<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-22076
----------------
ZYDECO ENERGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
76-0404904
(I.R.S. EMPLOYER IDENTIFICATION NO.)
1710 TWO ALLEN CENTER, 1200 SMITH STREET
HOUSTON, TEXAS
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
77002
(ZIP CODE)
(713) 659-2222
(REGISTRANT'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
As of June 30, 1997, there were 6,607,098 shares of Zydeco Energy, Inc.
Common Stock, $.001 par value, issued and outstanding.
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<PAGE>
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets........................................ 3
Consolidated Statements of Operations.............................. 4
Consolidated Statements of Stockholders' Equity.................... 5
Consolidated Statements of Cash Flows.............................. 6
Notes to Consolidated Financial Statements......................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 9
Part II. Other Information and Signatures
Item 6. Exhibits and Reports on Form 8-K.............................. 14
Signatures............................................................ 15
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1.
ZYDECO ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
ASSETS
------
<S> <C> <C>
Current Assets
Cash and cash equivalents........................... $2,758,532 $6,906,650
Marketable securities............................... -- 845,852
Oil and gas revenue receivable...................... 180,704 327,975
Exploration receivable.............................. 2,446,160 --
Other receivables................................... 12,607 21,244
Prepaid expenses.................................... 137,473 130,495
---------- ----------
Total Current Assets.............................. 5,535,476 8,232,216
Oil and gas properties, using successful efforts
method of accounting
Proved properties................................... 302,472 300,784
Unproved properties................................. 488,290 488,290
Equipment and software, at cost....................... 1,773,873 1,608,207
---------- ----------
2,564,635 2,397,281
Less: accumulated depreciation, depletion and
amortization......................................... (1,340,560) (1,026,046)
---------- ----------
1,224,075 1,371,235
Operating bond, deferred costs, and other assets...... 623,400 308,151
---------- ----------
TOTAL ASSETS.......................................... $7,382,951 $9,911,602
========== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities
Accounts payable.................................... $2,648,132 $ 692,188
Accrued liabilities................................. 575,863 232,738
Exploration obligations............................. 2,239 2,489,732
Capital lease obligation............................ 65,827 157,537
---------- ----------
Total Current Liabilities......................... 3,292,061 3,572,195
Stockholders' Equity
Convertible preferred stock, par value $.001 per
share; 1,000,000 shares authorized; no shares
issued and outstanding............................. -- --
Common stock, par value $.001 per share; 50,000,000
shares authorized; 7,388,353 and 7,374,905 shares
issued; 6,607,098 and 6,593,650 shares outstanding,
respectively....................................... 7,388 7,375
Additional paid-in-capital.......................... 9,522,430 9,503,943
Accumulated deficit................................. (5,431,676) (3,164,659)
Less: treasury stock, at cost; 781,255 shares....... (7,252) (7,252)
---------- ----------
Total Stockholders' Equity........................ 4,090,890 6,339,407
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............ $7,382,951 $9,911,602
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1997 1996 1997 1996
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Operating Revenues
Oil and gas sales............ $ 257,329 $ 305,211 $ 631,323 $ 556,746
Gain on sales of properties.. -- 16,319 -- 16,319
Seismic services............. -- 31,500 -- 31,500
----------- --------- ----------- ---------
257,329 353,030 631,323 604,565
Operating Costs and Expenses
Exploration expenses
Geological and geophysical
expenses.................. 1,361,357 192,.969 1,806,196 401,569
Other exploration costs.... 41,622 17,074 57,471 17,074
Production costs............. 3,735 4,684 9,425 11,233
Depreciation, depletion and
amortization................ 148,050 151,364 316,693 261,729
General and administrative
expenses.................... 448,768 261,513 804,889 648,911
----------- --------- ----------- ---------
2,003,532 627,604 2,994,674 1,340,516
Operating Loss................. (1,746,203) (274,574) (2,363,351) (735,951)
Other Income (Expense)
Interest income.............. 49,155 82,610 107,074 169,109
Interest expense............. (4,352) (11,983) (10,740) (25,671)
----------- --------- ----------- ---------
44,803 70,627 96,334 143,438
Net Loss....................... $(1,701,400) $(203,947) $(2,267,017) $(592,513)
=========== ========= =========== =========
Per Share of Common Stock and
Common Stock Equivalent--
Weighted average number of
shares of common stock and
common stock equivalents
outstanding................... 6,605,439 5,810,453 6,599,543 5,804,929
=========== ========= =========== =========
Loss per share of common stock
equivalent.................... $ (0.26) $ (0.04) $ (0.34) $ (0.10)
=========== ========= =========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
---------------- ----------------- PAID-IN ACCUMULATED TREASURY STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK EQUITY
------- -------- --------- ------ ---------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... -- $ -- 6,593,650 $7,375 $9,503,943 $(3,164,659) $(7,252) $6,339,407
(Unaudited):
Net Loss............... -- -- -- -- -- (2,267,017) -- (2,267,017)
Options and warrants
exercised for Common
Stock................. -- -- 13,450 13 18,487 -- -- 18,500
Adjustment for
fractional shares paid
in cash............... -- -- (2) -- -- -- -- --
------- -------- --------- ------ ---------- ----------- ------- ----------
Balance at June 30,
1997................... -- $ -- 6,607,098 $7,388 $9,522,430 $(5,431,676) $(7,252) $4,090,890
======= ======== ========= ====== ========== =========== ======= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................... $(2,267,017) $ (592,512)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization......... 316,693 261,729
Gain on sales of properties...................... -- (16,319)
Exploration costs................................ 1,863,668 418,643
Changes in operating assets and liabilities
(Increase) decrease in oil & gas revenue
receivables................................... 147,271 (118,698)
(Increase) decrease in other current assets.... 1,659 (76,968)
(Decrease) in accounts payable................. (93,788) (160,664)
Increase (decrease) in accrued liabilities..... 58,126 (114,486)
Other.......................................... (500) (48,497)
----------- -----------
Net cash provided by (used in) operating
activities........................................ 26,112 (447,772)
Cash flows from investing activities:
Net expenditures against exploration obligations... $(7,707,306) $(1,552,425)
Exploration costs.................................. (868,668) (418,643)
Advances on exploration obligation................. 6,000,000 3,000,000
Distributions to exploration partner............... (2,171,615) --
Purchases of equipment and software................ (165,666) (718,614)
Additions to oil and gas properties................ (1,688) (302,466)
Proceeds from the sale of marketable securities,
net............................................... 845,852 9,224,749
Proceeds from the sale of properties............... -- 16,319
----------- -----------
Net cash provided by (used in) investing
activities........................................ (4,069,091) 9,248,920
Cash flows from financing activities:
Repayments of short-term debt...................... $ -- $ (225,028)
Principal payments of capital lease obligation..... (91,710) (76,779)
Deferred costs..................................... (31,928) --
Proceeds from options and warrants exercised....... 18,499 8,890
----------- -----------
Net cash (used in) financing activities............ (105,139) (292,917)
----------- -----------
Net increase (decrease) in cash and cash equivalents. $(4,148,118) $ 8,508,231
Cash and cash equivalents at beginning of period..... 6,906,650 517,781
----------- -----------
Cash and cash equivalents at end of period........... $ 2,758,532 $ 9,026,012
=========== ===========
Cash paid during the period for:
Interest........................................... $ 10,740 $ 25,671
Income taxes....................................... $ -- $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. PREPARATION OF INTERIM FINANCIAL STATEMENTS.
The accompanying unaudited consolidated financial statements of Zydeco
Energy, Inc. and its wholly owned subsidiary Zydeco Exploration, Inc. have
been prepared by the Company without audit pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, these
statements reflect all adjustments (consisting only of normal recurring
entries) which are, in the opinion of management, necessary for a fair
statement of the financial results for the interim periods. Certain
information and notes normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations, although management
believes that the disclosures are adequate to make the information presented
not misleading. Interim period results are not necessarily indicative of the
results to be achieved for an entire year. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes to consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996. As
used herein, unless the context indicates otherwise, the term "Company" refers
to Zydeco Energy, Inc. and Zydeco Exploration, Inc., its wholly owned
subsidiary.
Reclassifications. Certain reclassifications of prior period amounts have
been made to conform with current presentation.
2. EARNINGS PER SHARE.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128--"Earnings per
Share" effective for interim and annual periods after December 15, 1997. This
statement replaces primary earnings per share ("EPS") with a newly defined
basic EPS and modifies the computation of diluted EPS. The Company's basic and
diluted EPS, computed using the requirements of SFAS 128, are the same as the
currently disclosed primary EPS, since inclusion of outstanding options and
warrants would be anti-dilutive.
3. EXPLORATION AGREEMENT EXPENDITURES.
Fortune Exploration Agreement. Effective June 4, 1997, Fortune Petroleum
Corporation ("Fortune") exercised its right under the exploration agreement
with Zydeco ("Fortune Exploration Agreement"), to have unexpended capital
contributions returned to Fortune. Under the terms of the agreement, which was
signed February 13, 1995, Fortune contributed a total of $4.8 million for the
leasing of acreage, the payment of lease rentals, the acquisition and
processing of seismic data, and other specified related expenses over leads
and prospects developed by Zydeco in the Transition Zone and Timbalier Trench
areas of offshore Louisiana. Of that total, approximately $2,153,645 unspent
at the time of Fortune election, was returned on June 20, 1997.
The funds returned to Fortune were charged against the Company's exploration
liability. The Company retained its undivided 50% working interest in each of
the existing properties and intends to continue the processing of seismic data
and evaluation of prospects which merit further development. At June 30, 1997,
inception-to-date expenditures under the Fortune Exploration Agreement
aggregated approximately $2,474,761, net of interest earned of $209,731 and
proceeds from farmouts of property interests of $66,319.
Cheniere Exploration Agreement. In April 1996, the Company executed an
Exploration Agreement (the "Cheniere Exploration Agreement") with Cheniere
Energy Operating Co., Inc. ("Cheniere") covering an area of land and waters in
western Cameron Parish, Louisiana ("West Cameron Seismic Project"). Inception-
to-date expenditures through June 30, 1997, aggregated approximately
$15,490,298 in connection with the West Cameron Seismic Project or $1,990,298
in excess of the $13.5 million which Cheniere is required to fund to
7
<PAGE>
ZYDECO ENERGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
maintain its 50% interest. At June 30, 1997, Cheniere had advanced $12.0
million under the Cheniere Exploration Agreement. At June 30, 1997, prior to an
amendment and extension granted by the Company (see "Note 5--Subsequent
Events"), Cheniere was obligated to advance the remaining $1.5 million of the
first $13.5 million of costs by July 21, 1997, or its interest in the West
Cameron Seismic Project would be substantially reduced to that percentage that
Cheniere's actual advances represent in relation to two times the Project's
ultimate cost. Cheniere's share of costs incurred in excess of the amount of
Cheniere's advances is classified as an exploration receivable of $2,446,160 at
June 30, 1997. The Company's 50% share of the excess costs or $995,149 was
expensed at geological and geophysical costs in the three months ended June 30,
1997. Interest income accumulated since inception on unused project funds was
$48,989 at June 30, 1997.
4. DEFERRED COSTS OF PENDING REGISTRATION STATEMENT.
In May 1997, the Company filed a registration statement with the Securities
and Exchange Commission which is still pending in connection with an offering
of up to 3,680,000 shares of Common Stock (including up to 480,000 shares of
Common Stock to cover underwriters' over-allotments) and warrants to purchase
320,000 shares of Common Stock (the "Offering"). At June 30, 1997, the Company
had incurred approximately $316,000 in costs related to the offering which will
be offset against the proceeds of the offering, if any, or expensed. These
costs were deferred at June 30, 1997, and classified in other assets and
$285,000 of the accrued but unpaid costs were classified as accrued
liabilities.
5. SUBSEQUENT EVENTS.
On June 20, 1997, at the request of Fortune, the Company returned $2,153,645
to Fortune representing the unexpended funds previously advanced to the Company
under the Fortune Agreement. The funds returned to Fortune were reported as an
exploration liability on the Company's balance sheet and their return will be
accounted for as a reduction of such balance, with no effect on working
capital. The Company will retain its current undivided 50% working interest in
each of the existing properties. Substantially all the cost of lease
acquisition and seismic data acquisition had been incurred at the time of
Fortune's election. The Company will continue to evaluate certain of the
prospects that merit further evaluation or development.
On July 1, 1997, the Company acquired Wavefield Image, Inc. ("Wavefield"), a
privately held company that develops and licenses a seismic data processing
technique known as Wavefield Imaging Technology. The Company is utilizing
Wavefield Imaging Technology in its West Cameron Seismic Project pursuant to a
license negotiated in May 1996. The Company issued 100,000 shares of Common
Stock to stockholders of Wavefield, including its founder, Dr. Norman S.
Neidell, in exchange for all of the outstanding stock of Wavefield. An
additional 150,000 shares of Common Stock are expected to be issued to
Wavefield's stockholders with respect to a patent for the Wavefield Imaging
Technology, for which the Company received notice on July 3, 1997, that the
application has been allowed for issuance of a patent by the United States
Patent and Trademark Office. The historical operations of Wavefield are not
significant to the Company's financial position or results of operations.
On July 21, 1997, the Company agreed to grant Cheniere an extension until
July 31, 1997, to fund $1.5 million and until August 8, 1997 to fund an
additional $1.9 million in order to maintain their 50% interest in the West
Cameron Seismic Project. The amount represents their share of costs incurred or
estimated throughJuly 31, 1997. If Cheniere elects to discontinue funding, or
is unable to raise further funds to pay for its full share of costs of the West
Cameron Seismic Project, the Company currently does not have sufficient funds
to pay all of such Project costs when due. If necessary, the Company would use
a portion of the proceeds to be received from the anticipated Offering in the
third quarter of 1997, to pay for such Project expenditures. Such offering
proceeds are otherwise anticipated to be used for leasehold acquisition and
other general corporate purposes. In the event that Cheniere elects to
discontinue funding and the anticipated offering does not occur, the Company
would be required to seek funds from another source. In such event, the Company
may be required to borrow against its interest in the Project or may sell an
interest in the West Cameron Seismic Project to an industry partner in order to
finance the costs of the Project.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company (formerly "TN Energy Services Acquisition Corp.") was
incorporated in June 1993. Other than raising capital and reviewing
acquisition candidates, the Company did not engage in any significant business
activities prior to December 1995. Zydeco Exploration, the Company's wholly
owned subsidiary, was incorporated as an independently owned corporation in
March 1994. Zydeco Exploration immediately commenced exploration activities in
the Louisiana Transition Zone. On December 20, 1995, the Company acquired all
the outstanding common stock and preferred stock of Zydeco Exploration
pursuant to a merger (the "Merger") and changed its name to Zydeco Energy,
Inc. For accounting purposes, the Merger has been treated as a
recapitalization of Zydeco Exploration with Zydeco Exploration as the acquiror
(a reverse acquisition). Accordingly, the historical financial statements
prior to December 20, 1995, are those of Zydeco Exploration. No pro forma
information giving earlier effect to the transaction has been presented since
the transaction was accounted for as a recapitalization.
In May 1996, the Company entered into a license agreement with Dr. Norman
Neidell ("Neidell") for the use of the Wavefield Imaging Technology, the
benefits of which may substantially reduce the Company's total costs of
seismic data acquisition for certain surveys. On July 1, 1997, the Company
acquired Wavefield, the owner and licensor of the rights to the Wavefield
Imaging Technology. On July 3, 1997, the Company received notice that a patent
application in respect of the Wavefield Imaging Technology was allowed for
issuance by the United States Patent and Trademark Office. The Company expects
that the patent will be issued in a few months.
In February 1996, the Company obtained an exclusive seismic permit from the
State of Louisiana covering approximately 51,000 acres of state waters in
western Cameron Parish, Louisiana, which will expire on August 18, 1997. The
Company paid a fee of $783,754 for the permit. The Company may extend the
permit period to February 18, 1998, by payment of an additional fee of
$391,877 in August 1997. During such period, the Company has the exclusive
right to nominate parcels of such area for competitive bidding for drilling
rights. Under the permit, the State of Louisiana is required to keep the
information obtained from the survey confidential for a period of ten years.
In April 1996, the Company executed the Cheniere Exploration Agreement with
Cheniere, for the West Cameron Seismic Project, covering an area of land and
waters in western Cameron Parish, Louisiana, including the area covered by the
seismic permit described above. Cheniere holds an interest of 50% in the West
Cameron Seismic Project. In exchange for such interest, Cheniere has agreed to
fund the costs of seismic acquisition up to $13.5 million and 50% of such
costs in excess of $13.5 million. Such costs include the purchase of seismic
rights, the cost of lease options on the related onshore acreage of the West
Cameron Seismic Project, and data acquisition and processing of a 3D seismic
survey of the onshore and offshore areas. Cheniere may elect to discontinue
funding of the West Cameron Seismic Project at any time, in which case its
interest would be substantially reduced to that percentage that Cheniere's
actual advances represent in relation to two times the Project's ultimate
cost. As of July 21, 1997, Cheniere had made payments of $12.0 million against
costs incurred by the Company through June 30, 1997, on the West Cameron
Seismic Project of approximately $15.5 million.
In connection with the West Cameron Seismic Project, the Company began
onshore leasing and permitting in February 1996. Seismic data acquisition
commenced in August 1996 and was discontinued in early December due to weather
conditions and recommenced in April 1997. On July 6, 1997, the seismic data
acquisition phase, comprising approximately 146,000 acres, was completed.
In May 1997, the Company filed a registration statement with the Securities
and Exchange Commission which is still pending in connection with an offering
of up to 3,680,000 shares of Common Stock (including up to 480,000 shares of
Common Stock to cover underwriters' over-allotments) and warrants to purchase
320,000 shares of Common Stock (the "Offering"). Proceeds of the Offering
would be used by the Company to fund leasehold acquisition and seismic data
acquisition, processing and analysis costs, principally in respect of its West
Cameron Seismic Project, drilling participation costs, and other general
corporate purposes. There is no assurance that the Company will be successful
in completing the Offering.
9
<PAGE>
The Company accounts for its oil and gas exploration and production
activities using the successful efforts method of accounting. Under this
method, acquisition costs for proved and unproved properties are capitalized
when incurred. Exploration costs, including geological and geophysical costs
and the costs of carrying and retaining unproved properties, are expensed.
Exploratory drilling costs are initially capitalized, but charged to expense if
and when the well is determined not to have found proved reserves. Costs of
productive wells, developmental dry holes, and productive leases are
capitalized and amortized on a property-by-property basis using the unit-of-
production method. The estimated costs of future plugging, abandonment,
restoration, and dismantlement are considered as a component of the calculation
of depreciation, depletion and amortization. Unproved properties with
significant acquisition costs are assessed periodically on a property-by-
property basis and any impairment in value is charged to expense.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
Oil and Gas Sales. Oil and gas sales decreased by $47,882, or 16%, to
$257,329 for the quarter ended June 30, 1997, from $305,211 for the quarter
ended June 30, 1996. The decrease was attributable to an increase in production
volumes of $23,416 and a decrease in the average prices for oil and natural gas
of $71,298. The price and volume variances from oil and gas in second quarter
1997, compared to the same quarter in 1996, demonstrate the sensitivity of the
Company's operations to price fluctuations and its current dependence on a
small number of producing wells. The following table sets forth information
concerning crude oil, and natural gas sales volumes, average sales prices, and
per barrel oil equivalent ("NBOE") operating costs (excluding depreciation,
depletion, and amortization hereinafter referred to as "DD&A") for the
Company's exploration and production activities for indicated periods:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JUNE
30,
-------------
1997 1996
------ ------
<S> <C> <C>
Sales volumes:
Natural gas (mcf)........................................ 95,695 73,742
Crude oil (bbl).......................................... 2,929 4,523
NBOE (bbl)............................................... 18,878 16,813
Average sales prices:
Natural gas ($/mcf)...................................... $ 2.09 $ 2.73
Crude oil ($/bbl)........................................ $19.48 $22.93
Lease operating expense ($/NBOE)........................... $ 0.20 $ 0.28
Depletion, depreciation, & amortization ($/NBOE)(1)........ $ 0.64 $ 2.00
</TABLE>
- --------
(1) Excludes depreciation on seismic computer hardware and software of $136,014
and $117,782 for the three months ended June 30, 1997 and 1996,
respectively.
Operating Expenses. Exploration expenses increased $1,192,936, or 568%, to
$1,402,979 for the quarter ended June 30, 1997, from $210,043 for the quarter
ended June 30, 1996. Of this increase, $995,149 represented the Company's 50%
share of geological and geophysical expenses related to the West Cameron
Seismic Project, and the remainder was principally related to additional
personnel associated with the Company's exploration projects. Production costs
from the one working interest well decreased 20% to $3,735. DD&A expense in the
second quarter of 1997 decreased $3,314, or 2%, to $148,050 from $151,364 for
the second quarter of 1996. The decrease was principally a result of a decrease
of $21,546 in depletion expense, offset by additional depreciation and
amortization of additions to computer equipment and geophysical software.
General and administrative expense in the second quarter of 1997 increased
$187,255, or 72%, to $448,768 from $261,513 for the second quarter of 1996,
principally due to increases in personnel and related costs.
Other Income (Expense). Net other income decreased $25,824, or 37%, to
$44,803 for the three months ended June 30, 1997, compared to net other income
of $70,627, for the three months ended June 30, 1996, principally as a result
of decreased interest income due to the decrease in available cash.
10
<PAGE>
Net Loss. For the quarter ended June 30, 1997, operations resulted in a net
loss of $1,701,400 ($.26 per share) compared to a net loss of $203,947 ($.04
per share) for the comparable period in 1996. The increase in net loss of
$1,497,453, or 734%, was due to decreased revenue of $95,701, increased
operating expenses of $1,375,928, and a decrease in net other income of
$25,824. The $.22 increase in per share loss was also affected by the increased
number of shares of common stock outstanding in the second quarter of 1997
principally due to the conversion of the preferred stock in July 1996.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Oil and Gas Sales. Oil and gas sales increased by $74,577, or 13%, to
$631,323 for the first half of 1997, from $556,746 for the first half of 1996.
The increase was attributable to an increase in production volumes of $93,718
and a decrease in the average prices for oil and natural gas of $19,141. The
price and volume variances from oil and gas in first half 1997, compared to the
same period in 1996, demonstrate the sensitivity of the Company's operations to
price fluctuations and its current dependence on a small number of producing
wells. The following table sets forth information concerning crude oil, and
natural gas sales volumes, average sales prices, and per barrel oil equivalent
("NBOE") operating costs (excluding depreciation, depletion, and amortization
hereinafter referred to as "DD&A") for the Company's exploration and production
activities for indicated periods:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
---------------
1997 1996
------- -------
<S> <C> <C>
Sales volumes:
Natural gas (mcf)....................................... 198,936 148,020
Crude oil (bbl)......................................... 6,209 8,004
NBOE (bbl).............................................. 39,365 32,674
</TABLE>
<TABLE>
<S> <C> <C>
Average sales prices:
Natural gas ($/mcf)...................................... $ 2.50 $ 2.60
Crude oil ($/bbl)........................................ $21.54 $21.50
Lease operating expense ($/NBOE)........................... $ 0.24 $ 0.34
Depletion, depreciation, & amortization ($/NBOE)(1)........ $ 1.17 $ 2.00
</TABLE>
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(1) Excludes depreciation on seismic computer hardware and software of $270,654
and $196,468 for the six months ended June 30, 1997 and 1996, respectively.
Operating Expenses. Exploration expenses increased $1,445,024, or 345%, to
$1,863,667 for the first half of 1997, from $418,643 for the first half of
1996. Of this increase, $995,149 represented the Company's 50% share of
geological and geophysical expenses of the West Cameron Seismic Project, and
the remainder was principally related to additional personnel associated with
the Company's exploration projects. Production costs from the one working
interest well decreased 16% to $9,425. DD&A expense in the first half of 1997
increased $54,964, or 21%, to $316,693 from $261,729 for the first half of 1996
principally as a result of additional depreciation and amortization of
additions to computer equipment and geophysical software. General and
administrative expense in the first six months of 1997 increased $155,978, or
24%, to $804,889 from $648,911 for the six months of 1996, principally due to
increases in personnel and related costs.
Other Income (Expense). Net other income decreased $47,104, or 33%, to
$96,334 for the six months ended June 30, 1997, compared to net other income of
$143,438, for the six months ended June 30, 1996, principally as a result of
decreased interest income due to the decrease in available cash.
Net Loss. For the six months ended June 30, 1997, operations resulted in a
net loss of $2,267,017 ($.34 per share) compared to a net loss of $592,513
($.10 per share) for the comparable period in 1996. The increase in net loss of
$1,674,504, or 283%, is comprised of increased revenue of $26,758, increased
operating expenses of $1,654,158, and a decrease in net other income of
$47,104. The $.24 increase in per share loss was also
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<PAGE>
affected by the increased number of shares of common stock outstanding in the
first half of 1997 principally due to the conversion of the preferred stock in
July 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has generated funds from public and private equity offerings,
cash flow from the Company's operations, and cash payments made to it under
the Fortune Exploration Agreement and the Cheniere Exploration Agreement. The
Company may use its cash for any general corporate purposes except for the
funds advanced by Fortune and Cheniere, which are committed to the project
operations for which they were intended. Sources of funds include
approximately $10.1 million from the sale of securities in 1993, 1994, and
1995, advances in 1995 under the Fortune Exploration Agreement, and $12.0
million, as of July 21, 1997, provided under the Cheniere Exploration
Agreement.
The Company expects that capital needs for 1997 will be satisfied through
cash on hand (including the proceeds from the Offering and internal cash
reserves) and cash available under the Cheniere Exploration Agreement.
Although Cheniere may elect to discontinue its funding of the remaining
payment of $1.5 million now due on July 31, 1997, and thus substantially
reduce its interest in the West Cameron Seismic Project, Cheniere is
responsible for funding 50% of the costs in excess of $13.5 million. The
Company estimates that the costs of seismic data acquisition and processing
and obtaining seismic permits for the West Cameron Seismic Project through
December 31, 1997, will aggregate approximately $18.5 million, of which the
Company's share is $2.5 million and $16.0 million is allocable to Cheniere.
The Company expects that approximately $17.3 million of these costs will have
been incurred through July 31, 1997, of which $14.3 million has been paid. As
of July 21, 1997, Cheniere had advanced $12.0 million and the Company had
funded the remaining $2.3 million. Of the $4.2 million of expected costs
remaining to be paid, Cheniere will be obligated to advance to Zydeco $3.4
million in order to maintain its full 50% interest in the West Cameron Seismic
Project. The Company would pay the remaining $200,000 of such expected costs.
As of July 21, 1997, the Company had approximately $1.1 million in cash. Of
such remaining costs, the Company expects approximately $3.0 million will be
due in August 1997. On July 21, 1997, the Company agreed to grant Cheniere an
extension until July 31, 1997, to fund $1.5 million and until August 8, 1997,
to fund an additional $1.9 million representing its share of these costs. If
Cheniere elects to discontinue funding, or is unable to raise further funds to
pay for its full share of costs of the West Cameron Seismic Project, the
Company will not have sufficient funds to pay all of the costs incurred when
due until it receives the proceeds of the Offering. In either event, the
Company will require funding from the proceeds of the Offering, or other
equity capital infusion or may be required to borrow against its interest in
the Project or sell a portion of its interest. There is no assurance that the
Company will be successful in completing the Offering. The Company does not
presently maintain any credit facilities. In addition, the Company may sell an
interest in the West Cameron Seismic Project to an industry partner in order
to pay the remaining costs of the Project.
To the extent that Cheniere funds its share of such costs, the proceeds of
the Offering are expected to be used to acquire potential prospects in the
West Cameron area and for other general corporate purposes. The Company's
share of the budgeted costs could increase if Cheniere elects to discontinue
funding of the West Cameron Seismic Project. Such additional costs and other
capital needs may be funded from available cash of the Company, the issuance
of additional equity securities, including the exercise of outstanding
warrants and options of the Company, securing additional project partners, or
the sale of prospects, if any, identified by the Company's projects. The
Company may in the future explore the possibility of obtaining a credit
facility in the event the Company increases oil and gas production through the
successful completion of oil and gas wells drilled by the Company. There can
be no assurance that the Company will be successful in securing additional
partners or additional project financing or credit financing.
The Company's current budget for its capital expenditures for 1997 is
approximately $3.0 million, including $2.5 million for West Cameron Seismic
Project costs (prior to any revisions for seismic acquisition costs) and
$393,000 related to the purchase of computer equipment and software. Other
significant additional capital expenditures may include the acquisition of
additional oil and gas leases, the drilling of prospects identified by
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<PAGE>
the Company, the acquisition of interests in producing wells, and other oil
and gas exploration and production related investment opportunities determined
by management and the Board of Directors to be in the interest of the Company.
The amount and timing of these expenditures will be dependent upon numerous
factors including the availability of capital to the Company, availability of
seismic data, the number and type of drilling prospects, if any, identified as
a result of the Company's 3D seismic analysis, the terms under which industry
partners may participate in the Company prospects, and the cost of drilling
and completing wells in the Louisiana Transition Zone and the Timbalier
Trench.
The Company has incurred net losses and negative cash flows from operations
since its inception in 1994, except that cash flow from operating activities
was $26,112 for the six months ended June 30, 1997. The Company does not
expect to generate operating cash flow or net income in 1997. The Company
expects to generate a net loss in 1997, including its 50% share of geological
and geophysical costs of approximately $2.5 million which it expects to incur
on the West Cameron Seismic Project primarily during the third quarter. The
successful efforts method of accounting generally requires that geological and
geophysical expenses be expensed when incurred.
The Company currently maintains a $300,000 bond required to hold its present
federal oil and gas leases. This bond is collateralized by a United States
Treasury Note. In the event the Company determines to act as operator on a
federal offshore lease or is otherwise required to increase its bonding by
federal or state authorities, such additional bonding may require significant
amounts of capital as collateral.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.20+ --Fifth Amendment to the Exploration Agreement between Zydeco
Exploration, Inc. and Cheniere Energy Operating Co., Inc. (formerly
FX Energy, Inc.) dated April 28, 1997 (filed as exhibit 10.20 to
the Company's Registration Statement (#333-27679) on Form S-1
Amendment No. 2).
10.21+ --Sixth Amendment to the Exploration Agreement between Zydeco
Exploration, Inc. and Cheniere Energy Operating Co., Inc. (formerly
FX Energy, Inc.) effective July 21, 1997 (filed as exhibit 10.21 to
the Company's Registration Statement (#333-27679) on Form S-1
Amendment No. 2).
</TABLE>
- --------
+ Incorporated herein by reference to the indicated filing.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the second quarter of 1997.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZYDECO ENERGY, INC.
/s/ Sam B. Myers, Jr.
_____________________________________
Sam B. Myers, Jr.
Chief Executive Officer
(Principal Executive Officer)
/s/ W. Kyle Willis
_____________________________________
W. Kyle Willis
Vice President and Treasurer
(Principal Financial Officer)
Dated: July 28, 1997
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