UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM 10-Q/A
[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
---- ----
<S> <C> <C>
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 289,242,843 275,581,044
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 22,919,165
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 89,716,902 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
---- ----
<S> <C> <C>
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 amortization 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 assets (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 62,123,504 369,949
Borrowings on notes payable 21,000,000 18,000,020
Payments of notes payable (66,215,526) (21,513,999)
(Increase) decrease in deferred financing costs 152,196 (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> 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.
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 MMBLS 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> 6
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> 7
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:
<TABLE>
<CAPTION>
FIRST QUARTER 1996
COMPARED TO
FIRST QUARTER 1995
------------------
<S> <C>
Increase (decrease) in oil and gas revenues
resulting from differences in:
Crude oil and condensate-
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
=======
</TABLE>
<PAGE> 8
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.
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."
<PAGE> 9
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
The following summary table reflects comparative cash flows for the Company
for the three months ended March 31, 1995 and 1996.
<TABLE>
Three Months Ended
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
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>
<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 properties - 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> 10
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 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
<PAGE> 11
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 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 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
<PAGE> 12
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.
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
MMBLS PRICE BBTU PRICE
----- ----- ---- -----
YEAR
----
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 at March 31, 1996. Under
the provisions of the applicable gas balancing agreement, the underproduced
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> 13
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> 14
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/ Robert L. Belk
-------------------------
Robert L. Belk
Senior Vice President and
Chief Financial Officer
Date: May 23, 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/ Robert L. Belk Senior Vice President, Chief Financial May 23, 1996
- ----------------------- Officer and Director (Principal Financial
Robert L. Belk and Accounting Officer)
</TABLE>
