<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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 : 0-26444
FORCENERGY INC
(Exact name of registrant as specified in its charter)
Delaware 65-0429338
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2730 S.W. 3rd Avenue, Suite 800
Miami, Florida
33129-2356
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (305) 856-8500
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 twelve 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 November 1, 1999, there were 24,756,349 shares of the
registrant's Common Stock, $.01 par value outstanding.
<PAGE> 2
FORCENERGY INC
DEBTOR-IN-POSSESSION
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements (Unaudited)
a) Consolidated Balance Sheets - September 30, 1999 and
December 31, 1998............................................................. 1
b) Consolidated Statements of Operations - Three months and nine
months ended September 30, 1999 and 1998...................................... 2
c) Consolidated Statements of Cash Flows - Nine months ended
September 30, 1999 and 1998................................................... 3
d) Notes to Consolidated Financial Statements.................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports of Form 8-K................................................... 16
</TABLE>
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. The words "anticipate," "believe," "expect," "plan,"
"intend," "estimate," "project," "will," "could," "may," "predict" and similar
expressions are intended to identify forward-looking statements. All statements
other than statements of historical facts included in this Form 10-Q, including
statements under "Management's Discussion and Analysis of Financial Condition
and Results of Operations" regarding planned capital expenditures, the
availability of capital to fund capital expenditures, estimates of proved
reserves, the Company's financial position, business strategy and other plans
and objectives for future operations, are forward-looking statements. Although
the Company believes that the expectations reflected in the forward-looking
statements are reasonable, it can give no assurance that actual results may not
differ materially from those in the forward-looking statements herein for
reasons including, without limitation, petitions filed or actions taken in
connection with its bankruptcy proceedings, the effect of competition, the
level of petroleum industry exploration and production expenditures, world
economic conditions, prices of and the demand for crude oil and natural gas,
drilling activity, weather, and the legislative environment in the United
States and other countries, OPEC policy, conflict in the Middle East and other
major petroleum producing regions and the condition of the capital and equity
markets. In addition, reserve engineering is a subjective process of estimating
and underground accumulations of oil and gas, and reserve estimates are
generally different from quantities of oil and gas that are ultimately
recovered. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by such factors.
<PAGE> 3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FORCENERGY INC
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS)
----------------------------------
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ---------------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash................................................................ $ 73,849 $ 1,690
Accounts receivable, net............................................ 40,959 28,433
Other current assets................................................ 29,273 19,668
------------- ---------------
Total current assets............................................ 144,081 49,791
------------- ---------------
PROPERTY, PLANT AND EQUIPMENT, at cost (full cost
method) net of accumulated depletion, depreciation
and amortization.................................................... 563,906 610,948
------------- ---------------
OTHER ASSETS............................................................. 11,934 17,729
------------- ---------------
$ 719,921 $ 678,468
============= ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT:
LIABILITIES NOT SUBJECT TO COMPROMISE:
CURRENT LIABILITIES:
Accounts payable.................................................... $ 12,339 $ --
Accrued liabilities................................................. 34,735 --
------------- ---------------
Total current liabilities....................................... 47,074 --
------------- ---------------
LIABILITIES SUBJECT TO COMPROMISE:
Accounts payable.................................................... 69,375 42,183
Accrued liabilities................................................. 12,847 64,837
Long-term debt...................................................... 689,473 671,700
------------- --------------
Total liabilities subject to compromise......................... 771,695 778,720
------------- --------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, $.01 par value; 5,000,000 shares
authorized; none issued or outstanding.......................... $ -- $ --
Common stock, $.01 par value; 50,000,000 shares
authorized; 24,756,346 and 24,747,445 issued
and outstanding at September 30, 1999 and December 31, 1998,
respectively.................................................... 248 247
Capital in excess of par value...................................... 346,445 346,135
Accumulated deficit................................................. (445,541) (446,634)
------------- --------------
Total stockholders' deficit..................................... (98,848) (100,252)
------------- --------------
$ 719,921 $ 678,468
============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 4
FORCENERGY INC
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
---------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales........................... $ 67,172 $ 67,081 $ 191,768 $ 209,459
Other....................................... 426 817 725 1,172
----------- ----------- ----------- -----------
67,598 67,898 192,493 210,631
----------- ----------- ----------- -----------
EXPENSES:
Lease operating............................. 18,563 25,327 67,269 73,400
Depletion, depreciation and amortization 26,993 37,327 90,661 110,928
Production taxes............................ 1,128 1,205 3,118 3,377
General and administrative.................. 3,364 3,853 10,177 12,973
Reorganization expenses..................... 2,420 -- 3,446 --
----------- ------------ ----------- -----------
52,468 67,712 174,671 200,678
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS........................... 15,130 186 17,822 9,953
Interest and other income........................ 875 255 8,100 1,042
Interest expense, net of amounts capitalized..... (6,608) (13,018) (24,150) (34,935)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES................ 9,397 (12,577) 1,772 (23,940)
Income tax benefit/(provision)................... (679) 0 (679) 4,153
----------- ----------- ----------- -----------
NET INCOME (LOSS)................................ $ 8,718 $ (12,577) $ 1,093 $ (19,787)
============ =========== =========== ===========
NET INCOME (LOSS) PER SHARE:
Basic....................................... $ .35 $ (.51) $ .04 $ (.79)
=========== =========== =========== ===========
Diluted..................................... $ .35 $ (.51) $ .04 $ (.79)
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic....................................... 24,756 24,703 24,753 24,903
Diluted..................................... 24,756 24,703 24,753 24,903
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
FORCENERGY INC
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
1999 1998
--------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................... $ 1,093 $ (19,787)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities before reorganization expenses:
Depletion, depreciation and amortization............................. 91,716 112,421
Deferred taxes....................................................... 679 (4,153)
Equity in net income of affiliate.................................... (921) (649)
Reorganization expenses.............................................. 3,446 --
(Increase) decrease in accounts receivable........................... (12,526) 11,845
(Increase) decrease in other current assets.......................... (9,605) 4,761
Increase (decrease) in accounts payable and accrued liabilities
(including accounts payable and accrued liabilities subject to
compromise).......................................................... 21,894 (2,192)
--------------- ---------------
Net cash provided by operating activities before reorganization expenses.. 95,776 102,246
Reorganization expenses.............................................. (3,446) --
--------------- ---------------
Net cash provided by operating activities after reorganization expenses... 92,330 102,246
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions......................................................... (794) (53,868)
Capital expenditures................................................. (43,181) (226,025)
Proceeds from sale of assets......................................... 60 1,246
Decrease in other assets............................................. 5,661 2,453
Dividends received from affiliate.................................... -- 1,380
--------------- ---------------
Net cash used in investing activities..................................... (38,254) (274,814)
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under senior credit facility.............................. 26,473 314,300
Repayments under senior credit facility.............................. (8,700) (155,564)
Issuance of common stock............................................. 310 406
Other................................................................ -- (116)
--------------- ---------------
Net cash provided by financing activities................................. 18,083 159,026
--------------- ---------------
Net increase (decrease) in cash........................................... 72,159 (13,542)
Cash at beginning of period............................................... 1,690 16,048
--------------- ---------------
Cash at end of period..................................................... $ 73,849 $ 2,506
=============== ===============
Supplemental disclosures of cash flow information:
Cash paid for interest:............................................. $ 14,242 $ 26,709
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
FORCENERGY INC
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND CHAPTER 11 BANKRUPTCY
The accompanying unaudited interim consolidated financial statements
include the accounts of Forcenergy Inc and its subsidiaries (the "Company")
after elimination of intercompany balances and transactions.
The unaudited interim consolidated financial statements of the Company
for the periods indicated herein have been prepared by the Company pursuant to
the rules and regulations of the Securities and Exchange Commission and in
accordance with generally accepted accounting principles for interim financial
reporting. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring accruals, necessary to present fairly the information in
the accompanying consolidated financial statements have been included. Interim
period results are not necessarily indicative of the results of operations or
cash flows for a full year period. Certain minor amounts previously reported in
the financial statements of the prior periods have been reclassified here to
conform to the current period presentation. Capitalized terms not defined
herein have the meanings as defined in the notes to the consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
On March 21, 1999 (the "Petition Date"), the Company and its
wholly-owned subsidiary, Forcenergy Resources Inc., filed a voluntary petition
for relief under Chapter 11 of the U.S. Bankruptcy Code ("Chapter 11") in order
to facilitate the restructuring of the Company's long-term debt, revolving
credit, trade and other obligations. The filing was made in the U.S. District
Court for the Eastern District of Louisiana in New Orleans (the "Bankruptcy
Court"). As a result of the bankruptcy filing, all of the Company's liabilities
incurred prior to the Petition Date, including secured debt, are subject to
compromise. The Company continues to operate as a debtor-in-possession subject
to the Bankruptcy Court's supervision and orders.
On August 23, 1999, the Company filed a proposed plan of
reorganization ("the Plan") with the Bankruptcy Court. The Plan sets forth the
means for satisfying claims, including liabilities subject to compromise and
equity interests in the Company. The Plan as proposed will result in, among
other things, substantial dilution to existing security holders as a result of
the issuance of new equity securities to creditors. The consummation of any
plan of reorganization will require approval of the Bankruptcy Court. The Plan
was amended on October 1, 1999. In an October 22, 1999, adequacy hearing, the
Bankruptcy Court approved the associated disclosure statement to the Plan and
set a court date of December 13, 1999, for the confirmation hearing.
At this time, it is not possible to predict the outcome of the
bankruptcy proceedings, in general, or the effect on the business of the
Company or on the interests of creditors or stockholders.
4
<PAGE> 7
FORCENERGY INC
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying financial statements have been prepared on a going
concern basis which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business. As a
result of the bankruptcy filing and related events, there is no assurance that
the carrying amounts of assets will be realized or that liabilities will be
liquidated or settled for the amounts recorded. In addition, a plan of
reorganization, or rejection thereof, could change the amounts reported in the
financial statements. As a result, there is substantial uncertainty about the
Company's ability to continue as a going concern. The ability of the Company to
continue as a going concern is dependent upon confirmation of a plan of
reorganization, obtaining adequate sources of capital and the ability to
sustain positive results of operations and cash flows sufficient enough to
continue to explore for and develop oil and gas reserves.
The Company makes substantial capital expenditures for the exploration
and development of oil and natural gas reserves in the ordinary course of
business. Historically, the Company has financed its capital expenditures, debt
service and working capital requirements with cash flow from operations, public
offerings of equity securities, private offerings of debt, borrowings under its
senior credit facility and other financings. Cash flow from operations is
sensitive to the prices the Company receives for its oil and natural gas
production. Greater than expected hydrocarbon production declines associated
with the reduction in capital spending during the bankruptcy process, or an
extended decline in oil and gas prices, could result in less than anticipated
cash flow from operations in the current fiscal year and in later years which
could have a material adverse effect on the Company.
Management's plans are to continue to incur capital expenditures with
the goal of increasing production and reserves. The Company has accumulated
approximately $73.9 million in cash since the Petition Date and may utilize
that cash, subject to restrictions and provisions of a court-approved cash
collateral order, to fund its operations, including planned capital
expenditures, during the pendency of the bankruptcy proceedings. The ability to
incur capital expenditures, sell properties and obtain additional financing is
subject to the approval and ongoing supervision of the Bankruptcy Court. There
is no assurance that adequate funds can be obtained on a timely basis or that
the Bankruptcy Court will approve such transactions.
NOTE 2 - EARNINGS PER SHARE
There are no reconciling items between basic and diluted earnings per
share in either periods presented.
NOTE 3 - STOCK OPTION PLANS
On February 1, 1999, the Board of Directors of the Company authorized
a repricing of stock options whereby all options then outstanding were
cancelled and reissued with an exercise price of $1.275 per share. All other
terms of options previously granted to non-executives remained unchanged. The
number of options held by executives and directors was reduced by approximately
114,000 shares in conjunction with the repricing.
The proposed plan of reorganization provides for the cancellation of
these options upon confirmation of the Plan by the Bankruptcy Court.
5
<PAGE> 8
FORCENERGY INC
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company has historically entered into various financial
instruments with off-balance-sheet risk, in the normal course of business, to
reduce its exposure to changing commodity prices. The Company normally utilizes
these arrangements for portions of its current oil and gas production to
achieve more predictable cash flows and to reduce its exposure to fluctuations
in oil and gas prices for varying time periods. The remaining portion of
current production is not hedged so as to provide the Company the opportunity
to benefit from increases in prices on that portion of the production, should
price increases materialize. The Company had various instruments in place on
the Petition Date, all of which were cancelled at the option of the
counterparties subsequent to the Company's bankruptcy filing. The Company
received $5.5 million (fair market value of the contracts at the time) in cash
in April 1999, in final settlement of the contracts. The settlements were
accrued in the quarter ended March 31, 1999, and are included in Interest and
Other Income.
The Company subsequently entered into several new financial hedging
contracts ("SWAPS") with respect to its future oil and natural gas production.
Under these agreements, monthly settlements are based on the differences
between the prices specified in the instrument and/or the settlement price of
certain oil and gas futures contracts quoted on the New York Mercantile
Exchange ("NYMEX"). In instances where the applicable settlement price is less
than the price specified in the contract, the Company receives a settlement
based on the difference and in instances where the applicable settlement price
is higher than the specified prices, the Company pays an amount based on the
difference. SWAP contracts in place at September 30, 1999 on future oil
production were as follows:
<TABLE>
<CAPTION>
Volume in NYMEX Contract
Bbl's Per Day Price Per Bbl
------------- -------------
<S> <C> <C>
October 1999 - December 1999(1) 5,000 $18.09
October 1999 - January 2000(1) 3,000 21.27
October 1999 - January 2000(2) 1,000 22.19
October 1999 - March 2000(1) 2,000 21.85
</TABLE>
These contracts may be extended by the counterparty, for the periods
below, by making a one-time election immediately prior to the expiration of the
current contract periods.
(1) through June 2000
(2) through May 2000
6
<PAGE> 9
SWAP contracts in place at September 30, 1999 on future natural gas
production were follows:
<TABLE>
<CAPTION>
Volume in Weighted Average
Mcf NYMEX Contract
Per Day Price Per Mcf
--------- ---------------
<S> <C> <C>
October 1999 30,000 $2.77
October 1999 - December 1999(1) 10,000 3.19
November 1999 30,000 2.90
December 1999 40,000 3.01
January 2000 40,000 3.04
February 2000 40,000 2.87
</TABLE>
(1) This contract is extendable at the option of the counterparty
through March 2000.
The counterparty for all of these natural gas hedge contracts has an
one-time option to combine the above into a single extension for 50,000 Mcf per
day at $2.80 per Mcf from March thru June 2000.
At September 30, 1999, the Company had $7.5 million in collateral
associated with the above contracts on deposit with the counterparty. This cash
collateral is included in Other Current Assets. The instruments contain an
element of credit risk and price risk. The Company attempts to minimize the
extent of credit risk by limiting the counterparties to major banks or
significant industry participants. All of these arrangements are entered into on
a no-cost basis and are settled monthly. The Company accounts for the swap
arrangements as hedging activities and, accordingly, gains or losses are
included in oil and gas revenues for the period the production was hedged. The
Company recorded hedging gains of $6.0 million and $9.6 million in the nine
month periods ended September 30, 1999 and 1998, respectively, associated with
contract's in place during those periods. The Company's future exposure under
the hedging instruments in place at September 30, 1999 (i.e. estimated future
loss assuming that NYMEX prices remain at current levels) is estimated to be
approximately $4.7 million ($13.3 million assuming extension options are
exercised by the counterparty).
As an additional hedge on natural gas prices, the Company has also
committed to fixed prices on approximately 58MMCF per day of its estimated
fourth quarter 1999 natural gas production at an average price of $2.53 per Mcf
and 26 MMCF per day of its estimated first quarter 2000 natural gas production
at an average of $2.69 per Mcf under existing sales contracts with the
Company's purchaser of physical production. The Company may enter into
additional arrangements in the future as part of its strategy to reduce
exposure to commodity price fluctuations.
In June 1998 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133"). The statement
requires companies to report the fair market value of derivatives on the
balance sheet and record in income or other comprehensive income, as
appropriate, any changes in the fair value of the derivative. Statement No. 133
will become effective with respect to the Company on January 1, 2001. The
Company is currently evaluating the impact of the statement.
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
---------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Production in thousands:
Liquids (MBbls) (1)......................... 1,888 2,039 5,995 6,414
Natural Gas (MMcf).......................... 13,826 20,514 48,400 58,798
Total (MBOE)................................ 4,192 5,458 14,062 16,214
Average realized sales prices (2)
Liquids (per Bbl) (1)....................... $ 17.91 $ 12.60 $ 14.49 $ 12.85
Natural gas (per Mcf)....................... 2.42 2.02 2.19 2.16
Expenses (per BOE):
Lease operating............................. $ 4.43 $ 4.64 $ 4.78 $ 4.53
Depletion, depreciation and
amortization............................... 6.45 6.84 6.45 6.84
General and administrative, net(3).......... .80 .71 .72 .80
</TABLE>
- -------
(1) Includes crude oil, condensate and natural gas liquids.
(2) Net of hedging results (but excluding contract cancellation settlements)
(3) Net of amounts capitalized, and exclusive of reorganization expenses.
COMPARISON OF THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND
SEPTEMBER 30, 1998
Operating Income and Net Income/Loss. The Company had operating income
of $15.1 million for the three months ended September 30, 1999, compared to
$186,000 for the same period during 1998. Net income for the three months ended
September 30, 1999, was $8.7 million compared to a net loss of $12.6 million
reported for the same period last year. Several factors contributed to the
increase in operating income. Higher realized liquids and natural gas prices
were the main contributor to the earnings improvement. Lower production
volumes, and a lower DD&A rate, contributed to a lower 1999 depletion,
depreciation and amortization expense and an increase in the profit margin.
Operating income also improved because of lower lease operating expenses. 1999
operating income was adversely affected by $2.4 million in reorganization
expenses incurred in association with the bankruptcy process. Net income
increased due to the factors discussed above, higher interest income and lower
interest expense. Each of these factors is discussed in more specific detail
below.
8
<PAGE> 11
Production. Net liquids production was 1,888 thousand barrels
("MBbls") in the third quarter of 1999 and 2,039 MBbls in 1998, a 7% decrease.
Net gas production decreased to 13,826 million cubic feet of natural gas
("MMcf") in the 1999 quarter, a 33% decrease from the 20,514 MMcf reported in
the 1998 period. On an equivalent unit basis, liquids and gas production
declined 23% to 4,192 thousand barrels of oil equivalent ("MBOE") in the third
quarter of 1999, from 5,458 MBOE during the comparable 1998 period. Production
of both liquids and natural gas declined as the Company significantly reduced
its capital expenditure program beginning in the third quarter of 1998 because
of a lack of available capital, thereby limiting the Company's ability to
replace production and reserves. See "Liquidity and Capital Resources."
Revenues. Revenues remained flat at $67.6 million for the 1999 third
quarter compared to the $67.9 million reported for last year's third quarter as
the benefits from higher realized prices (including effects of hedging) were
offset by lower production volumes. Average net realized liquids prices
increased to $17.91 per barrel ("Bbl") for the 1999 third quarter, a 42%
increase over the $12.60 per Bbl received during the same period last year.
Average net realized natural gas prices increased to $2.42 per thousand cubic
feet of natural gas ("Mcf") for the three months ended September 30, 1999, a
20% increase over the $2.02 per Mcf reported for the 1998 period. Average
prices received at the field level for the 1999 quarter were $18.91 per Bbl and
$2.43 per Mcf for liquids and natural gas, respectively. After taking into
account the effects of financial hedging instruments, specifically a $1.9
million decrease in liquids revenue and a $100,000 decrease in natural gas
revenue, net realized prices decreased to $17.91 per Bbl and $2.42 per Mcf,
respectively. Average prices received at the field level for the 1998 period
were $11.51 per Bbl and $1.90 per Mcf for liquids and natural gas,
respectively. After the effects of hedging instruments, specifically a $2.2
million increase in liquids revenue and a $2.4 million increase in natural gas
revenue, net realized 1998 prices were adjusted to $12.60 per Bbl for liquids
and $2.02 per Mcf for natural gas.
Lease Operating Expenses. Lease operating expenses decreased 27% to
$18.6 million for the three months ended September 30, 1999, compared to the
$25.3 million reported for the same period last year. The decrease related
primarily to a reduction in workover activities as the Company worked with its
creditors and the Bankruptcy Court to get project approval under the cash
collateral order. Though total lease operating expenses declined by $6.7
million, lease operating expenses on an equivalent unit of production basis
decreased only slightly, from $4.64 to $4.43 per barrel of oil equivalent
("BOE"), because of the lower production volumes.
Depletion, Depreciation and Amortization ("DD&A"). DD&A expense
decreased 28% to $27.0 million for the 1999 third quarter, compared with $37.3
million reported for the same period in 1998. The decrease was due to
previously discussed declines in production and the decrease in the DD&A rate
from $6.84 per BOE in 1998 to $6.45 per BOE in 1999.
General and Administrative Costs. General and administrative expenses,
net of capitalized internal costs and overhead reimbursements, decreased 13% to
$3.4 million for the three months ended September 30, 1999, compared to $3.9
million for the 1998 third quarter. The decrease in general and administrative
expenses relates primarily to the closing of the Company's Houston office in
the fourth quarter of 1998 and company-wide staff reductions in the first
quarter of 1999. On a per BOE produced basis, general and administrative
expenses increased to $.80 per BOE from $.71 per BOE reported in last years
quarter because of the lower production volumes.
Reorganization Expenses. The Company incurred $2.4 million in legal
and financial advisory fees associated with bankruptcy proceedings during the
third quarter of 1999.
Interest Expenses. Interest and other income increased to $875,000 in
the 1999 third quarter, from $255,000 in the same period last year. The
increase related primarily to interest income earned on higher cash balances
accumulated subsequent to the Petition Date.
9
<PAGE> 12
Interest Expense. Interest expense was $6.6 million for the quarter
ended September 30, 1999, compared with $13.0 million for the 1998 quarter.
Pursuant to the bankruptcy filing, the Company discontinued the accrual of
interest on the senior subordinated note issues, a benefit which was partially
offset by the increased interest expense associated with higher outstanding
balances under the Company's senior credit facility.
Income Tax Benefit. The Company recognized an income tax provision of
$679,000 in the third quarter of 1999 based on year to date net income before
tax of $1.8 million and an effective combined federal and state income tax rate
of 38.3%. The Company did not recognize an income tax benefit on the third
quarter 1998 net loss because the Company's overall tax position could not
support the recordation of a deferred tax asset; therefore, recognition of
deferred tax assets on accumulated losses was discontinued.
COMPARISON OF THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND
SEPTEMBER 30, 1998
Operating Income and Net Income/Loss. Operating income increased 79%
to $17.8 million for the nine months ended September 30, 1999, compared to
$10.0 million for the same period during 1998. The net income for the nine
months ended September 30, 1999, was $1.1 million compared to a loss of $19.8
million reported for the same period last year. Operating income increased
primarily due to higher oil and gas prices, lower lease operating expenses and
lower DD&A expenses. The positive impact of higher prices, lower lease
operating expenses and lower DD&A was offset by lower oil and gas production
and by reorganization expenses incurred in the bankruptcy process. The
improvement from a net loss in 1998 to net income in 1999 was due to the above
discussed factors plus increases in other income, and a decrease in interest
expense. The individual factors mentioned above are discussed in more specific
detail below.
Production. Net liquids production decreased 7% to 5,995 MBbls in the
first nine months of 1999 compared to 6,414 MBbls in the 1998 period. Net gas
production was 48,400 MMcf in the first nine months of 1999 compared to 58,798
MMcf in the 1998 period, a decrease of 18%. On an equivalent unit basis,
liquids and gas production decreased 13% to 14,062 MBOE in the first nine
months of 1999 from 16,214 MBOE during the comparable 1998 period. Production
of both liquids and natural gas declined between the periods because of the
effects of the previously discussed reduction in the Company's capital
expenditure program. See "Liquidity and Capital Resources."
Revenues. Revenues were $192.5 million for the 1999 period compared to
the $210.6 million reported for the first nine months of 1998, a 9% decrease
attributable primarily to the decline in liquids and natural gas production
volumes that were only partially offset by higher average realized prices.
Average net realized liquids prices increased to $14.49 per Bbl for the first
nine months of 1999, an increase of 13% compared to the $12.85 per Bbl received
during the same period last year. Average net realized natural gas prices
increased to $2.18 per Mcf for the nine months ended September 30, 1999, a 1%
increase over the $2.16 per Mcf reported for the 1998 period.
Average prices received at the field level for the first nine months
of 1999 were $14.67 per Bbl and $2.05 per Mcf for liquids and natural gas,
respectively. After taking into account financial hedging instruments,
specifically a $419,000 decrease and a $6.1 million increase in liquids and
natural gas revenue, respectively, net realized prices were $14.49 per Bbl and
$2.18 per Mcf. Average prices received at the field level for the 1998 period
were $12.15 per Bbl and $2.07 per Mcf for liquids and natural gas,
respectively. After the effects of financial hedging instruments for 1998,
specifically a $4.5 million increase in liquids revenue and a $5.1 million
increase in natural gas revenue, net realized 1998 prices were adjusted to
$12.85 per Bbl for liquids and $2.16 per Mcf for natural gas.
Lease Operating Expenses. Lease operating expenses were $67.3 million
for the nine months ended September 30, 1999, an 8% decrease compared to the
$73.4 million reported for the same period last year. On an equivalent unit of
10
<PAGE> 13
production basis, lease operating expenses were $4.78 and $4.53 per barrel of
oil equivalent for the 1999 and 1998 periods, respectively, a slight increase
caused by the decline in production volumes.
Depletion, Depreciation and Amortization. DD&A expense decreased 18%
to $90.7 million for the first nine months of 1999, compared with $110.9
million reported for the same period in 1998. The decrease was primarily the
result of the lower production volumes, and to a lesser extent, a reduction in
the DD&A rate per unit of production to $6.45 per BOE, from $6.84 per BOE for
the same period last year.
General and Administrative Expenses. General and administrative
expenses, net of capitalized internal costs and overhead reimbursements,
decreased 22% to $10.2 million for the nine months ended September 30, 1999,
compared to $13.0 million for the 1998 period. General and administrative
expenses decreased primarily due to the closing of the Company's Houston office
in late 1998 and a company-wide reduction in staffing in the first quarter of
1999. On a per BOE produced basis, general and administrative expenses
decreased to $.72 per BOE for the first nine months of 1999 compared with the
$.80 per BOE reported for the comparable 1998 period despite the decrease in
production volumes.
Reorganization Expenses. The Company incurred $3.4 million in legal
and financial advisory fees associated with the bankruptcy proceedings.
Interest and other Income. Interest and other income increased to $8.1
million in the first nine months of 1999, from $1.0 million in the same period
last year. The increase is primarily due to the Company's receipt of the $5.5
million settlement on the cancellation of hedging contracts by the
counterparties subsequent to the Company's filing of Chapter 11, and to a
lesser degree, increased interest income accrued on higher cash balances.
Interest Expense. Interest expense, net of amounts capitalized,
decreased to $24.2 million for the nine months ended June 30, 1999 compared to
$34.9 million for the 1998 period. The Company discontinued the accrual of
interest on the senior subordinated note issues as of the Petition Date. This
decrease in interest expense was partially offset by increased interest expense
on higher average outstanding principal balances under the senior credit
facility in 1999.
Income Tax Provision/Benefit. The Company recorded a $679,000 tax
provision in the third quarter of 1999 based on year to date 1999 income before
tax of $1.8 million and on a combined federal and state income tax rate of
38.3%. The Company recognized an income tax benefit in the first six months of
1998; however, the Company's overall tax position could not support the
recordation of a deferred tax asset thereafter and recognition of income tax
benefits on accumulated losses was discontinued.
LIQUIDITY AND CAPITAL RESOURCES
On March 21, 1999 (the "Petition Date"), the Company and its
wholly-owned subsidiary, Forcenergy Resources Inc., ("Resources") filed a
voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code
("Chapter 11") in order to facilitate the restructuring of the Company's
long-term debt, revolving credit, trade debt and other obligations. The filing
was made in the U.S. District Court for the Eastern District of Louisiana in
New Orleans (the "Bankruptcy Court"). The Company continues to operate as a
debtor-in-possession subject to the Bankruptcy Court's supervision and
orders.
The consummation of a plan of reorganization is the primary objective
of the Company. The Company has distributed a disclosure statement which
includes a proposed plan of reorganization. The plan of reorganization sets
forth the means for satisfying claims, including liabilities subject to
compromise and interests in the Company. The plan of reorganization as proposed
will result in, among other things, material dilution of existing security
holders as a result of the issuance of new equity securities to unsecured
creditors. The consummation of a plan of reorganization will require the
approval of the Bankruptcy Court.
11
<PAGE> 14
At this time, it is not possible to predict the outcome of the
bankruptcy proceedings, in general, or the effect on the business of the
Company or on the interests of creditors or stockholders. There can be no
assurance that the plan of reorganization submitted by the Company will be
approved or that the Bankruptcy Court will permit the Company to continue to
operate as a debtor-in-possession. As a result, there is substantial
uncertainty about the Company's ability to continue as a going concern.
In the ordinary course of business, the Company makes substantial
capital expenditures for the exploration and development of oil and natural gas
reserves. Historically, the Company has financed its capital expenditures, debt
service and working capital requirements with cash flow from operations, public
offerings of debt and equity, borrowings under its senior credit facility and
other financings. Cash flow from operations is sensitive to the prices the
Company receives for its oil and natural gas production. Lower hydrocarbon
production associated with a reduction in planned capital spending or an
extended decline in oil and gas prices could result in less than anticipated
cash flow from operations in the current fiscal year and in later years which
could have a material adverse effect on the Company.
Subsequent to the Petition Date, Forcenergy and Resources filed an
Emergency Motion for Interim Order Authorizing Use of Cash Collateral (the
"Cash Collateral Motion"), pursuant to which Forcenergy and Resources sought
the use of various purported secured parties' cash collateral in on-going
operations. On March 22, 1999, the Bankruptcy Court signed a Preliminary Order
Authorizing Use of Cash Collateral, thereby authorizing Forcenergy's and
Resource's use of cash collateral in accordance with a budget attached thereto.
Since the preliminary order, the Bankruptcy Court has conducted several
hearings on Forcenergy's and Resource's continued use of cash collateral and on
May 14, 1999, the Order Authorizing the Use of Cash Collateral ("Cash
Collateral Order") was signed and is the order under which the Company
currently operates. To the extent that on-going expenses for post-petition
goods and services (after March 21, 1999), are within the ordinary course of
business, and are reflected on the court-approved budget, Forcenergy and
Resources are permitted to make such expenditures without further Bankruptcy
Court order. Any expenditure, however, that is outside the ordinary course of
business, or that is not reflected on the budget or not otherwise authorized by
the Cash Collateral Order, must be specifically authorized by the Bankruptcy
Court. As of October 31, 1999, the Company had accumulated $73.9 million in cash
since the Petition Date that can be used for operations pursuant to the terms
of the Cash Collateral Order.
Historically, the Company has financed its capital expenditures, debt
service and working capital requirements with cash flow from operations, public
offerings of equity, private offerings of debt, borrowings under its senior
credit facility and other financings. The Company's primary sources of funds
for each of the periods presented were as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
------------------------------
1999 1998
----------- -----------
(in thousands)
<S> <C> <C>
Net cash provided by operating activities $ 92,330 $ 102,246
Borrowings under the Senior Credit Facility 26,473 314,300
Repayments under the Senior Credit Facility (8,700) (155,564)
</TABLE>
Working capital, before accounts payable and accrued liabilities
subject to compromise, was $97.0 million at September 30, 1999, compared to
$49.8 million at December 31, 1998. The increase relates to several factors.
Cash balances on hand increased from $1.7 million at December 31, 1998 to $73.9
million at September 30, 1999. The increase in cash results from the stay on
payments on pre-petition invoices during the pendency of the bankruptcy
proceedings and the reduction in capital expenditure activities pursuant to
limitations imposed by the Bankruptcy Court. Accounts receivable balances have
increased primarily due to higher revenues associated with higher liquids and
12
<PAGE> 15
gas prices and to the suspension of revenue payments to the Company by certain
joint interest operators. Specifically, accrued revenue receivables have
increased approximately $8.1 million, from $22.7 million at December 31, 1998,
to $30.8 million at September 30, 1999. Receivables from joint partners have
also increased approximately $4.6 million, from $7.3 million at December 31,
1998 to $11.9 million at September 30, 1999. Other Current Assets increased by
approximately $10 million, $7.5 million of which was cash collateral deposited
with the Company's commodity price hedging partner. These increases in
post-petition working capital were partially offset by the incurrence of
liabilities related to post-petition operating and capital expenditure
activities.
Cash flow from operations, before changes in working capital was $92.6
million for the nine months ended September 30, 1999, compared with $87.8
million in 1998.
Capital expenditures were $44.0 million for the nine months ended
September 30, 1999, compared with $279.9 million for the 1998 period. Prior to
the Petition Date, capital expenditures were funded by the Company's existing
senior credit facility and cash generated from operations, and since the
Petition Date, by cash flow from operations. As a result, the Company's
long-term debt (all classified as subject to compromise) increased from $671.7
million at the end of 1998 to $689.5 million at September 30, 1999. The Company
was fully drawn under the senior credit facility on March 21, 1999. The use of
cash to fund operating or capital expenditure activities is subject to approval
by the Bankruptcy Court. The working capital and net cash balances available at
September 30, 1999, may be used to cover some of the liabilities subject to
compromise pursuant to a finally approved plan of reorganization. The Company's
capital expenditures for 1999 will remain subject to the approval and
supervision of the Bankruptcy Court and may vary significantly due to a variety
of factors, including drilling results, oil and gas prices, industry conditions
and outlook, future acquisitions of properties, the availability of capital and
the consent of the Company's creditors.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In an effort to reduce exposure to changing commodity prices the
Company has, in the normal course of business, entered into various financial
instruments with off-balance-sheet risk. The Company normally utilizes these
arrangements for portions of its current oil and gas production to achieve more
predictable cash flows. The remaining portion of current production is not
hedged so as to provide the Company the opportunity to benefit from increases
in prices on that portion of the production, should price increases
materialize. On March 21, 1999, the Company had various instruments in place,
all of which were cancelled at the option of the counterparties subsequent to
the Company's filing for reorganization under Chapter 11. The Company received
$5.5 million (fair market value) in April 1999 in settlement of the contracts
pursuant to the cancellations. The settlements were accrued in the quarter
ended March 31, 1999, and are included in Interest and Other Income.
Subsequently, the Company has entered into hedging contracts with respect to
its future oil production as follows, all of which are SWAPs (see Note 4 to the
financial statements):
<TABLE>
<CAPTION>
Volume in NYMEX Contract
Bbl's Per Day Price Per Bbl
------------- --------------
<S> <C> <C>
October 1999 - December 1999(1) 5,000 $18.09
October 1999 - January 2000(1) 3,000 21.27
October 1999 - January 2000(2) 1,000 22.19
October 1999 - March 2000(1) 2,000 21.85
</TABLE>
These contracts may be extended by the counterparty, for the periods
below, by making a one-time election immediately prior to the expiration of the
current contracts.
(1) through June 2000
(2) through May 2000
13
<PAGE> 16
SWAP contracts on future natural gas production is as follows:
<TABLE>
<CAPTION>
Swaps
-----------------------------------
Volume in Weighted Average
Mcf NYMEX Contract
Period Per Day Price Per Mcf
------ --------- ----------------
<S> <C> <C>
October 1999 30,000 $2.77
October 1999 - December 1999(1) 10,000 3.19
November 1999 30,000 2.90
December 1999 40,000 3.01
January 2000 40,000 3.04
February 2000 40,000 2.87
</TABLE>
(1) This contract is extendable at the option of the counterparty
through March 2000.
The counterparty for all of these natural gas hedge contracts has an
one-time option to combine the above into a single extension for 50,000 Mcf per
day at $2.80 per Mcf from March thru June 2000.
At September 30, 1999, the Company had $7.5 million in cash collateral
on deposit with the counterparty.
The Company has also committed to fixed prices on an average of 57,837
Mcf per day of estimated fourth quarter 1999 natural gas production at an
average price of $2.53 per Mcf and also on 26,077 Mcf per day of its estimated
first quarter 2000 natural gas production at an average of $2.44 per Mcf under
existing sales contracts with the regular purchasers of the Company's physical
production.
The Company may enter into additional arrangements in the future as
part of its strategy to reduce exposure to commodity price fluctuations. The
instruments contain an element of credit risk and price risk. The Company
attempts to minimize the extent of credit risk by limiting the counterparties
to major banks or significant industry participants.
YEAR 2000 COMPLIANCE
Forcenergy has established a "Year 2000" project (the "Project") to
assess, to the extent possible, its Year 2000 risk exposure, to take remedial
actions necessary to minimize the Year 2000 risk exposure and to test its
systems and processes once remedial actions have been taken. Because of the
importance of occurrence dates in the oil and gas industry, the consequences of
not pursuing Year 2000 modifications could be critical to Forcenergy's ability
to manage and report operating activities. The final costs associated with the
Project are expected to be minimal.
The assessment phase of the Project is complete as of September 30,
1999, however, the Company has had limited success in assessing the likelihood
of year 2000 failure on the part of certain of the Company's purchasers of its
oil and gas production and of certain service providers because of limited
responses to the Company's inquires. The Company believes, however, that any
equipment failure at the customer/vendor level can be overcome by a change in
provider or by the implementation of manual procedures. This assessment phase
included, among other procedures: the assessment of information technology
applications and systems; the assessment of non-information technology
14
<PAGE> 17
exposures; the initiation of inquiry and dialogue with significant third party
business partners, customers and suppliers in an effort to understand their
Year 2000 readiness and its potential impact on Forcenergy; and, the
formulation of contingency plans for mission-critical information technology
systems. The remedial phase of the Project was approximately 90% complete as of
September 30, 1999 (remaining 10% is not critical), subject to the results of
third party inquiry assessments and is expected to be completed by year end.
The testing phase of the Project is complete subject to the Company's
assessment of customer and vendor inquiries.
Although Forcenergy is making every effort to mitigate the risks
associated with the Year 2000 problem, and currently believes that no internal
material risk exists that has not been mitigated, there can be no assurance
that the resulting contingency plans will have anticipated all Year 2000
scenarios. A failure to remedy a critical Year 2000 problem could result in
information and non-information technology failures, the receipt or transmission
of erroneous data, lost data or a combination of similar problems of a magnitude
that cannot be accurately assessed at this time.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133"). The statement
requires companies to report the fair market value of derivatives on the
balance sheet and record in income or other comprehensive income, as
appropriate, any changes in the fair value of the derivative. Statement No. 133
will become effective with respect to the Company on January 1, 2001, The
Company is currently evaluating the impact of the statement.
15
<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 -- Financial Data Schedule
(b) Reports on Form 8-K
None
16
<PAGE> 19
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 hereunto, duly authorized, in the City of Miami, State of Florida,
on the 12th day of November 1999.
FORCENERGY INC
By: /s/ E. Joseph Grady
----------------------------------------
E. Joseph Grady
Vice President - Chief Financial Officer
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED
INTERIM SEPTEMBER 30, 1999 BALANCE SHEET AND STATEMENT OF OPERATIONS OF
FORCENERGY INC FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 73,849
<SECURITIES> 0
<RECEIVABLES> 40,959
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 144,081
<PP&E> 563,906
<DEPRECIATION> 0
<TOTAL-ASSETS> 719,921
<CURRENT-LIABILITIES> 47,074
<BONDS> 689,473
0
0
<COMMON> 248
<OTHER-SE> (99,096)
<TOTAL-LIABILITY-AND-EQUITY> 719,921
<SALES> 67,172
<TOTAL-REVENUES> 67,598
<CGS> 0
<TOTAL-COSTS> 52,468
<OTHER-EXPENSES> 875
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,608
<INCOME-PRETAX> 9,397
<INCOME-TAX> 679
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,718
<EPS-BASIC> .35
<EPS-DILUTED> .35
</TABLE>
