UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-25058
FLORES & RUCKS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 72-1277752
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
8440 JEFFERSON HIGHWAY, SUITE 420
BATON ROUGE, LOUISIANA 70809
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (504) 927-1450
Securities Registered Pursuant to Section 12 (b) of the Act:
COMMON STOCK, $0.01 PAR VALUE
(Title of Class)
Securities Registered Pursuant to Section 12(g) of the Act:
None
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 [ ]
19,550,790 shares of the registrant's Common
Stock were outstanding as of May 8, 1996.
<PAGE> 2
FLORES & RUCKS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
Unaudited)
March 31, December 31,
1996 1995
--------- ----------
<C> <S> <S>
Current assets:
Cash and cash equivalents $ 22,625,698 $ 212,238
Joint interest receivables 1,401,019 390,275
Oil and gas sales receivables 16,579,799 17,546,127
Notes and accounts receivable -- stockholders - 129,129
Prepaid expenses 820,716 390,412
Other current assets 1,078,108 424,824
-------- -------
Total current assets 42,505,340 19,093,005
Oil and gas properties -- full cost method:
Evaluated 289,242,843 75,581,044
Less accumulated depreciation, depletion,
and amortization (128,390,292) 114,040,044)
------------ ------------
160,852,551 161,541,000
Unevaluated properties excluded from
amortization 26,931,287 19,041,148
Other assets:
Furniture and equipment, less accumulated
depreciation of $1,551,686 and $1,258,225
in 1996 and 1995, respectively
2,639,588 2,340,641
Restricted deposits 4,771,385 4,259,182
Deferred financing costs 4,975,778 5,127,974
Deferred tax asset 3,491,136 4,692,263
--------- ---------
Total assets $ 246,167,065 216,095,213
============ ===========
</TABLE>
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
<S> <C> <C>
Current liabilities:
Accounts payable and accrued liabilities $ 24,648,314 $ 15,090,791
Oil and gas sales payable 5,133,260 5,177,277
Accrued interest 5,818,540 2,651,097
--------- ---------
Total current liabilities 35,600,114 2,919,165
Long-term debt 125,176,030 157,391,556
Notes payable to be refinanced under revolving
line of credit - 14,300,000
Other noncurrent liabilities 638,609 638,609
Deferred hedge revenue 752,750 870,333
Stockholders' equity:
Preferred stock, $.01 par value; authorized
10,000,000 shares,
no shares issued or outstanding at March 31, 1996 - -
Common stock, $.01 par value; authorized 100,000,000
shares;issued and outstanding 19,550,790 shares
and 15,044,125 shares at March 31, 1996 and
December 31, 1995, respectively 195,508 150,441
Paid-in capital 6,716,902 27,638,465
Retained earnings (deficit) (5,912,848) (7,813,356)
---------- ----------
Total stockholders' equity 83,999,562 19,975,550
---------- ----------
Total liabilities and stockholders' equity 246,167,065 216,095,213
============= =============
</TABLE>
The accompanying notes to financial statements are an integral part
of these statements.
<PAGE> 3
FLORES & RUCKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
1996 1995
---- ----
<C> <S> <S>
Revenues:
Oil and gas sales $36,812,203 $25,766,517
Plant processing income 16,654 267,499
------ -------
Total revenues 36,828,857 26,034,016
Operating expenses:
Lease operations 8,445,683 6,777,336
Severance taxes 2,885,699 2,204,378
Depreciation, depletion and amortization 14,350,248 10,698,308
---------- ----------
Total operating expenses 25,681,630 19,680,022
General and administrative expenses 3,257,725 3,098,037
Interest expense 4,511,758 4,394,433
Other expense (income) 257,922 (76,417)
------- -------
Net income (loss) before income taxes 3,119,822 (1,062,059)
Income tax expense 1,219,314 -
--------- --------
Net income (loss) $ 1,900,508 $ (1,062,059)
============== ============
Weighted average common shares outstanding 15,688,083 15,040,056
Earnings (loss) per common share $.12 $(.07)
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
<PAGE> 4
FLORES & RUCKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
---- ----
<S> <C> <C>
Operating activities:
Net income (loss) $ 1,900,508 $ (1,062,059)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation, depletion and amozation 14,643,709 10,822,631
Deferred hedge revenue (117,583) (33,334)
Deferred tax asset 1,201,127 -
Changes in operating assets and liabilities:
Accrued interest 1,867,443 4,490,987
Receivables 84,713 156,430
Prepaid expenses (430,304) (176,449)
Other current asset (653,284) (10,660)
Accounts payable and accrued liabilities 9,557,523 5,912,910
Oil and gas sales payable (44,017) 362,327
------- -------
Net cash provided by operating activities 28,009,835 20,462,783
========== ==========
Investing activities:
Additions to oil and gas properties and
furniture and equipment (22,144,346) (17,259,126)
Increase in restricted deposits (512,203) (495,825)
-------- --------
Net cash used in investing activities (22,656,549) (17,754,951)
----------- -----------
Financing activities:
Sale of stock 2,123,504 369,949
Borrowings on notes payable 1,000,000 18,000,020
Payments of notes payable (66,215,526) (21,513,999)
(Increase) decrease in deferred financing
costs 2,196 (32,085)
------- -------
Net cash provided by (used in) financing
activities 17,060,174 (3,176,115)
---------- ----------
Increase (decrease) in cash and cash equivalents 22,413,460 (468,283)
Cash and cash equivalents, beginning of the period 212,238 568,690
------- -------
Cash and cash equivalents, end of the period $ 22,625,698 $ 100,407
============= ==============
Interest paid during the period 3,176,883 $ 234,747
============ ==============
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
<PAGE>
<PAGE> 5
FLORES & RUCKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. General Information
The consolidated financial statements included herein have been
prepared by Flores & Rucks, Inc. (the "Company") without audit
and include all adjustments (of a normal and recurring nature)
which are, in the opinion of management, necessary for the fair
presentation of interim results which are not necessarily
indicative of results for the entire year. The financial
statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's
latest annual report.
2. Earnings Per Share
Earnings per common share are based on the weighted average
number of shares of common stock outstanding for the periods. The
Company had 1,498,835 stock options outstanding as of March 31,
1996. The options were not reflected as common stock equivalents
for the three months ended March 31,1996, as the dilutive effect
caused by the options on earnings per share was less than three
percent. The Company had 760,500 options outstanding as of March
31, 1995, which were not reflected as common stock equivalents
for the three months ended March 31, 1995, as they were
anti-dilutive.
3. Hedging Activities
The Company hedges certain of its production through a master
swap agreement ("Swap Agreement") with Enron Capital & Trade
Resources Corp. ("ECT"). The Swap Agreement provides for separate
contracts tied to the NYMEX light sweet crude oil and natural gas
futures contracts. On April 8, 1996, the Company unwound a
portion of two four-month crude oil hedges which were entered
into during the first quarter of 1996. In addition, on April 12,
1996, the Company unwound a portion of a hedge that was extended
by ECT on March 29, 1996. On April 11, 1996, the Company entered
into an additional gas hedge. The gain or loss realized upon
unwinding these transactions has been deferred and is being
amortized over the original determination period on a
units-of-production basis. The Swap Agreement is settled monthly
based on the differences between contract prices and the average
NYMEX prices for that month applied to the related contract
volumes. To the extent the NYMEX price exceeds the contract
price, the Company pays the spread to ECT, and to the extent the
contract price exceeds the NYMEX price, ECT pays the spread to
the Company. Under the terms of the Swap Agreement, if the
Company's exposure (i.e., the cost to buyout all of the contracts
covered by the Swap Agreement) exceeds $5 million, ECT can
require the Company to establish and maintain a letter of credit
in the amount of such excess, rounded up to the next multiple of
$500,000. As of May 8, 1996, the Company's exposure under all
contracts covered by the Swap Agreement was approximately $3.5
million.
<PAGE> 6
As of March 31, 1996, after giving effect to the aforementioned
transactions, the Company's open forward position with ECT was as follows:
OIL GAS
AVERAGE AVERAGE
Year MBBLS PRICE BBTU PRICE
---- ----- ----- ---- -----
1996 2,075 $18.28 4,870 $1.92
1997 300 $18.55 - -
1998 300 $18.55 - -
1999 300 $18.55 - -
2000 300 $18.55 - -
---- --- ------ ------ ------
Total 3,275 $18.38 4,870 $1.92
The above tables assumes extendible contracts have not been
exercised by ECT. Included in the 1996 swap arrangements is a
three-month term hedge with a three-month option exercisable by
ECT. If ECT exercises its option to extend, total barrels would
increase to 2,375 MBbls in 1996.
<PAGE>
<PAGE> 7
FLORES & RUCKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--(Continued)
4. Common Stock Offering
On March 19, 1996, the Company completed an additional offering of
4,500,000 common shares to the public at $14.75 per share (the "Offering").
Net proceeds of the Offering were approximately $62.2 million, of which
$15.4 million was used to repay a note payable to Shell Offshore, Inc. and
approximately $33.0 million was used to repay all outstanding indebtedness
under the Company's $50 million borrowing based senior revolving bank
credit facility.
<PAGE>
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
The following table reflects certain information with respect to the
Company's oil and gas operations.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1995 1996
---- ----
(dollars in thousands,
except per unit amounts)
<S> <C> <C>
SALES VOLUMES
Oil (MBbls) 1,232 1,558
Gas (MMcf) 2,795 3,310
Oil and Gas (MBOE) 1,698 2,110
REVENUES (1)
Total Oil Revenues $21,268 $30,005
Total Gas Revenues 4,616 10,672
AVERAGE SALES PRICES (1)
Oil (per Bbl) $17.26 $19.25
Gas (per Mcf) 1.65 3.22
Per BOE 15.24 19.28
Severance Taxes $2,204 $2,886
Lease Operating Expenses 6,777 8,446
Lease Operating Expenses per BOE $3.99 $4.00
<FN>
- ---------
(1) Excludes results of hedging activities which decreased revenue recognized in
the three months ended March 31, 1995 and 1996, by $.1 million and $3.9 million,
respectively. Including the effect of hedging activities, the Company's average
oil price per Bbl received was $16.99 and $18.71 in the three months ended March
31, 1995 and 1996, respectively. The average gas price per Mcf received was
$1.73 and $2.31 in the three months ended March 31, 1995 and 1996, respectively.
</FN>
</TABLE>
REVENUES. The following table reflects an analysis of differences in
the Company's oil and gas revenues (expressed in thousands of dollars)
between the three months ending March 31, 1996 and the comparable period in
1995:
First Quarter 1996
Compared to
First Quarter 1995
Increase (decrease) in oil and gas revenues
resulting from differences in:
Crude oil and condensate-
<PAGE> 9
Price $ 3,109
Production 5,627
-----
8,736
Natural gas-
Price 5,206
Production 850
6,056
Plant processing and hedging, net (3,997)
------
Increase in oil and gas revenues $10,795
=======
The Company's total revenues increased approximately $10.8 million, or
42%, to $36.8 million for the three months ended March 31, 1996, from $26.0
million for the comparable period in 1995. Production levels for the three
months ended March 31, 1996, increased 24% to 2,110 MBOE from 1,698 MBOE
for the comparable period in 1995. The Company's average sales prices
(excluding hedging activities) for oil and natural gas for the three months
ended March 31, 1996 were $19.25 per Bbl and $3.22 per Mcf versus $17.26
per Bbl and $1.65 per Mcf in the prior period. Revenues increased by $6.5
million due to the aforementioned production increases and by $8.3 million
as a result of increased oil and gas prices.
These increases were partially offset by a $3.7 million decrease in
hedging revenues and a $0.3 million decrease in plant processing income. In
order to manage its exposure to price risks in the sale of its crude oil
and natural gas, the Company from time to time enters into price hedging
arrangements. See --Other Matters--Energy swap agreements. The Company's
average sales prices (including hedging activities) for oil and natural gas
for the three months ended March 31, 1996, were $18.71 per Bbl and $2.31
per Mcf versus $16.99 per Bbl and $1.73 per Mcf in the prior period. The
Company is also contractually committed to process its gas production from
Main Pass 69 and the East Bay fields under certain processing agreements.
Plant processing income (loss) represents revenues from the sale of natural
gas liquids less the costs of extracting such liquids, which costs include
natural gas shrinkage. Income from plant processing fluctuates primarily as
a result of changes in volumes processed, and changes in prices for natural
gas in comparison to changes in prices for natural gas liquids. Such price
changes are usually not proportionate due to the generally higher price
volatility of natural gas. For the three months ended March 31, 1996, plant
processing income decreased due to natural gas liquid prices remaining
relatively stable, while natural gas prices generally increased.
LEASE OPERATING EXPENSES. On a BOE basis, lease operating expenses
remained relatively unchanged at $4.00 per BOE for the three months ended
March 31, 1996, as compared to $3.99 per BOE in the comparable 1995 period.
Lease operating expenses for the three months ended March 31, 1996, were
$8.4 million, as compared to $6.8 million for the comparable 1995 period.
The change in lease operating expenses in the 1996 period from the
comparable 1995 period can primarily be attributed to the Company's 1996
workover program. Workover expenses for the three months ended March 31,
1996, were $1.1 million. No workovers were performed during the comparable
1995 period. The remaining increase primarily relates to fluctuations in
normal operating expenses, including operating expenses associated with
increased production.
<PAGE> 10
SEVERANCE TAXES. The effective severance tax rate as a percentage of
revenues decreased to 7.8% in the three months ended March 31, 1996, from
8.5% in the comparable 1995 period. The decrease was primarily due to
increased production from new wells on federal leases and from state leases
which were exempt from state severance tax under Louisiana's severance tax
abatement program.
General and administrative expenses. General and administrative
expenses per BOE decreased 15% to $1.54 per BOE in the three months ended
March 31, 1996, from $1.82 per BOE in the comparable 1995 period, primarily
as a result of increased production in the 1996 period. In the three months
ended March 31, 1996, general and administrative expenses were $3.3
million, as compared to $3.1 million in the comparable 1995 period. The
increase in general and administrative expenses is primarily due to costs
associated with increased corporate staffing, partially offset by an
increase in the capitalization of the salaries paid to employees directly
engaged in the acquisition, exploration and development of oil and gas
properties during 1996.
DEPRECIATION, DEPLETION, AND AMORTIZATION EXPENSE. For the three
months ended March 31, 1996, depreciation, depletion and amortization
("DD&A") expense was $14.4 million, as compared to $10.7 million for the
comparable 1995 period. On a BOE basis, DD&A for the three months ended
March 31, 1996, was $6.80 per BOE, as compared to $6.30 per BOE for the
comparable 1995 period. This variance was primarily related to the
Company's increased production and related capital cost additions from the
1995 and 1996 drilling programs, partially offset by the increase to proved
reserves resulting from the programs.
INTEREST EXPENSE. For the three months ended March 31, 1996, interest
expense was $4.5 million, as compared to $4.4 million in the comparable
1995 period. The increase in interest expense is primarily due to increased
borrowings under the Company's $50 million borrowing based senior revolving
bank credit facility (the "Revolving Credit Facility"). This increase was
partially offset by interest which was capitalized during the three months
ended March 31, 1996, of $.7 million, as compared to $.5 million in the
1995 period. Also, during March 1996, the Company repaid a portion of its
debt with proceeds from the issuance of 4,500,000 shares of common stock at
$14.75 per share on March 19, 1996 (the "Offering"). See "--Liquidity and
Capital Resources." Other (income) expense.
Other (income) expense decreased by $.3 million in the three months ended
March 31, 1996, from the comparable 1995 period. This decrease relates primarily
to the Company's accrual of a $.4 million loss associated with the
classification of a portion of its future swap arrangements as speculative at
March 31, 1996.
INCOME TAX EXPENSE (BENEFIT). For the three months ended March 31
1996, the Company recorded income tax expense of $1.2 million. During the
comparable 1995 period, no income tax benefit was recorded due to a
valuation allowance which existed at March 31, 1995.
NET INCOME. Due to the factors described above, net income increased
from a net loss of $1.1 million for the three months ended March 31, 1995,
to net income of $1.9 million for the comparable period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
<PAGE> 11
The following summary table reflects comparative cash flows for the
Company for the three months ended March 31, 1995 and 1996.
<TABLE>
<CAPTION>
March 31,
1995 1996
---- ----
(in thousands)
<S> <C> <C>
Net cash provided by operating activities $ 20,463 $ 28,010
Net cash used in investing activities (17,755) (22,657)
Net cash provided by (used in) financing activities (3,176) 17,060
</TABLE>
For the three months ended March 31, 1996, net cash provided by
operating activities increased by $7.5 million. This increase relates
primarily to increased revenues, partially offset by increases in lease
operating expenses, severance taxes and general and administrative
expenses. In addition, the Company paid interest of $3.2 million during the
three months ended March 31, 1996, as compared to $.2 million in the
comparable 1995 period. Finally, accounts payable increased by $9.6 million
during the 1996 period as compared to an increase of $5.9 million in the
comparable 1995 period. The increase in accounts payable is primarily a
result of variances in vendors payable resulting from a more aggressive
drilling program in the 1996 period.
Cash used in investing activities during the three months ended March
31, 1996, increased to $22.7 million as compared to $17.8 million in the
comparable 1995 period, reflecting the more aggressive 1996 drilling
program.
Financing activities during the three months ended March 31, 1996,
generated cash of $17.1 million, as compared to a use of cash of $3.2
million in the comparable 1995 period. The increase in cash during the 1996
period is primarily a result of the issuance of 4,500,000 shares of common
stock at $14.75 per share on March 19, 1996, of which the Company's net
proceeds totaled approximately $62.2 million. Of these proceeds,
approximately $15.4 million was used to repay a note payable to Shell
Offshore, Inc. and $33.0 million was used to repay all outstanding
indebtedness under the Revolving Credit Facility.
CAPITAL REQUIREMENTS. The Company's expenditures for property
acquisition, exploration and development for the three months ended March
31, 1995 and 1996, were as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
1995 1996
---- ----
(in thousands)
<S> <C> <C>
Property acquisition costs of evaluated properties $ 20 $ -
Property acquisition costs of unevaluated propertie - 1,082
Exploration costs (drilling and completion) 4,019 5,269
Development costs (drilling and completion) 11,233 10,878
Abandonment costs 15 140
Geological and geophysical costs 449 422
Capitalized interest and general and administrative
costs 554 1,245
Other capital costs 678 2,516
--- -----
$16,968 $21,552
======= =======
</TABLE>
<PAGE> 12
A primary component of the Company's strategy is to continue its
exploration and development activities. The Company intends to finance
capital expenditures related to this strategy primarily with funds provided
by operations, proceeds from the Offering and borrowings under the
Revolving Credit Facility. During the three months ended March 31, 1996,
the Company spent $16.1 million on exploration and development drilling and
$.4 million on 3-D seismic surveys and other geological and geophysical
costs. Other capital costs relate primarily to capital costs incurred on
production facilities and flowlines. The Company is also a party to two
escrow agreements which provide for the future plugging and abandonment
costs associated with oil and gas properties. The first agreement, related
to East Bay, requires monthly deposits of $100,000 through June 30, 1998,
and $350,000 thereafter until the balance in the escrow account equals $40
million, unless the Company commits to the plug and abandonment of a
certain number of wells in which case the increase will be deferred. The
second agreement, related to Main Pass 69, required an initial deposit of
$250,000 and monthly deposits thereafter of $50,000 until the balance in
the escrow account equals $7,500,000. As of March 31, 1996, the escrow
balances totaled $4.8 million.
The Company has budgeted $80 million in 1996 for drilling activities.
The Company currently intends to utilize the remainder of its $107 million
1996 capital expenditure budget for seismic purchases, purchases of
producing and nonproducing oil and gas leaseholds and other capital
expenditures.
In addition to developing its existing reserves, the Company attempts
to increase its reserve base, production and operating cash flow by
engaging in strategic acquisitions of proved producing and nonproducing
properties. In order to finance any possible future acquisitions, the
Company may seek to obtain additional debt or equity financing or to sell
production payments or obtain other non-recourse financing relating to the
properties to be acquired. The availability and attractiveness of these
sources of financing will depend upon a number of factors, some of which
will relate to the financial condition and performance of the Company, and
some of which will be beyond the Company's control, such as prevailing
interest rates, oil and gas prices and other market conditions. There can
be no assurance that the Company will bid for or acquire any producing
properties. In addition, the ability of the Company to incur additional
indebtedness and grant security interests with respect thereto will be
limited by the terms of the Indenture governing the Company's $125,000,000
of 13-1/2% Senior Notes due December 1, 2004 (the "Senior Notes").
The Company's other primary capital requirements in 1996 will be for
the payment of interest on its Senior Notes (expected to total $16.9
million) and on any borrowings the Company may incur under the Revolving
Credit Facility. The Company expects to fund its debt service obligations
with operating cash flow.
LIQUIDITY. The ability of the Company to satisfy its obligations and
fund planned capital expenditures will be dependent upon its future
performance, which will be subject to prevailing economic conditions,
including oil and gas prices, and to financial and business conditions and
other factors, many of which are beyond its control, supplemented if
necessary with existing cash balances, proceeds from the Offering and
borrowings under the Revolving Credit Facility. The Company expects that
its cash flow from operations, proceeds from the Offering and availability
under the Revolving Credit Facility will be adequate to execute its 1996
business plan. However, no assurance can be given that the Company will not
experience liquidity problems from time to time in the future or on a
long-term basis. If the Company's cash flow from operations, proceeds from
the Offering and availability
<PAGE> 13
under the Revolving Credit Facility are not sufficient to satisfy its cash
requirements, there can be no assurance that additional debt or equity
financing will be available to meet its requirements.
The Revolving Credit Facility has a borrowing base of $50 million. The
lenders may redetermine the borrowing base at their option once within any
12-month period as well as on scheduled redetermination dates as outlined
in the Revolving Credit Facility. The borrowing base automatically reduces
by an amount equal to one-sixteenth (1/16) of the borrowing base in effect
on each quarter beginning March 31, 1997, unless the Company requests and
is granted a one-year deferral of such reductions.
The Company's ability to draw additional amounts on the Revolving
Credit Facility is limited to the extent that adjusted consolidated net
tangible assets (as defined) minus certain net production revenue (as
defined) exceeds 100% (110% after June 1, 1996) of all indenture
indebtedness (as defined). Adjusted consolidated net tangible assets is
determined quarterly, utilizing certain financial information, and is
primarily based on a quarterly estimate of the present value of future net
revenues of the Company's proved oil and gas reserves. Such quarterly
estimates utilize the most recent year end oil and gas prices and vary
based on additions to proved reserves and net production. As of May 8,
1996, the Company's outstanding balance on its Revolving Credit Facility
was $2.0 million, all of which represented a letter of credit associated
with future abandonment obligations. The Company had remaining availability
of $48.0 million under the Revolving Credit Facility as of May 8, 1996.
EFFECTS OF LEVERAGE. The Company is highly leveraged with outstanding
indebtedness of approximately $125 million as of March 31, 1996. The
Company's level of indebtedness has several important effects on its future
operations, including (i) a substantial portion of the Company's cash flow
from operations must be dedicated to the payment of interest on its
indebtedness and will not be available for other purposes, (ii) the
covenants contained in the Indenture related to the Senior Notes require
the Company to meet certain financial tests, and other restrictions which
may limit its ability to borrow additional funds or to dispose of assets
and may affect the Company's flexibility in planning for, and reacting to,
changes in its business, including possible acquisition activities and
(iii) the Company's ability to obtain additional financing in the future
for working capital, expenditures, acquisitions, general corporate purposes
or other purposes may be impaired.
During the three months ended March 31, 1996, Company made aggregate
debt service payments of approximately $48.4 million, including the
repayment of debt with a portion of the proceeds from the Offering. During
1996, debt service associated with the Senior Notes is expected to be
approximately $16.9 million.
Pursuant to the Indenture, the Company may not incur any indebtedness
other than permitted indebtedness (as defined in the Indenture) unless the
Company's consolidated fixed charge coverage ratio (as defined in the
Indenture) for the four full fiscal quarters preceding the proposed new
indebtedness is greater than 2.5 to 1.0 (2.75 to 1.0 if the indebtedness is
<PAGE> 14
incurred after June 1, 1996, and 3.0 to 1.0 if incurred after December
1, 1997) after giving proforma effect to the proposed new indebtedness, the
application of such indebtedness and other significant transactions during
the period. In addition, the Company's adjusted consolidated net tangible
assets (as defined in the Indenture) must be greater than 125% (150% after
June 1, 1996) of indebtedness after giving effect to the proposed new
indebtedness and related transactions. As of March 31, 1996, the Company's
consolidated fixed charge coverage ratio was 4.77 to 1.0 for the preceding
four quarters. The Company's adjusted consolidated net tangible assets was
218% of indebtedness as of March 31, 1996. If the ratio of adjusted
consolidated net tangible assets to indebtedness falls below 100% (110%
after June 1, 1996), the Company may be required to buy back a portion of
the Senior Notes.
In accordance with the terms of the Indenture, if the Company disposes
of oil and gas assets, it must apply such proceeds to permanently pay down
indebtedness other than the Senior Notes or within 270 days of the asset
sale, purchase additional oil and gas properties to replace the properties
sold. If proceeds not applied as indicated above exceed $10 million, the
Company shall be required to offer to purchase outstanding Senior Notes or
other pari passu indebtedness in an amount equal to the unapplied proceeds.
The Company believes it is currently in compliance with all covenants
contained in the Indenture and has been in compliance since the issuance of
the Senior Notes.
The Company's ability to meet its debt service obligations and to
reduce its total indebtedness will be dependent upon the Company's future
performance, which will be subject to oil and gas prices, general economic
conditions and to financial, business and other factors affecting the
operations of the Company, many of which are beyond its control. There can
be no assurance that the Company's future performance will not be adversely
affected by such economic conditions and financial, business and other
factors.
OTHER MATTERS
ENERGY SWAP AGREEMENTS. On June 30, 1993, the Company entered into a
Master Energy Price Swap Agreement (the "Swap Agreement") with Enron
Capital & Trade Resources Corp. ("ECT"), pursuant to which the Company and
ECT enter into energy price swap arrangements from time to time. These
arrangements obligate the Company or ECT to make payments to the other at
the end of a determination period based on the difference between a
specified fixed price and an average of floating prices over the
determination period, applied to a specified quantity of crude oil or
natural gas. All of the Company's currently outstanding swap arrangements
use a floating price for crude oil based on NYMEX light sweet crude oil
futures contracts. Under the terms of the Swap Agreement, if the Company's
net exposure exceeds $5.0 million, ECT can require the Company to establish
and maintain a letter of credit for the amount of such excess, rounded up
to the next multiple of $500,000. Net exposure is based upon the amount by
which the Company's payment obligations to ECT under energy price swap
arrangements under the Swap Agreement exceed the payment obligations of ECT
to the Company under such arrangements. As of May 8, 1996, the Company's
net exposure to ECT under all contracts covered by the Swap Agreement was
approximately $3.5 million.
<PAGE> 15
On April 8, 1996, the Company unwound a portion of two four-month
crude oil hedges which were entered into during the first quarter of 1996.
In addition, on April 12, 1996, the Company unwound a portion of a hedge
that was extended by ECT on March 29, 1996. On April 11, 1996, the Company
entered into an additional gas hedge. As of March 31, 1996, after giving
effect to the above transactions, the Company's open forward position was
as follows:
OIL GAS
--- ---
AVERAGE AVERAGE
YEAR MBBLS PRICE BBTU PRICE
---- ----- ----- ---- -----
1996 2,075 $18.28 4,870 $1.92
1997 300 $18.55 - -
1998 300 $18.55 - -
1999 300 $18.55 - -
2000 300 $18.55 - -
---- --- ------ -----
Total 3,275 $18.38 4,870 $1.92
The above table assumes extendible contracts have not been exercised
by ECT. Included in the 1996 swap arrangements is a three-month term hedge
with a three-month option exercisable by ECT. If ECT exercises its option
to extend, total barrels would increase to 2,375 MBbls in 1996.
As a result of hedging activity under the Swap Agreement, on a BOE
basis, the Company estimates that 51% (56% assuming ECT exercises its
option to extend such arrangements) of its estimated remaining 1996
production which is classified as proved reserves as of March 31, 1996,
will not be subject to price fluctuation for 1996.
Currently, it is the Company's intention to commit no more than 50% of
its total annual production on a BOE basis to such arrangements. Moreover,
under the Revolving Credit Facility, the Company is prohibited from
committing more than 75% of its production estimates for the next 24 months
to such arrangements at any point in time. As the current swap agreements
expire, the portion of the Company's oil and natural gas production which
is subject to price fluctuations will increase significantly, unless the
Company enters into additional hedging transactions.
Despite the measures taken by the Company to attempt to control price
risk, the Company remains subject to price fluctuations for natural gas and
oil sold in the spot market. Prices received for natural gas sold on the
spot market are volatile due primarily to seasonality of demand and other
factors beyond the Company's control. Domestic oil prices generally follow
worldwide oil prices which are subject to price fluctuations resulting from
changes in world supply and demand. While the price the Company receives
for its oil and natural gas production has significant financial impact on
the Company, no prediction can be made as to what price the Company will
receive for its oil and natural gas production in the future.
GAS BALANCING. It is customary in the industry for various working
interest partners to produce more or less than their entitlement share of
natural gas from time to time. The Company's net overproduced position
decreased from 1,080,726 Mcf at December 31, 1995, to 1,014,906 Mcf
<PAGE> 16
at March 31, 1996. Under the provisions of the applicable gas
balancing agreement, the un derproduced party can take up to 50% of the
Company's entitled share of gas production in future months to eliminate
the imbalance. During the make-up period, the Company's gas revenues will
be adversely affected, minimized by an unjust enrichment clause contained
in the gas balancing agreement. The Company recognizes revenue and
imbalance obligations under the sales method of accounting.
<PAGE>
<PAGE> 17
FLORES & RUCKS, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
[A] Exhibits
None
[B] Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended March 31, 1996.
<PAGE>
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
FLORES & RUCKS, INC.
By: /s/ James C. Flores
James C. Flores
Chairman and Chief Executive Officer
Date: May 14, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
s/ James C. Flores Chairman and Chief Executive Officer May 14, 1996
- -----------------------
James C. Flores
/s/ Robert L. Belk Senior Vice President, Chief Financial May 14, 1996
- ----------------------- Officer and Director (Principal Financial
Robert L. Belk and Accounting Officer)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the consolidated balance sheets and consolidated statements of operation
found on pages 3 and 4 of the Company's Form 10-Q for the year-to-date, and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 22,626
<SECURITIES> 0
<RECEIVABLES> 17,981
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 42,505
<PP&E> 316,174
<DEPRECIATION> 128,390
<TOTAL-ASSETS> 246,167
<CURRENT-LIABILITIES> 35,600
<BONDS> 125,176
<COMMON> 196
0
0
<OTHER-SE> 83,804
<TOTAL-LIABILITY-AND-EQUITY> 246,167
<SALES> 36,829
<TOTAL-REVENUES> 36,829
<CGS> 11,331
<TOTAL-COSTS> 28,939
<OTHER-EXPENSES> 258
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,512
<INCOME-PRETAX> 3,120
<INCOME-TAX> 1,219
<INCOME-CONTINUING> 1,901
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,901
<EPS-PRIMARY> .12
<EPS-DILUTED> 0
</TABLE>
