATION, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 73-1421000
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
500 NORTH WATER STREET, SUITE 1100
CORPUS CHRISTI, TEXAS 78471
(Address of principal executive offices including zip code)
(361) 883-7464
(Issurer's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
18,870,573 shares as the registrant's common stock were outstanding
as of May 11, 2000.
Transitional Small Business Disclosure Format (Check one):
Yes /X/ No / /
<PAGE>
ESENJAY EXPLORATION, INC.
FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements - General Information......................................................3
Condensed Consolidated Balance Sheets as of March 31, 2000 (unaudited) and
December 31, 1999............................................................................4
Condensed Consolidated Statements of Operations for the three months ended
March 31, 2000 and 1999 (unaudited)..........................................................5
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999 (unaudited)....................................................6
Notes to Condensed Consolidated Financial Statements (unaudited)................................7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................................9
PART II. OTHER INFORMATION..............................................................................19
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAL
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 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 presentation of the results of operations for the
first quarter of 2000 and 1999.
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, 1999 and the related notes thereto
included in Form 10-KSB and 10KSB/A as filed with the SEC.
3
<PAGE>
ESENJAY EXPLORATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------------- ----------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................................. $ 1,776,924 $ 2,598,047
Accounts receivable, net of allowance for doubtful
accounts of $480,015 at March 31, 2000 and
$519,137 at December 31, 1999 ............................................ 11,309,129 7,078,109
Prepaid expenses and other .................................................. 397,973 3,940,133
Receivables from affiliates ................................................. 759,275 363,027
------------ -------------
Total current assets ............................................... 14,243,301 13,979,316
Property and equipment, successful efforts method of accounting .................. 78,191,934 80,120,781
Less accumulated depletion, depreciation and amortization ........................ (28,022,223) (25,937,472)
------------ -------------
50,169,711 54,183,309
Other assets ..................................................................... 1,456,546 770,210
------------ -------------
Total assets ....................................................... $ 65,869,558 $ 68,932,835
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------------- ----------------
(unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable............................................................ $ 8,762,986 $ 8,838,629
Accounts payable to affiliate, net.......................................... 263,898 2,083,913
Revenue distribution payable................................................ 2,625,078 2,491,798
Current portion of long-term debt........................................... 100,000 11,013,162
Accrued and other liabilities............................................... 3,305,105 6,095,188
------------ -------------
Total current liabilities.......................................... 15,057,067 30,522,690
Long-term debt .................................................................. 14,341,782 4,750,000
Non-recourse debt ............................................................... 864,000 864,000
Accrued interest on non-recourse debt ........................................... 496,153 463,395
------------ -------------
Total liabilities ................................................. 30,759,002 36,600,085
Stockholders' equity:
Convertible preferred stock $.01 par value;
5,000,000 shares authorized; 356,999 shares issued and
outstanding at March 31, 2000 and December 31, 1999...................... 3,570 3,570
Common stock:
Class A common stock, $.01 par value; 40,000,000
shares authorized; and 18,857,272 and
18,837,699 outstanding at March 31, 2000 and
December 31, 1999, respectively.......................................... 188,573 188,377
Additional paid-in capital ................................................. 84,914,298 84,877,904
Accumulated deficit......................................................... (49,995,885) (52,737,101)
------------ -------------
Total stockholders' equity......................................... 35,110,556 32,332,750
------------ -------------
Total liabilities and stockholders' equity......................... $ 65,869,558 $ 68,932,835
============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ESENJAY EXPLORATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------
2000 1999
------------------- ------------------
<S> <C> <C>
Revenues:
Gas and oil revenues............................................ $ 5,264,653 $ 964,245
Realized gain (loss) on commodity transactions.................. (293,994) 190,849
Gain on sale of assets.......................................... 4,489,903 271,652
Operating fees.................................................. 124,968 63,734
Other revenues.................................................. 31,186 20,522
---------------- --------------
Total revenues.............................................. 9,616,716 1,511,002
---------------- --------------
Costs and expenses:
Lease operating expenses........................................ 274,183 253,971
Production taxes................................................ 224,344 63,793
Depletion, depreciation and amortization........................ 1,856,723 619,000
Amortization of unproved properties............................. 1,440,800 2,383,000
Exploration costs - geological and geophysical.................. 218,105 713,769
Exploration costs - dry hole.................................... 1,134,392 ---
Interest expense................................................ 323,044 123,286
General and administrative expense.............................. 1,244,195 1,403,972
Delay rentals................................................... 43,176 31,689
Other tax expense............................................... 116,538 ---
---------------- --------------
Total costs and expenses.................................... 6,875,500 5,592,480
---------------- --------------
Income (loss) before provision for income taxes...................... 2,741,216 (4,081,478)
Benefit (provision) for income taxes................................. --- ---
---------------- --------------
Net income (loss).................................................... 2,741,216 (4,081,478)
Cumulative preferred stock dividend.................................. --- ---
---------------- --------------
Net income (loss) applicable to common stockholders.................. $ 2,741,216 $ (4,081,478)
================ ==============
Net income (loss) per common and common equivalent share-basic....... $0.15 $(0.26)
================ ==============
Net income (loss) per common and common equivalent share-diluted..... $0.14 $(0.26)
================ ==============
Weighted average number of common shares
outstanding-basic (in thousands)............................ 18,857 15,785
================ ==============
Weighted average number of common and common equivalent shares
outstanding-diluted (in thousands).......................... 19,277 15,785
================ ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ESENJAY EXPLORATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------
2000 1999
------------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................. $ 2,741,216 $ (4,081,478)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depletion, depreciation and amortization ..................... 1,856,723 619,000
Amortization of unproven property............................. 1,440,800 2,383,000
Gain on sale of assets........................................ (4,489,903) (271,652)
Amortization of financing costs and warrants.................. 40,581 18,822
Exploration costs-dry hole.................................... 1,134,392 --
Changes in operating assets and liabilities:
Trade and affiliate receivables........................... (4,627,268) (1,232,181)
Prepaid expenses and other................................ 3,542,160 (1,147,573)
Other assets.............................................. (686,336) (157,842)
Accounts payable.......................................... (75,643) (3,462,727)
Revenue distribution payable.............................. 133,280 1,673,833
Trade and affiliate payables.............................. (1,820,015) (40,798)
Accrued and other liabilities............................. (2,757,324) 717,631
------------- ------------
Net cash used in operating activities......................... (3,567,337) (4,981,965)
------------- ------------
Cash flows from investing activities:
Capital expenditures - gas and oil properties................. (6,476,335) (5,858,119)
Capital expenditures - other property and equipment........... (42,052) (58,307)
Proceeds from sale of assets.................................. 10,585,981 3,768,519
------------- ------------
Net cash provided by (used in) investing activities....... 4,067,594 (2,147,907)
------------- ------------
Cash flows from financing activities:
Proceeds from issuance of debt................................ 18,341,782 7,000,000
Repayments of long-term debt.................................. (19,663,162) (1,236)
------------- ------------
Net cash (used in) provided by financing activities....... (1,321,380) 6,998,764
------------- ------------
Net decrease in cash and cash equivalents..................... (821,123) (131,108)
Cash and cash equivalents at beginning of period................... 2,598,047 646,200
------------- ------------
Cash and cash equivalents at end of period......................... $ 1,776,924 $ 515,092
============= ============
Supplemental disclosure of cash flow information:
Cash paid for interest........................................ $ 248,895 $ 369,156
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying unaudited condensed consolidated financial
statements of Esenjay Exploration, Inc. and its subsidiaries (the "Company")
have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. Interim results are
not necessarily indicative of results for a full year.
The Company uses the successful efforts method of accounting for gas
and oil exploration and development costs. All costs of acquired wells,
productive exploratory wells, and development wells are capitalized and
depleted by the unit of production method based upon estimated proved
developed reserves. Exploratory dry hole costs, geological and geophysical
costs, and lease rentals on non-producing leases are expensed as incurred.
Gas and oil leasehold acquisition costs are capitalized. Costs of unproved
properties are transferred to proved properties when reserves are proved.
Valuation allowances are provided if the net capitalized costs of gas and oil
properties at the field level exceed their realizable values based on
expected future cash flows. Unproved properties are periodically assessed for
impairment and, if necessary, a loss is recognized. The Company did not
recognize any impairments for the quarters ended March 31, 2000 and March 31,
1999.
In addition, the $54,200,000 fair market value assigned to unproven
gas and oil exploration projects contributed by Esenjay Petroleum Corporation
("EPC") and Aspect Resources LLC ("Aspect") pursuant to certain acquisitions
of undeveloped exploration projects (the "Acquisitions") which closed on May
14, 1998 is, until such time as the book value of each such project is either
drilled and transferred to producing properties or is otherwise evaluated as
impaired, are being amortized on a straight-line basis over a period not to
exceed forty-eight months. For the quarters ended March 31, 2000 and March
31, 1999, such amortization was $1,440,800 and $2,383,000, respectively. The
remaining balance in this amortization group of unproven properties was
$12,007,900 at March 31, 2000.
A summary of all of the Company's significant accounting policies is
presented on pages 39 and 40 of its 1999 Form 10KSB/A filed with the SEC.
Users of financial information are encouraged to refer to the footnotes
contained therein when reviewing interim financial results. There have been
no material changes in the accounting policies followed by the Company during
2000.
The accompanying interim financial statements contain all material
adjustments, which are in the opinion of management, consistent with the
adjustments necessary to present the fairly stated consolidated financial
position, results of operations and cash flows of Esenjay Exploration, Inc.
for the interim period. Certain prior period amounts have been reclassified
to conform to the current period presentation.
7
<PAGE>
2. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---- ----
<S> <C> <C>
Non-recourse loan, payable out of an 8% ORRI on the Starboard Prospect,
interest accrued at 15%..................................................... $ 864,000 $ 864,000
Note payable, interest at 12%, payable monthly, is currently due............... 100,000 100,000
Loan with Bank of America NT&SA ("B of A"), was repaid in 2000............... 0 8,523,162
Loan with Duke Energy Field Services, Inc. was repaid in 2000.................. 0 7,140,000
Loan with Deutsche Bank closed on January 25, 2000 as further
described below.............................................................. 14,341,782 ---
------------- ------------
15,305,782 16,627,162
Less current portion........................................................... 100,000 11,013,162
------------- ------------
$15,205,782 $ 5,614,000
============= ============
</TABLE>
On January 25, 2000, the Company closed a credit facility with
Deutsche Bank AG, New York branch. This facility provides for Deutsche Bank
to loan up to $29,000,000 to be available in two tranches. Tranche A is in
the amount of $20,000,000, with $12,000,000 established as the current
available borrowing base, and Tranche B is fully drawn in the amount of
$9,000,000. Under the terms and conditions of this facility, the facilities
existing at December 31, 1999 with Duke Energy Financial Services, Inc. and
Bank of America, NT&SA, were paid in full utilizing approximately $15,800,000
of the available proceeds from Deutsche Bank. Tranche A will mature on
January 25, 2001, at which time any remaining unpaid principal will convert
to a five-year monthly amortizing term loan. The Tranche B loan is payable
interest only through April 30, 2001 at which date the amount available
begins to decrease by 25% per quarter beginning April 30, 2001 with a final
maturity in January of 2002. In addition, the Company must remain in compliance
with certain covenants required by Deutsche Bank, including a redetermination of
the borrowing base every six months. The company also is required to assign
an overriding royalty interest to Deutsche Bank for those wells logged prior
to the later of the maturity date of Tranche B or the Tranche A termination
date or the date the Tranche B Loan is repaid. The Company may repurchase
this overriding royalty interest prior to April 30, 2002, if all Tranche B
loans are repaid in full.
As part of the credit agreement, the Company is subject to certain
covenants and restrictions, among which are the limitations on additional
borrowing, and sales of significant properties, working capital, cash, and
net worth maintenance requirements and a minimum debt to net worth ratio. The
covenants regarding financial condition of Company are as follows:
<TABLE>
<S> <C>
Tangible Net Worth............................ $20,000,000 plus 50% of net income from inception of the credit
agreement to the date of calculation treated as a single period.
Current Ratio................................. 1.1 to 1.0 (computed by including unused portion of loan
commitments in current assets and excluding current portion of
long-term debt from current liabilities).
Debt to Capitalization........................ 0.6 to 1.0
Interest Coverage Ratio ...................... 3.0 to 1.0
</TABLE>
At March 31, 2000 the Company was in compliance with all such
covenants.
The Company has entered into an interest rate swap guaranteeing a
fixed Libor rate of 7.075%. The rate the Company pays Deutsche Bank is Libor
plus 2%. In addition, Company will pay fees of one-half of one percent (0.5%)
on the unused portion of the commitment amount.
8
<PAGE>
3. RELATED PARTY TRANSACTIONS
The Company's outstanding accounts receivable from employees and
affiliates of the Company at March 31, 2000 and December 31,1999 was $759,275
and $472,827, respectively. The March 31, 2000 and December 31, 1999
receivables include approximately $8,664 and $47,786, respectively, from an
affiliated partnership for which the Company serves as the managing general
partner. In addition, the March 31, 2000 balance includes a net $656,215
receivable from EPC primarily related to joint interest billings. In
addition, at March 31, 2000 the Company had a net account payable to Aspect
in the amount of $263,898.
4. COMMITMENTS AND CONTINGENCIES
The Company markets its natural gas through monthly spot sales.
Because sales made under spot sales contracts result in fluctuating revenues
to the Company depending upon the market price of gas, the Company may enter
into various hedging agreements to minimize the fluctuations and the effect
of price declines or swings.
In February of 2000, in conjunction with its financing with Deutsche
Bank, the Company restructured all existing natural gas hedges with an
affiliate of Deutsche Bank. Pursuant to these hedges, the Company has 9,381
MMBtu/day of net production hedged in the first quarter of 2000, 9,031
MMBtu/day hedged for the second quarter of 2000, 8,646 MMBtu/day for the
third quarter of 2000, 8,278 MMBtu/day for the fourth quarter of 2000, 7,161
MMBtu/day for the first quarter of 2001, 6,880 MMBtu/day for the second
quarter of 2001, 6,600 MMBtu/day for the third quarter of 2001, and 6,319
MMBtu/day for the fourth quarter of 2001. All hedges are at $2.45 per MMBtu.
Concurrent with the restructuring of the hedges, the Company was relieved of
any liability or rights pursuant to all previously existing natural gas
hedges. An existing "collar" hedge arrangement on 280 barrels of oil per day
in the first quarter of 2000, and 256 and 237 barrels of oil per day in the
second and third quarters of 2000, respectively, was transferred to the
Deutsche Bank affiliate at the existing $18.00 floor price and $20.40 cap
price. These positions were supplemented with oil hedges at $21.03 per barrel
on volumes of 238 barrels of oil per day in the fourth quarter of 2000 and
175, 168, 161, and 154 barrels of oil per day in the first through fourth
quarters of 2001, respectively. First quarter 2000 hedges approximated 60%
of the Company's natural gas and 55% of its oil production for such quarter.
Future percentages will vary.
In 1999 the Company recorded an deferred gain on sale of $1,797,707
in relation to an ongoing sale in the Company's Papalote project. As a part
of the sales transaction the Company is required to conduct a 3-D seismic
survey over the project area. The survey is currently being shot over the
project area and the gain on sale, if any, will be recognized upon the
completion of the 3-D seismic survey.
5. NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -Deferred of the Effective Date of FASB Statement No. 133" ("SFAS
137"). SFAS 137, which is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000, establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded
in other contracts (collectively referred to as "derivatives") and for
hedging activities. SFAS 137 requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The Company is currently evaluating the
impact of the application of SFAS 137, which when adopted, could have a
material effect on its consolidated financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis reviews Esenjay Exploration,
Inc.'s and/or its predecessor Frontier Natural Gas Corporation's operations
for the three month periods ended March 31, 2000 and 1999 and should be read
in conjunction with the consolidated financial statements and notes related
thereto. Certain statements contained herein that set forth management's
intentions, 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
9
<PAGE>
uncertain results of 3-D seismic surveys, drilling costs and operational
uncertainties, risks associated with quantities of total reserves and rates
of production from existing gas and oil reserves and pricing assumptions of
said reserves, 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, potential dry
holes and regulatory uncertainties and the availability of capital to fund
planned expenditures as well as general industry and market conditions.
OVERVIEW
OVERVIEW OF HISTORICAL DEVELOPMENTS - INCEPTION THROUGH DECEMBER 31,
1999. In mid-1996, the Company refocused its activities from acquiring gas
reserves principally in the mid-continent region of the United States to
concentrate on exploration and related development drilling projects in
Southern Louisiana and along the Gulf Coast region of Alabama, Mississippi
and Texas. During 1996 and 1997, the Company's drilling activities, which
were based primarily on 2-D seismic data, were largely unsuccessful. This
fact, along with an unexpected drop in production from the Company's Mobile
Bay area wells, greatly reduced the Company's cash and capital resources.
To address the Company's capital needs, the Board of Directors, at
its meeting on August 12, 1997, directed management to look for potential
assets to acquire in exchange for the Company's Common Stock, to identify and
review potential business consolidation opportunities, identify potential
partners to help fund the Company's proposed drilling activities, and to
consider any other avenues to strengthen the Company's capital resources and
diversify its exploration opportunities. The Board also directed management
to reduce overhead wherever prudently possible and the Company retained an
investment advisor to aid in achieving these objectives. The Company explored
a series of such transactions and the Board, after receipt of the advice of
management and its investment advisor, and receipt of due diligence reports
and other materials, unanimously agreed that a transaction with Aspect and
EPC was the best option for the Company's shareholders. This process led to
the Company entering into the Acquisition Agreement among the Company, EPC,
and Aspect. This Acquisition Agreement, and certain provisions of it,
required approval of the shareholders of the Company. At a special meeting of
shareholders held on May 14, 1998 the shareholders approved the Acquisition
Agreement, a recapitalization of the Company pursuant to which each
outstanding share of common stock would convert into one-sixth (1/6) of a
share of new common stock (the "Reverse Split"), a plan and agreement of
merger pursuant to which the Company would reincorporate in the state of
Delaware and would change its name to Esenjay Exploration, Inc. (the
"Reincorporation"), and the election of seven directors.
On May 14, 1998 after a Special Meeting of Shareholders, the Company
closed the transactions provided for in the Acquisition Agreement,
implemented the Reverse Split, and completed the Reincorporation. All
references in the accompanying financial statements to the number of common
shares have been restated to reflect the foregoing. In addition, as required
by the Acquisition Agreement, the Company called for redemption, all of its
issued and outstanding cumulative convertible preferred stock and did redeem
said preferred stock. The result of the foregoing is that the Company
conveyed a substantial majority of its Common Stock to acquire an array of
significant technology enhanced natural gas oriented exploration projects.
The Company believed the Acquisitions would facilitate expanded access to
capital markets due to the value and diversity of its exploration project
portfolio. The Company also believes the transactions significantly enhanced
the Company's management team.
In connection with the Acquisitions, an affiliate of Enron Corp.
exercised an option to exchange $3.8 million of debt Aspect owed to such
Enron affiliate for 675,000 shares of the Company's Common Stock that would
otherwise have been issued to Aspect in the Acquisitions, at an effective
conversion rate of $5.63 per share.
On July 21, 1998 the Company closed an underwritten offering of
4,000,000 shares of its common stock at a price of $4.00 per share. The net
proceeds to the Company were approximately $14,880,000. After the offering
the Company had 15,762,723 shares outstanding.
On Exploration Projects acquired in 1998 pursuant to the Acquisitions,
the Company participated in the drilling of twenty-four wells through December
31, 1998 with working interests, which range from 8% to 79%. Out of those
twenty-four wells drilled, thirteen wells have been completed and eleven were
dry holes. Several of the
10
<PAGE>
successful wells went into production late in the third quarter of 1998, and
in the fourth quarter of 1998.
As a result of the above-described acquisitions, restructuring, and
the underwritten offering, the Company believed it was, and believes it
continues to be, positioned for a period of significant exploration activity
on its technology enhanced projects. Many of the projects have reached the
drilling stage. In many instances the requisite process of geological and/or
engineering analysis, followed by acreage acquisition of leasehold rights and
seismic permitting, and 3-D seismic field data acquisition, then processing
of the data and finally its interpretation, required several years and the
investment of significant capital. Management believes the acquisition of
projects at this advanced stage has not only reduced the drilling risk, but
should allow the Company to consistently drill on a broad array of
exploration prospects, as was demonstrated in 1999, and in subsequent years.
In 1999, the Company participated in 29 new wells which reached
total depth and were logged during the year. Of the total wells drilled and
logged in 1999, 22 were productive, and 7 were dry holes. Only 2 of the 1999
wells were producing as of July 1, 1999, and as a result the Company's net
daily oil and gas production increased substantially throughout the third and
fourth quarters of 1999. Based upon estimated sustainable flow rates, the
1999 wells helped to increase the Company's net daily production to
approximately 532 barrels of oil per day and 14,605 million cubic feet of
natural gas per day or 17,797 Mcfe per day as of December 1999.
The Company's net cost in the 29 wells drilled in 1999 was
approximately $8,652,439 for drilling and completion, not including certain
prior expenditures incurred at the project level for land and seismic. It
should be noted that the Company defines a "project" as a distinct 3-D
seismic data area which often comprises several distinct exploratory
"prospects". Net proved reserves attributable to the 29 wells drilled in 1999
totaled 18,466,712 Mcfe including 1999 production and December 31, 1999
remaining reserves as independently evaluated. On a present value basis, the
Company achieved a present value in excess of four times the 1999 drilling
and completion costs expended.
The Company ended 1999 having gone from nominal third quarter 1998
gas and oil revenues of approximately $35,000 per month and large operating
cash flow deficits to a company which averaged $1,815,637 per month in net
oil and gas revenues and associated hedging revenues from commodity
transactions in the fourth quarter of 1999. This number increased
significantly as the wells drilled in 1999 continued to come on line. This
allowed the Company to achieve positive operating cash flow (before capital
expenditures, and before the costs of acquisition of new 3-D seismic data,
and changes in working capital) in the third quarter, which operating cash
flow increased in the fourth quarter. As a result of this trend,
approximately 56% of the Company's 1999 gas and oil revenue was attributable
to the fourth quarter of the year.
On September 23, 1999, the Company acquired, via merger, 3DX
Technologies, Inc. ("3DX"). As a result, Esenjay issued approximately
2,906,800 new shares of common stock and approximately 357,000 shares of
convertible preferred stock, which convertible preferred stock is scheduled
to be converted or redeemed (at the Company's option) not later than November
1, 2000.
OVERVIEW OF 2000 ACTIVITIES. The Company believes it entered 2000 in
a position to continue to expand its exploration activities on its
technology-enhanced projects. By utilizing its increased capital available to
it from cash flow, financings and industry partner transactions, the Company
is pursuing an aggressive exploration budget in all of its major trends
of activity. The Company's net daily production averaged 505 barrels of oil
per day and 15,416 Mcf natural gas per day in the first quarter of 2000. This
net production is after a reduction of 6 barrels of oil per day and 1,981 Mcf
of natural gas per day attributable to the sale of interests in the
Raymondville Project as described below in the following paragraph.
The Company has also successfully improved its working capital and
cash resources. On February 7, 2000, it announced the closure of a $29
million credit facility with Deutsche Bank AG, New York Branch. Initial
availability pursuant to the facility was $21 million with a borrowing base
adjustment scheduled for the second quarter of 2000. A portion of the
available proceeds was utilized to retire approximately $15.8 million of
previously existing debt with Bank of America and Duke Energy Financial
Services, Inc., of which approximately $11 million was classified as the
current portion of long-term debt. The amount outstanding under the new
facility was all classified as long term debt. In addition, the Company sold
approximately 84.39% of its interest in its Raymondville Project in Willacy
County to
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Cody Texas, L.P. for cash proceeds of $10,940,000 ($10,585,981 net of
transaction fees). The sale closed on March 20, 2000 but was effective as of
January 1, 2000. Pursuant to this sale the Company sold 3,462,967 Mcfe of its
reserves classified as proved as of December 31, 1999. Its borrowing base
availability with Deutsche Bank was not reduced. The combination of these two
financing transactions provided $15.8 million in net additional cash
resources (after repayment of existing debt) and created significant positive
working capital for the Company. As a result of its current cash flow and the
impact of these two transactions, the Company believes it is well positioned
to fund its 2000 drilling activities, the results of which are intended to
help continue the upward trends of increasing cash flow and reserves. The
Company will look to a variety of sources to further supplement its capital
expenditures budget, including its credit facilities and sales of additional
promoted project interests to industry partners, as it seeks to maximize its
interests and manage its risks while aggressively pursuing its exploration
projects.
In the quarter ended March 31, 2000, the Company incurred approximately
$2,903,628 in new year 2000 drilling and completion expenditures and $603,874
in new year 2000 land and seismic costs. Although the first quarter expenditures
were less than 25% of total planned 2000 capital expenditures, the Company
believes the total budget for the year 2000 remains realistic. In the first
quarter of 2000, the Company participated in 8 new wells which reached total
depth and were logged during the quarter. Of these 8 wells, 5 were dry holes, 2
were producing and 1 was scheduled to commence production upon completion and
pipeline connections. Since March 31, 2000 and through May 10, 2000, it has
participated in 5 additional wells which have logged or are still drilling, of
which 3 were dry holes, 2 are being completed and 1 was drilling.
The Company experienced production problems with one well early in
the second quarter which averaged approximately 2,300 Mcf and 126 barrels of
oil per day in the first quarter. It is not certain as to the cause of the
problem or if it is mechanical or reservoir related. Production from this
well will be minimal in the second quarter of 2000 and its future
contributions to overall Company production is uncertain. This will impede
second quarter revenue growth.
The Company has budgeted $18,000,000 in drilling and completion
expenditures on interests in over 40 wells and an additional $8,000,000 in
land and new seismic costs in 2000. The budgeted drilling and completion
expenditures, which are primarily on exploratory wells, compares to total
drilling and completion expenditures of approximately $8,652,439 in 1999 when
the Company had less capital available. Through this exploration program, the
Company believes it can resume its 1999 trends of rapid growth in net
production, net revenues, operating cash flow, and net gas and oil reserves
in the second half of the year 2000 and beyond. It believes that certain of
its planned 2000 exploratory wells represent the highest upside potential to
which the Company has been exposed.
SUCCESSFUL EFFORTS ACCOUNTING AND RELATED MATTERS. The Company
utilizes the successful efforts method of accounting. Under this method it
expenses its exploratory dry hole costs and the field acquisition costs of
3-D seismic data as incurred. The undeveloped properties, which were acquired
pursuant to the Acquisitions, were comprised primarily of interests in
unproven 3-D seismic based projects, and were recorded in May of 1998 at an
independently estimated fair market value of $54.2 million as determined by
Cornerstone Ventures, L.P., a Houston, Texas based investment banking firm.
Pursuant to the successful efforts method of accounting, the Company is
amortizing such initial costs of unproved properties on a straight-line basis
over a period not to exceed forty-eight months, as well as recognizing
property specific impairments. As of March 31, 2000 the unamortized balance
was $12,007,900. Hence significant non-cash charges have depressed reported
earnings of the Company and will likely continue to do so in 2000; however,
the non-cash charges will not affect cash flows provided by operating
activities nor the ultimate realized value of the Company's natural gas and
oil properties.
As a result of the tax rules applicable to the Acquisitions, the
Company will likely not be able to fully use its existing net operating loss
carry forward in the future.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2000 WITH THREE MONTHS ENDED MARCH
31, 1999
REVENUES. Total revenues increased 536.45% from $1,511,002 for the
first quarter of 1999 to $9,616,716 for the first quarter of 2000. The
primary attributing factors to these increases include the Company's growth
in gas and oil revenues and the non-recurring gain on sale of assets all as
further described below.
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GAS AND OIL REVENUES. Total gas and oil revenues increased from
$964,245 for the first quarter of 1999 to $5,264,653 for the first quarter of
2000. $368,653 of the first quarter 2000 revenues were attributable to
adjustments to prior periods and $4,896,000 was generated from first quarter
2000 production. This resulted in a 446% increase to overall gas and oil
revenue, but a 407.75% increase in revenue attributable to the respective
first quarters in 1999 and 2000. The increase is primarily attributable to the
growth in the Company's net gas and oil production throughout the year 1999. It
was impacted to a lesser degree by higher gas and oil prices received in the
first quarter of 2000 as contrasted with the first quarter of 1999.
REALIZED GAIN (LOSS) ON COMMODITY TRANSACTIONS. The first quarter of
1999, the Company realized a gain of $190,849 on commodity transactions, as
contrasted with a $293,994 loss in the first quarter of 2000. This gain
(loss) results from actual commodity prices for the period being greater or
less than the Company's hedge position on natural gas or oil. Although the
Company has hedges in place at higher places in the first quarter of 2000
than in the first quarter of 1999, commodity prices increased more resulting
in the loss for the period.
GAIN ON SALE OF ASSETS. The gain on sale of assets in the first
quarter of 2000 is primarily attributable to the sale in the quarter of
interests in the Company's Raymondville Project. As a result, the gain on
sale of assets increased 1,553% in the period as contrasted with the same
period in the prior year.
OPERATING FEES. The increase in revenue from operating fees from
$63,734 in the first quarter of 1999 to $124,968 in the first quarter of 2000
is attributable to increased volume of activity. The result was a 96.08%
increase in revenues from this category.
OTHER REVENUES. Other revenues in the first quarter of the year 2000
was comprised of $31,186 of interest income. This created a 51.96% increase
over the $20,522 in other revenue in the first quarter of 1999.
COSTS AND EXPENSES. Total costs and expenses grew from $5,592,480 in
the first quarter of 1999 to $6,875,500 in the first quarter of 2000. This
22.94% increase is the result of changes in the categories as discussed below.
LEASE OPERATING EXPENSES. Lease operating expenses for the period
increased 7.96% from $253,971 in the first quarter of 1999 to $274,183 in the
first quarter of 2000. First quarter 1999 lease operating costs included
approximately $149,000 in costs associated with compressor installations,
road repairs due to flood damages and other nonrecurring expenses. These
comparable costs were not incurred in the first quarter of 2000, but
increases in ongoing lease operating expenses attributable to the
significantly increased volume of activities in 2000 factored in the total
increase in lease operating expenses.
PRODUCTION TAXES. Production taxes increased 251.67% from $63,793 in
the first quarter of 1999 to $224,344 in the first quarter of 2000. The
increases are a direct result of increased production from the company's gas
and oil properties.
DEPLETION, DEPRECIATION AND AMORTIZATION. "DD&A" increased 199.96%
from $619,000 in the first quarter of 1999 to $1,856,723 in the first quarter
of 2000. This was attributable to the increased gas and oil production from the
Company's properties.
AMORTIZATION OF UNPROVED PROPERTIES. Amortization of unproved
properties decreased from $2,383,000 in the first quarter of 1999 to
$1,440,800 in the first quarter of 2000. The Company has amortized the
undeveloped and unevaluated value of the properties acquired pursuant to the
Acquisition Agreement between the Company, EPC, and Aspect over a period not
to exceed 48 months. The amounts are amortized until the applicable
properties are moved into the proven property base or reduced to zero by
amortization or impairment. Since the first quarter of 1999, the amortization
pool has decreased due to certain properties being moved into the proven
property base, and further decreased by the sale of certain unproven,
undeveloped project interest to industry partners. As a result, the
amortization pool is a lower amount which has resulted in the lower
amortization for the first quarter of 2000. As of March 31, 2000, $12,007,900
remained in this amortization pool. Also see Overview-Successful Efforts
Accounting and Related Matters.
EXPLORATION COSTS - GEOLOGICAL AND GEOPHYSICAL. Exploration costs
- -geological and geophysical decreased 69.44% from $713,769 in the first
quarter of 1999 to $218,105 in the first quarter of 2000. These exploration
costs reflect the topographical, geological and geophysical studies and
include the expenses of geologists, geophysical
13
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crews and other costs of acquiring and analyzing 3-D seismic data. Such costs
for the first quarter of 2000 as contrasted with the first quarter of 1999
are reduced primarily due to the timing and acquisition of new 3-D seismic
field surveys. In this regard, the Company incurred fewer costs in the first
quarter of 2000.
EXPLORATION COSTS - DRY HOLE. Exploration - dry hole increased from
zero in the first quarter of 1999 to $1,134,392 in the first quarter of 2000.
This was attributable to dry holes incurred in the first quarter of 2000,
none of which were incurred in the first quarter of 1999.
INTEREST EXPENSE. Interest expense increased 162.03% from $123,286
in the first quarter of 1999 to $323,044 in the first quarter of 2000. The
increase was primarily attributable to the Company's higher level of
long-term debt as contrasted with the first quarter of 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses decreased 11.38% from $1,403,972 in the first quarter of 1999 to
$1,244,195 in the first quarter of 2000. Between the periods, certain costs
were increased as the Company expanded its staffing after the acquisition of
3DX Technologies Inc. in September of 1999. These increases were offset by
certain reductions in the Company's general and administrative costs, caused by
cost reduction efforts implemented in the second half of 1999 as the Company
sought to increase its efficiencies of operations. In addition, certain
general administrative costs in 1999 were costs associated with departmental
reorganizations and information system conversions and implementations.
DELAY RENTALS. Delay rental expense increased 36.25% from $31,689 for
the first quarter of 1999 to $43,176 for the first quarter of 2000. This
increase was primarily attributable to rentals payable on leases and prospects
not yet determined to be part of the Company's proven undeveloped reserves.
OTHER TAX EXPENSE. Other tax expense increased from none during the
first quarter of 1999 to $116,538 for the first quarter of 2000. This increase
was primarily attributable to franchise taxes paid during the first quarter of
2000.
NET INCOME PER COMMON SHARE. Net income per common share increased
from a net loss of $.26 per share for the first quarter of 1999 to net
income of $.15 per share for the first quarter of 2000.
KNOWN AND ANTICIPATED TRENDS, CONTINGENCIES AND DEVELOPMENTS IMPACTING FUTURE
OPERATING RESULTS.
The Company's future operating results will continue to be
substantially dependent upon the success of the Company's efforts to develop
the projects acquired in the Acquisitions and the acquisition of 3DX, as well
as its other prospects.
Management continues to believe these projects represent the most
promising prospects in the Company's history. The wells drilled in 1998 and
1999 on projects acquired pursuant to the Acquisitions continue to increase the
Company's year 2000 revenues as compared with 1999. Conversely, the capital
expenditures planned in 2000 will continue to require substantial outlays of
capital to explore, develop and produce. Drilling results for 1998 resulted in
substantial revenue increases. Drilling results in 1999 resulted in rapidly
expanding revenues in the third and fourth quarters of 1999. The Company
anticipates certain general and administrative cost decreases to continue in
2000 due to personnel and systems changes which were implemented in 1999 and,
which were intended to increase efficiency and/or reduce costs. However,
pursuant to the acquisition of 3DX Technologies, Inc., certain of the planned
savings have been offset by staff additions pursuant to the merger. Such cost
additions should be more than offset by revenue increases from producing
properties acquired in the merger and the additions expand the Company's
ability to manage and create value from its broad project inventory. However,
because of the Company's expanded 2000 drilling budget, capital from sources
other than cash flow from operations is required for funding planned
exploration activities. The recently closed Raymondville Interests Sale has,
however, provided the cash resources to substantially fund the 2000 capital
budget when combined with available credit facilities and anticipated operating
cash flow. The Company's 2000 budget remains significantly funded from cash on
hand, available credit and anticipated cash flow.
The trend of increasing revenues will be slowed by the sale of the
Raymondville Interests, effective January 1, 2000 a reduction of approximately
2,000 Mcfe per day. The production problems incurred on one well early in the
second quarter, which resulted in a reduction of approximately 2,300 Mcf and 126
barrels of oil per day, and natural decline rates. Continued upward growth will
be dependent upon the Company's continued drilling success on wells currently
drilling and to be drilled through 2000. The budget will, however, continue to
include the sales of certain project interests to industry partners; however,
the Company believes it will be much less dependent upon such sources due to
its increasing operating cash flow, improved liquidity, and new credit facility.
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LIQUIDITY AND CAPITAL RESOURCES
The Company business plan calls for net expenditures of $18,000,000
in drilling and completion and $8,000,000 in land and geophysical costs
resulting in a $26,000,000 capital budget for 2000. These budgeted amounts
are based upon exploration opportunities and may be adjusted based upon
available capital, new opportunities and industry conditions. The Company's
sources of financing include borrowing capacity under its credit facilities,
the sale of promoted interests in the Exploration Projects to industry
partners and cash provided from operations. The Company's budget includes the
sales of certain project interests to industry partners.
The Company entered 1999 having gone from nominal second quarter 1998
gas and oil production revenues of approximately $35,000 per month and large
operating cash flow deficits to a company which averaged $1,815,637 per month
in oil and gas revenues and in realized revenue from hedges on production in
the fourth quarter of 1999. These revenues averaged $1,754,884 per month in the
first quarter of 2000; however, $122,884 of this average was attributable to
adjustments to prior periods and the average gas and oil revenues for actual
first quarter 2000 production was $1,632,000 per month. This was achieved after
the sale of interests in the Raymondville Project, which sale was effective
January 1, 2000. The Company estimates its gas and oil production and
revenues will be lower in the second quarter of 2000 due to production problems
with the Holland well; however, as new wells commence production, it believes
its second quarter 2000 average daily production by the end of the quarter will
be back up to the first quarter daily average. Additional success in 2000 on
wells currently drilling, if obtained, would result in increased production in
2000. This would allow the Company to achieve increasing operating cash flow in
the second half of the year (prior to capital expenditures and new 3-D seismic
data acquisition costs, which costs the successful efforts accounting method
utilized by the Company mandate to be expensed rather than capitalized).
The Company ended 1999 with a deficit working capital of approximately
$16,543,374. Of this amount approximately $11.0 million was represented by the
current portion of its long term debt. This deficit working capital was greatly
improved when the Company, on January 25, 2000, closed a new credit facility
with Deutsche Bank AG, New York Branch. Pursuant to this facility, all of the
$15.8 million of the Company's long term debt at December 31, 1999 was repaid.
This repayment included $4.8 million of long term debt classified as long term
and the repayment of approximately $11.0 million of long term debt classified
as current. Pursuant to the Deutsche Bank credit facility, $21 million was
initially available. All amounts available were long term debt, none of which
was classified as current portion at the end of the first quarter of 2000. The
credit facility with Deutsche Bank is in two tranches. $12 million is available
under Tranche A, and $9 million under Tranche B. Tranche A is a revolving
facility with no required principal payments until January 24, 2001, after
which date it converts into a 60-month term loan. Tranche B is payable interest
only until the second quarter of 2001, at which time the principal is amortized
at a rate of 25% per quarter until fully repaid. Both loans are at a varied
interest rate utilizing either Deutsche Bank's alternative interest rate or the
London interbank rate plus 2% for both Tranche A and Tranche B. As of May 10,
2000, $5,341,782 was drawn under Tranche A and $9 million under Tranche B. All
undrawn funds will be available for future drilling activities of the Company.
The facility is secured by a mortgage on most of the proven properties
currently owned by the Company. In addition, the Company has a negative pledge
and an agreement to mortgage any of the Company's unproven projects or
properties at the demand of the bank. In addition to the foregoing, Deutsche
Bank AG received a 1.5% overriding royalty interest, proportionately reduced to
the Company's net interest, on the gas and oil properties classified as proven
as of the date of closing, and an agreement that it would convey to the bank a
1.5% overriding royalty interest, proportionately reduced to the Company's net
interest, on future proven wells on the date any such future wells are logged,
for as long as funds are outstanding pursuant to Tranche B. In the event the
Tranche B loans are repaid in full prior to April 30, 2002, the Company may
redeem the overriding royalty interests conveyed to Deutsche Bank AG for an
amount equal to (a) an amount which, when added to the interest paid to
Deutsche Bank AG, plus revenues received by Deutsche Bank AG from the
overriding royalties conveyed to Deutsche Bank AG, would provide to Deutsche
Bank AG an internal rate of return of approximately 15%, plus (b) 60% of the
then remaining present value of the overriding royalties to be redeemed after
subtracting the amount calculated in (a) above. In addition, Deutsche Bank also
received a five-year warrant to purchase 250,000 shares of the Company's common
stock at a price equal to $1.50 per share. Proceeds of the credit facility were
utilized to retire the Company's existing long term debt and additional
proceeds can be utilized to supplement working capital and exploration costs.
The Company expects further increases in the borrowing base in the event its
proven oil and gas reserves continue to grow.
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The Company's working capital was further enhanced when it closed a
sale of project interests to Cody Texas, L.P. for an amount net to the
Company totaling approximately $10,585,591 on March 17, 2000. In this sale,
the Company conveyed 84.39% of its net interest in its Raymondville Project
in Willacy County, Texas to Cody Texas, L.P. The Company's borrowing base
pursuant to Tranche A with Deutsche Bank was not reduced as a result of the
sale. The proceeds of the sale of interests to Cody Texas, L.P. were utilized
to increase working capital, to reduce outstanding amounts under the revolving
borrowing base available to the Company pursuant to Tranche A of the Deutsche
Bank facility, and to fund capital expenditures of the Company.
In the second quarter of 2000, the Company finalized a bonus to
employees for results achieved in 1999. The bonus was primarily based upon
drilling results achieved as contrasted with drilling and completion costs
incurred to achieve the results. On 1999 drilling, the Company achieved over a
4 to 1 return on drilling and completion costs incurred. As a result, the
respective Company-wide bonus ranged from approximately 48% to approximately
64% of each individual employee's respective 1999 salary. The bonus is payable
in two installments. 50% was paid in the second quarter of 2000, representing a
total cash payment of $581,934. The balance is to be paid in October of 2000,
subject to adjustment based upon a June 30, 2000 engineering report on the
reserves discovered in 1999. The Company may pay up to 50% of the October
payment in the form of common stock.
The Company believes that it has achieved a much more desirable
position from a standpoint of liquidity than it has experienced since the
consummation of the Acquisitions in May of 1998. Improvements to its working
capital position, which have resulted from the closing of the facility with
Deutsche Bank and the sale to Cody Texas, L.P., combine with the Company's
recently increased cash flow to place it in a good position to fund its year
2000 capital expenditures budget. Said budget is, in fact, significantly
funded from cash, currently available credit and anticipated operating cash
flow. Given the $26 million budget, the Company anticipates that the full
funding of said budget will likely still depend upon some sales or other
transactions with industry partners in the second half of the year 2000. Its
ongoing business plan is to always implement such transactions in order to
properly manage the spread of risk in its drilling activities as well as to
be a source of capital expenditure funds.
Pursuant to the Company's credit agreement with Deutsche Bank, it
has certain covenants regarding current interest coverage ratios and other
covenants regarding which it is expected to be in compliance at the end of
each quarter. Although the Company believes it will be in compliance with
these covenants in the year 2000, there can be no assurance that it will be
in compliance. In the event it is not in compliance, the Company will be
required to seek waivers of said covenants or would be required to seek
alternative financing arrangements. The Company was in compliance at March
31, 2000.
The Company historically has addressed its long-term liquidity needs
through the issuance of debt and equity securities, through bank credit and
other credit facilities, sales of project interests to industry partners and
with cash provided by operating activities. Its major obligations as of March
2000, consisted principally of (i) servicing loans under the credit
facilities with Deutsche Bank and other loans, (ii) funding of the Company's
exploration activities, and (iii) funding of the day-to-day operating costs.
The Company has an ambitious capital expenditure plan for 2000,
which includes approximately $18,000,000 in drilling and completion costs,
and an additional $4,600,000 and $3,600,000, respectively, in geological,
geophysical and land costs for the year. In the first quarter, the Company
incurred $2,903,628 in drilling and completion costs, and $603,874 in
geological and geophysical costs and land costs. Cash on hand, cash currently
available pursuant to the Deutsche Bank credit facility, and cash flow from
operations will contribute significantly to said budgets, but additional
funds in the form of sales of project interests and/or long term debt will
likely be needed in the second half of the year.
Many of the factors that may affect the Company's future operating
performance and long-term liquidity are beyond the Company's control,
including, but not limited to, oil and natural gas prices, governmental
actions and taxes, the availability and attractiveness of financing and its
operational results. The Company continues to examine alternative sources of
long-term capital, including the acquisition of a company with producing
properties for common stock or other equity securities, and also including
bank borrowings, the issuance of debt instruments, the
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sale of common stock or other equity securities, the issuance of net profits
interests, sales of promoted interests in its Exploration Projects, and
various forms of joint venture financing. In addition, the prices the Company
receives for its future oil and natural gas production and the level of the
Company's production will have a significant impact on future operating cash
flows.
The Company markets its natural gas through monthly spot sales.
Because sales made under spot sales contracts result in fluctuating revenues
to the Company depending upon the market price of gas, the Company may enter
into various hedging agreements to minimize the fluctuations and the effect
of price declines or swings. In February of 2000, in conjunction with its
financing with Deutsche Bank, the Company restructured all existing natural
gas hedges with an affiliate of Deutsche Bank. Pursuant to these hedges, the
Company had 9,381 MMBtu/day of net production hedged in the first quarter of
2000, and it has 9,031 MMBtu/day hedged for the second quarter of 2000, 8,646
MMBtu/day for the third quarter of 2000, 8,278 MMBtu/day for the fourth
quarter of 2000, 7,161 MMBtu/day for the first quarter of 2001, 6,880
MMBtu/day for the second quarter of 2001, 6,600 MMBtu/day for the third
quarter of 2001, and 6,319 MMBtu/day for the fourth quarter of 2001. All
hedges are at $2.45 per MMBtu. Concurrent with the new hedges, all prior
natural gas hedges were retired. In September of 1999, the Company entered
into a "collar" hedge arrangement on certain of its oil production. It
entered into an oil hedge for a quantity equal to 300 barrels of oil per day
in the fourth quarter of 1999, 280 barrels of oil per day in the first
quarter of 2000, 256 barrels of oil per day in the second quarter of 2000,
and 237 barrels of oil per day in the third quarter of 2000, all of which
transactions were structured with an $18.00 floor price and a $20.40 cap
price. These positions were supplemented with oil hedges for 238 barrels of
oil per day in the fourth quarter of 2000, and 175 barrels of oil per day,
168 barrels of oil per day, 161 barrels of oil per day and 154 barrels of oil
per day for the first through fourth quarters of 2001, respectively, all of
which supplemental hedges were at $21.03 per barrel. As a result of the
above-referenced transactions, the Company has hedged varying quantities of
its natural gas and oil production through December of 2001. First quarter
2000 hedges approximated 60% of the Company's natural gas and 55% of its oil
production for such quarter. Future percentages will vary.
WORKING CAPITAL. At March 31, 2000, the Company had a cash balance
of $1,776,924, total current assets of $14,243,301, and total current
liabilities of $15,057,067. This resulted in a working capital deficit of
$813,766. The Company expects its trend of increasing gas and oil revenues
and associated hedging revenues from commodity transactions will continue the
growth in revenues in excess of the ongoing costs of operations, which may
also enhance the Company's working capital position. Conversely, the Company
utilizes excess cash to reduce its revolving line of credit which may result
in lower reported working capital than would be reported were it to utilize
more long-term debt, but does not affect available cash resources. Tranche B
of the Deutsche Bank facility begins amortizing at a rate of 25% of the
principal per quarter in the second quarter of 2001. This will result in
increases in the Company's current portion of long-term debt in 2000 but will
not affect cash available in 2000. The net working capital can be negatively
effected by the Company's continuing aggressive capital expenditures program
on its exploration projects to the extent said capital expenditures exceed
cash generated from operations and from the sale of project interests and/or
growth in its credit facilities.
SUMMARY. The Company believes it is positioned to continue to expand
its exploration activity on its technology enhanced projects. Many of the
projects have reached the drilling stage. In many instances the requisite
process of geological and/or engineering analysis, followed by acreage
acquisition of leasehold rights and seismic permitting, and 3-D seismic field
data acquisition, then processing of the data and finally its interpretation
took several years of time and the investment of significant capital.
Management believes the acquisition of projects at this advanced stage has
not only reduced the drilling risk, but should allow the Company to
consistently drill on a broad array of exploration prospects throughout 2000
and beyond.
As evidence of this activity the Company has participated in the
drilling of 14 wells on its exploration projects in the first quarter of 2000
and through May 10, 2000. The addition of wells drilled in 1999 and 2000 to
producing status has increased the Company's net daily production to
approximately 505 barrels of oil per day and 15,416 Mcf of natural gas per day
in the first quarter of 2000. The Company expects that these revenues will
provide positive and growing operating cash flow in 2000 (prior to capital
expenditures and new 3-D seismic data acquisition costs, which costs the
successful efforts accounting method utilized by the Company mandates to be
expensed rather than capitalized). The Company's 1999 and 2000 drilling results
have further served to increase its confidence in its future drilling on the
technology enhanced Exploration Projects. Additional exploration success would
continue this positive trend.
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The Company expects to fund significant portions of its $18 million
year 2000 drilling and completion budget from operating cash flow (prior to
capital expenditures and new 3-D seismic data acquisition costs). Its total
capital budget, including land and new seismic, of $26 million is significantly
funded from cash available, anticipated cash flow and available credit
facilities. These amounts will be supplemented by continued sales of
interests to industry partners. The Company will utilize a variety of sources
to fund its continuing capital expenditures budget including operating cash
flow, currently available credit facilities and certain sales of promoted
project interests to industry partners, as it seeks to maximize its interests
and manage its risks while aggressively pursuing its exploration projects.
The Company intends to aggressively pursue its exploration plan in
2000 while continuing to enhance its project inventory through its ongoing
acquisition of 3-D seismic-enhanced opportunities. It will also focus on any
potential merger or acquisition which it believes can enhance shareholder
value through expansion of exploration opportunities or increased economics
of scale.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company currently has no action filed against it other than
ordinary routine litigation.
ITEM 2. CHANGES IN SECURITIES.
In the quarter ended March 31, 2000 and in the second quarter
through May 10, 2000, the Company has issued 19,573 and 13,301 shares,
respectively, of its common stock pursuant to its employees' 401-K plan. The
shares represent the employer's pro rata match of employee contributions. It
also issued 84,000 shares of common stock comprised of 12,000 shares to each
of seven of its directors. The shares were part of an overall compensation
package for its directors, which package included stock options as further
described in Item 10 located at Part III of the Company's report on Form
10-KSB/A for the year ended December 31, 1999 dated April 28, 2000. The price
per share paid by Directors was $1.83 per share payable one third upon
subscription, one third on or before May 14, 2000 and one third on or before
May 15, 2001. The shares issued pursuant to the 401-K plan and to the
Directors are presently unregistered but are intended to be registered in
2000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no such matters submitted in the first quarter of 2000.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(11) Computation of Earnings Per Common Share
(27.1) Financial Data Schedule
(b) Reports on Form 8-K
None.
19
<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.
ESENJAY EXPLORATION, INC.
Date: MAY 16, 2000 By: /s/ MICHAEL E. JOHNSON
------------ --------------------------------------
MICHAEL E. JOHNSON, President,
Chief Executive Officer and Director
Date: MAY 16, 2000 By: /s/ DAVID B. CHRISTOFFERSON
------------ --------------------------------------
DAVID B. CHRISTOFFERSON,
Senior Vice President, General Counsel,
Principal Financial Officer
Date: MAY 16, 2000 By: /s/ ANGELA D. CONWAY
------------ --------------------------------------
ANGELA D. CONWAY,
Controller
20
<PAGE>
EXHIBIT 11 TO FORM 10QSB
ESENJAY EXPLORATION, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Three months ended March 31,
-------------------------------------------------
2000 1999
---------------------- ----------------------
<S> <C> <C>
BASIC EARNINGS PER SHARE
Weighted average common shares
outstanding............................... 18,857,272 15,784,834
---------------------- ----------------------
Basic income (loss) per share................. $ 0.15 $ (0.26)
====================== ======================
DILUTED EARNINGS PER SHARE
Weighted average common shares
outstanding.............................. 18,857,272 15,784,834
Shares issuable from assumed conversion
of convertible preferred stock........... 356,999 ---
Shares issuable from assumed conversion
of common share options and warrants..... 62,837 7,500
---------------------- ----------------------
Weighted average common shares
outstanding, as adjusted................. 19,277,108 15,792,334
====================== ======================
Diluted income (loss) per share.............. $ 0.14 $ (0.26)
====================== ======================
EARNINGS FOR BASIC AND DILUTED
COMPUTATION
Net income (loss)............................ $ 2,741,216 $(4,081,478)
Preferred share dividends.................... ----- -----
---------------------- ----------------------
Net income (loss) to common stockholders
(Basic and diluted income (loss) per
share computation).................... $ 2,741,216 $(4,081,478)
====================== ======================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,776,924
<SECURITIES> 0
<RECEIVABLES> 11,789,144
<ALLOWANCES> 480,015
<INVENTORY> 0
<CURRENT-ASSETS> 14,243,301
<PP&E> 78,191,934
<DEPRECIATION> (28,022,223)
<TOTAL-ASSETS> 65,869,558
<CURRENT-LIABILITIES> 15,057,067
<BONDS> 14,341,782
0
3,570
<COMMON> 188,573
<OTHER-SE> 34,918,413
<TOTAL-LIABILITY-AND-EQUITY> 65,869,558
<SALES> 5,264,653
<TOTAL-REVENUES> 9,616,716
<CGS> 0
<TOTAL-COSTS> 6,552,456
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 323,044
<INCOME-PRETAX> 2,741,216
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,741,216
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,741,216
<EPS-BASIC> 0.15
<EPS-DILUTED> 0.14
</TABLE>
