<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 June 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 July 31, 1999, there were 24,755,884 shares of the registrant's
Common Stock, $.01 par value outstanding.
<PAGE> 2
FORCENERGY INC
DEBTOR-IN-POSSESSION
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements (Unaudited)
<S> <C> <C>
a) Consolidated Balance Sheets - June 30, 1999 and
December 31, 1998............................................................. 1
b) Consolidated Statements of Operations - Three months and six
months ended June 30, 1999 and 1998........................................... 2
c) Consolidated Statements of Cash Flows - Six months ended
June 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.............................................................. 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports of Form 8-K................................................... 13
</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
underground accumulations of oil and natural 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)
-----------------------------------
June 30, December 31,
1999 1998
------------- ----------------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash ........................................................... $ 53,613 $ 1,690
Accounts receivable, net............................................ 41,744 28,433
Other current assets................................................ 19,907 19,668
------------- ---------------
Total current assets............................................ 115,264 49,791
------------- ---------------
PROPERTY, PLANT AND EQUIPMENT, at cost (full cost
method) net of accumulated depletion, depreciation
and amortization.................................................... 572,750 610,948
------------- ---------------
OTHER ASSETS............................................................. 12,417 17,729
------------- ---------------
$ 700,431 $ 678,468
============= ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT:
LIABILITIES NOT SUBJECT TO COMPROMISE:
CURRENT LIABILITIES:
Accounts payable.................................................... $ 10,256 $ --
Accrued liabilities................................................. 28,481 --
------------- ---------------
Total current liabilities....................................... 38,737 --
------------- ---------------
LIABILITIES SUBJECT TO COMPROMISE:
Accounts payable.................................................... 63,350 42,183
Accrued liabilities................................................. 16,436 64,837
Long-term debt...................................................... 689,473 671,700
-------------- ---------------
Total liabilities subject to compromise......................... 769,259 778,720
-------------- ---------------
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; 24,755,334 and 24,747,445 issued
and outstanding at June 30, 1999 and December 31, 1998,
respectively.................................................... 248 247
Capital in excess of par value...................................... 346,446 346,135
Accumulated deficit................................................. (454,259) (446,634)
-------------- ---------------
Total stockholders' deficit..................................... (107,565) (100,252)
-------------- ---------------
$ 700,431 $ 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 Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales........................... $ 65,116 $ 70,593 $ 124,596 $ 142,378
Other....................................... 41 185 299 355
----------- ----------- ----------- -----------
65,157 70,778 124,895 142,733
----------- ----------- ----------- -----------
EXPENSES:
Lease operating............................. 23,142 24,442 48,706 48,073
Depletion, depreciation and amortization.... 31,194 38,089 63,668 73,601
Production taxes............................ 1,145 1,137 1,990 2,172
General and administrative.................. 3,628 4,327 7,839 9,120
----------- ----------- ----------- -----------
59,109 67,995 122,203 132,966
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS........................... 6,048 2,783 2,692 9,767
Interest and other income........................ 1,364 284 7,225 787
Interest expense, net of amounts capitalized..... (4,786) (11,658) (17,542) (21,917)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES................ 2,626 (8,591) (7,625) (11,363)
Income tax benefit............................... -- 2,980 -- 4,153
----------- ----------- ----------- -----------
NET INCOME (LOSS)................................ $ 2,626 $ (5,611) $ (7,625) $ (7,210)
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE:
Basic....................................... $ .11 $ (.23) $ (.31) $ (.29)
=========== =========== =========== ===========
Diluted..................................... $ .11 $ (.23) $ (.31) $ (.29)
=========== =========== ============ ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic....................................... 24,755 24,642 24,752 25,004
Diluted..................................... 24,755 24,642 24,752 25,004
</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)
Six Months Ended June 30,
-----------------------------------
1999 1998
--------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................ $ (7,625) $ (7,210)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depletion, depreciation and amortization............................ 64,362 74,574
Deferred taxes...................................................... -- (4,153)
Equity in net loss of affiliate..................................... (845) (631)
(Increase) decrease in accounts receivable.......................... (13,311) 7,630
(Increase) decrease in other current assets......................... (239) 2,697
Increase in accounts payable and accrued liabilities(Including
accounts payable and accrued liabilities subject to compromise) 11,503 15,182
--------------- ---------------
Net cash provided by operating activities................................ 53,845 88,089
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions........................................................ (276) (42,818)
Capital expenditures................................................ (25,195) (165,634)
Decrease in other assets............................................ 5,464 462
Dividends received from affiliate................................... -- 750
--------------- ---------------
Net cash used in investing activities.................................... (20,007) (207,240)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under senior credit facility............................. 26,473 225,400
Repayments under senior credit facility............................. (8,700) (115,558)
Issuance of common stock............................................ 312 375
Other ........................................................... -- (116)
--------------- ---------------
Net cash provided by financing activities................................ 18,085 110,101
--------------- ---------------
Net increase (decrease) in cash.......................................... 51,923 (9,050)
Cash at beginning of period.............................................. 1,690 16,048
--------------- ---------------
Cash at end of period.................................................... $ 53,613 $ 6,998
=============== ===============
Supplemental disclosures of cash flow information:
Cash paid for interest:............................................. $ 14,242 $ 23,196
=============== ===============
</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 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 bankruptcy petitions were filed in order to preserve cash and to
give the Company the opportunity to restructure its debt. The consummation of a
plan of reorganization is the primary objective of the Company. The plan of
reorganization will set forth the means for satisfying claims, including
liabilities subject to compromise and interests in the Company. A plan of
reorganization may result in, among other things, substantial dilution to or
elimination of existing security holders as a result of the issuance of
securities to creditors or new investors. The Company is currently negotiating
with the secured and unsecured creditors in an effort to reach a mutually
acceptable plan of reorganization and the Company intends to submit a plan of
reorganization for consideration by the Bankruptcy Court in the near future.
The consummation of any plan of reorganization will require approval of the
Bankruptcy Court.
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. As a result of the
bankruptcy filing, all of the Company's liabilities incurred prior to the
Petition Date, including certain secured debt, are subject to compromise.
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 doubt 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, adequate sources of capital and the ability to sustain positive
results of operations and cash flows sufficient to continue to explore for and
develop oil and gas reserves.
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 equity, private offerings of debt, asset sales, 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.
Management's plans are to continue to incur capital expenditures with
the goal of increasing production and reserves. The Company has accumulated
approximately $53 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 pending 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. At present, the Company is
also close to reaching agreement on the terms of a debtor-in-possession credit
facility that will provide additional financial flexibility to pursue its
business strategy.
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.
5
<PAGE> 8
FORCENERGY INC
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
During 1998 and prior to March 21, 1999, the Company was a party to
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, all of which were cancelled at the option of the
counterparties subsequent to the Company's March 21, 1999 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. The Company subsequently entered
into a crude oil swap agreement whereby it has hedged approximately 25% of its
estimated oil production at $18.09 per barrel for the months July through
December 1999. The agreement may be extended through June 2000 at the option of
the counterparty. Additionally, the Company has fixed prices on an average of
69,233 Mcf per day of estimated 3rd and 4th quarter 1999 natural gas production
at an average price of $2.44 per Mcf and also on 37,890 Mcf per day of its
estimated first quarter 2000 gas production at an average of $2.69 per Mcf under
existing sales contracts. 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. 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. 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. The Company had no hedging contracts in place during
the quarter ended June 30, 1999. The Company recognized an additional $2.5
million in oil and gas revenues associated with hedging contracts in place for
the quarter ended June 30, 1998. Excluding the settlement payments discussed
above, the Company recognized $7.7 million and $5.0 million in additional oil
and gas revenues for the six month periods ending June 30, 1999 and 1998,
respectively.
6
<PAGE> 9
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 Six Months Ended
June 30, June 30,
--------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Production in thousands:
Liquids (MBbls) (1)......................... 2,067 2,239 4,106 4,375
Natural Gas (MMcf).......................... 16,604 19,972 34,573 38,286
Total (MBOE)................................ 4,834 5,568 9,868 10,756
Average realized sales prices(2):
Liquids (per Bbl) (1)....................... $ 14.45 $ 11.86 $ 12.82 $ 12.97
Natural gas (per Mcf)....................... 2.12 2.20 2.08 2.24
Expenses (per BOE):
Lease operating............................. $ 4.79 $ 4.39 $ 4.94 $ 4.47
Depletion, depreciation and
amortization............................... 6.45 6.84 6.45 6.84
General and administrative, net............. .75 .78 .79 .85
</TABLE>
- ------------
(1) Includes crude oil, condensate and natural gas liquids.
(2) Net of hedging results (but excluding cancellation settlements)
COMPARISON OF THE THREE MONTH PERIODS ENDED JUNE 30, 1999 AND JUNE 30, 1998
Operating Income and Net Income/Loss. The Company had operating income
of $6.0 million for the three months ended June 30, 1999 compared to $2.8
million for the same period during 1998. Net income for the three months ended
June 30, 1999 was $2.6 million compared to a net loss of $5.6 million reported
for the same period last year. Several factors contributed to the increase in
operating income. The benefit derived from higher realized liquids prices was
offset by a decline in production, however the lower production volumes, and a
lower DD&A rate, contributed to a lower 1999 depletion, depreciation and
amortization expense. Operating income was further positively impacted by lower
lease operating and general and administrative expenses. 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.
7
<PAGE> 10
Production. Net liquids production was 2,067 thousand barrels
("MBbls") in the second quarter of 1999 and 2,239 MBbls for the comparable 1998
period. The Company reported net gas production of 16,604 million cubic feet of
natural gas ("MMcf") in the 1999 quarter and 19,972 MMcf in the 1998 period. On
an equivalent unit basis, liquids and gas production amounted to 4,834 thousand
barrels of oil equivalent ("MBOE") in the second quarter of 1999 and 5,568 MBOE
during the comparable 1998 period. Production of both liquids and natural gas
declined as the Company's capital expenditure program was significantly reduced
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 were $65.2 million for the 1999 second quarter
compared to the $70.8 million reported for last year's second quarter, a
decrease attributable primarily to the declines in liquids and natural gas
production. Average net realized liquids prices, however, increased to $14.45
per barrel ("Bbl") for the 1999 second quarter, a 22% increase over the $11.86
per Bbl (including effects of hedging) received during the same period last
year. Average net realized natural gas prices declined to $2.12 per thousand
cubic feet of natural gas ("Mcf") for the three months ended June 30, 1999, a
4% decrease from the $2.20 per Mcf (including effects of hedging) reported for
the 1998 period. Average prices received at the field level for the 1998
periods were $11.24 per Bbl and $2.15 per Mcf for liquids and natural gas,
respectively. The Company had no hedging contracts in place for the quarter
ended June 30, 1999. After the effects of 1998 hedging activities,
specifically, a $1.4 million increase in liquids revenue and a $1.1 million
increase in natural gas revenue, net realized 1998 prices were adjusted to
$11.86 per Bbl for liquids and $2.20 per Mcf for natural gas.
Lease Operating Expenses. Lease operating expenses were $23.1 million
for the three months ended June 30, 1999 compared to the $24.4 million reported
for the same period last year. The decrease related primarily to a reduction in
workover activities as the Company worked with the creditors and the Bankruptcy
Court to get project approval under the cash collateral order. On an equivalent
unit of production basis, lease operating expenses increased moderately to $4.79
from $4.39 per barrel of oil equivalent ("BOE") because of the decline in
production in 1999.
Depletion, Depreciation and Amortization ("DD&A"). DD&A expense was
$31.2 million for the 1999 second quarter, compared with $38.1 million reported
for the same period in 1998. The decrease was due to previously discussed
production decreases and the decrease in the DD&A rate per unit of production
to $6.45 per BOE for the 1999 second quarter, compared to $6.84 per BOE for the
same period last year.
General and Administrative Costs. General and administrative costs,
net of capitalized internal costs and overhead reimbursements, were $3.6
million for the three months ended June 30, 1999 and $4.3 million for the 1998
second quarter. The decrease in general and administrative costs relates
primarily to a reduction in staff in the first quarter of 1999 and the closing
of the Company's Houston office during the fourth quarter of 1998. On a per BOE
produced basis, general and administrative expenses remained relatively flat at
$.75 and $.78 per BOE for the second quarters of 1999 and 1998, respectively.
Interest and Other Income. Interest and other income increased to $1.4
million in the 1999 second quarter, from $284,000 in the same period last year.
The increase related primarily to interest income earned on higher cash
balances accumulated subsequent to the Petition Date.
Interest Expense. Interest expense was $4.8 million for the quarter
ended June 30, 1999 compared with $11.7 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.
8
<PAGE> 11
Income Tax Benefit. The Company recognized an income tax benefit in
the second quarter of 1998 in the amount of $3.0 million. The Company
recognized no income tax expense on the second quarter of 1999 net income
because the cumulative results for the year remain negative and the Company no
longer recognizes an income tax benefit on accumulated losses.
COMPARISON OF THE SIX MONTH PERIODS ENDED JUNE 30, 1999 AND JUNE 30, 1998
Operating Income and Net Loss. The Company had operating income of
$2.7 million for the six months ended June 30, 1999 compared to $9.8 million
for the same period during 1998. The net loss for the six months ended June 30,
1999 was $7.6 million compared to $7.2 million reported for the same period
last year. Operating income declined primarily due to lower production volumes,
and to a lesser extent, lower average realized liquids and natural gas prices.
The decrease in revenue was offset by lower DD&A associated with the lower
production volumes and the lower DD&A rate for 1999. Finally, lower general and
administrative expenses also offset the decline in oil and gas sales revenue.
The net loss was flat between the periods due to the above discussed factors
which were offset by increases in other income and decreases in interest expense
and income tax benefit. The individual factors discussed above are discussed in
more specific detail below.
Production. Net liquids production was 4,106 thousand barrels
("MBbls") in the first six months of 1999 and 4,375 MBbls for the comparable
1998 period. The Company reported net gas production of 34,573 million cubic
feet of natural gas ("MMcf") in the first six months of 1999 and 38,286 MMcf in
the 1998 period. On an equivalent unit basis, liquids and gas production
amounted to 9,868 MBOE in the first half of 1999 and 10,756 MBOE during the
comparable 1998 period. Production of both liquids and natural gas decreased
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 $124.9 million for the 1999 period compared to
the $142.7 million reported for the first half of 1998, a decrease attributed
primarily to declines in liquids and natural gas production volumes and to a
lesser extent average realized prices. Average net realized liquids prices
(including the effects of hedging) declined to $12.82 per barrel ("Bbl") for
the first six months of 1999, a 1% decrease compared to the $12.97 per Bbl
received during the same period last year. Average net realized natural gas
prices (including the effects of hedging) declined to $2.08 per thousand cubic
feet of natural gas ("Mcf") for the six months ended June 30, 1999, a 7%
decrease from the $2.24 per Mcf reported for the 1998 period.
Average prices received at the field level for the first six months of
1999 were $12.46 per Bbl and $1.90 per Mcf for liquids and natural gas,
respectively. After taking into account hedging activities, specifically, a
$1.5 million and a $6.3 million increase in liquids and natural gas revenue,
respectively, net realized prices increased to $12.82 per Bbl and $2.08 per
Mcf, respectively. Average prices received at the field level for the 1998
period were $12.44 per Bbl and $2.17 per Mcf for liquids and natural gas,
respectively. After the effects of hedging activities for 1998, specifically, a
$2.3 million increase in liquids revenue and a $2.7 million increase in natural
gas revenue, net realized 1998 prices were adjusted to $12.97 per Bbl for
liquids and $2.24 per Mcf for natural gas.
Lease Operating Expenses. Lease operating expenses were flat at $48.7
million for the six months ended June 30, 1999 compared to the $48.1 million
reported for the same period last year. On an equivalent unit of production
basis, lease operating expenses were $4.94 and $4.47 per barrel of oil
equivalent ("BOE") for the 1999 and 1998 periods, respectively, an increase
primarily due to lower production volumes.
Depletion, Depreciation and Amortization ("DD&A"). DD&A expense was
$63.7 million for the first six months of 1999, compared with $73.6 million
reported for the same period in 1998. The decrease was primarily the result of
a decrease in production volumes, and to a lesser extent, a reduction in the
DD&A rate per unit of production to $6.45 per BOE for the six months ended June
30, 1999, compared to $6.84 per BOE for the
9
<PAGE> 12
same period last year.
General and Administrative Costs. General and administrative costs,
net of capitalized internal costs and overhead reimbursements, were $7.8
million for the six months ended June 30, 1999 and $9.1 million for the
comparable 1998 period. General and administrative costs decreased primarily
due to a reduction in staffing in the first quarter of 1999 and the closing of
the Company's Houston office in late 1998. On a per BOE produced basis, general
and administrative expenses declined to $.79 per BOE for the first six months
of 1999 compared with the $.85 per BOE reported for the comparable 1998 period.
Interest and Other Income. Interest and other income increased to $7.2
million in the first half of 1999, from $800,000 in the same period last year.
The increase is primarily due to the Company's receipt of the $5.5 million (fair
market value) settlement pursuant to 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 $17.5 million for the six months ended June 30, 1999 compared to
$21.9 million for the 1998 period. The Company discontinued the accrual of
interest on the senior subordinated note issues as of the Petition Date,
pursuant to the Chapter 11 filing. 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 Benefit. The Company recognized an income tax benefit in
the first six months of 1998. Since the Company's overall tax position cannot
support the recordation of a deferred tax asset at this time, it discontinued
the recognition of income tax benefits on accumulated losses in 1999.
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 bankruptcy petitions were filed in order to preserve cash and to
give the Company the opportunity to restructure its debt. The consummation of a
plan of reorganization is the primary objective of the Company. The plan of
reorganization will set forth the means for satisfying claims, including
liabilities subject to compromise and interests in the Company. A plan of
reorganization may result in, among other things, material dilution or
elimination of existing security holders as a result of the issuance of
securities to creditors or new investors. The consummation of a plan of
reorganization will require the approval of the Bankruptcy Court.
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, royalty owners or stockholders. The
Company is currently negotiating with the secured and unsecured creditors in an
effort to reach a mutually acceptable plan of reorganization and the Company
intends to submit a plan of reorganization for consideration by the Bankruptcy
Court in the near future. There can be no assurance that the plan of
reorganization to be 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 doubt about the
Company's ability to continue as a going concern.
10
<PAGE> 13
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 equity, private offerings of debt, asset sales,
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 are 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. The procedures for payment of such expenses may be further specified in
a debtor-in-possession financing facility. The Company has accumulated, as of
July 31, 1999, $59.2 million in cash since the Petition Date that can be used
for operations pursuant to the terms of the Cash Collateral Order.
Forcenergy is presently in final negotiations to obtain
debtor-in-possession financing that will provide additional financial
flexibility to pursue its business strategy.
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, asset sales, 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>
Six Months Ended
June 30,
------------------------
1999 1998
--------- ---------
(in thousands)
<S> <C> <C>
Net cash provided by operating activities $ 53,845 $ 88,089
Borrowings under the Senior Credit Facility 26,473 225,400
Repayments under the Senior Credit Facility (8,700) (115,558)
</TABLE>
Working capital, before accounts payable and accrued liabilities
subject to compromise, was $76.5 million at June 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 $53.6
million at June 30, 1999. The increase in cash accrued as a result of the
Chapter 11 filing and a severe 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 gas prices. Accrued revenue receivables, specifically, have
increased approximately $7.5 million from $22.7 million at December 31, 1998 to
$30.2 million at June 30, 1999. Receivables from joint partners have also
increased approximately $6.0
11
<PAGE> 14
million, from $7. 3 million at December 31,1998 to $13.3 million at June 30,
1999. The increase relates to more difficulty in collecting receivables from
joint partners subsequent to the Chapter 11 filing, including revenues due to
the Company being withheld. These increases in post-petition working capital
are offset by the incurrence of post-petition liabilities related to
post-petition operating and capital expenditure activities.
Cash flow from operations, before changes in liabilities subject to
compromise, was $81.1 million for the six months ended June 30, 1999, compared
with $88.1 million in 1998.
Capital expenditures were $25.5 million for the six months ended June
30, 1999, compared with $208.5 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 June 30, 1999. The Company was fully drawn under the
senior credit facility on March 21, 1999.
At June 30, 1999, the Company had working capital before liabilities
subject to compromise of $76.5 million, including cash of $53.6 million. The
use of this 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 June 30, 1999 may be used to cover some of the liabilities subject
to compromise pursuant to a final 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.
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 90% complete as of June 30,
1999, with the remainder being the assessment of risk related to Year 2000
failure on the part of the Company's customers and vendors. This phase
included, among other procedures: the assessment of information technology
applications and systems; the assessment of non-information technology
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. Forcenergy expects to complete the assessment phase of its Year 2000
project by the end of the third quarter of 1999 but is being delayed by
limited responses to inquiries made to third party businesses. The Company
believes, however, that any equipment failure at the customer/vendor level
could be overcome by a change in provider or by the implementation of manual
procedures. The remedial phase of the Project was approximately 85% complete as
of June 30,1999, subject to the results of third party inquiry assessments. The
remediation of non-information technology is expected to be completed by mid to
late 1999. The testing phase of the Project is expected to be completed by mid
to late 1999, subject to the Company's assessment of customer and vendor
inquiries.
12
<PAGE> 15
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 Project or 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 -- Financial Data Schedule
(b) Reports on Form 8-K
On April 15, 1999 the Company filed a Current Report on Form 8-K
reporting results of operations for the fourth quarter and year ended December
31, 1998.
On June 14, 1999 the Company filed a Current Report on Form 8-K filing
the monthly operating report for the period March 22, 1999 to April 30, 1999
filed earlier with, and as required by, the U.S. Bankruptcy Court for the
Eastern District of Louisiana in New Orleans.
13
<PAGE> 16
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 14th day of August, 1999.
FORCENERGY INC
By: /s/ E. Joseph Grady
----------------------------------------
E. Joseph Grady
Vice President - Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED
INTERIM JUNE 30, 1999 BALANCE SHEET AND STATEMENT OF OPERATIONS OF FORCENERGY
INC FOR THE THREE MONTH PERIOD ENDED JUNE 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> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 53,613
<SECURITIES> 0
<RECEIVABLES> 41,744
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 115,264
<PP&E> 572,750
<DEPRECIATION> 0
<TOTAL-ASSETS> 700,431
<CURRENT-LIABILITIES> 38,737
<BONDS> 689,473
0
0
<COMMON> 248
<OTHER-SE> (107,566)
<TOTAL-LIABILITY-AND-EQUITY> 700,431
<SALES> 65,116
<TOTAL-REVENUES> 65,157
<CGS> 0
<TOTAL-COSTS> 59,109
<OTHER-EXPENSES> (1,364)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,786
<INCOME-PRETAX> 2,626
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,626
<EPS-BASIC> .11
<EPS-DILUTED> .11
</TABLE>
