-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EAdABsMZjtqRUkPWAxpwJ1miB15HiO9sWM71JBrRFgY/0LO5cjv9hWCt3prSGu5j NAB+KztgPkR03I6P/M7xmw== 0000950134-03-008115.txt : 20030515 0000950134-03-008115.hdr.sgml : 20030515 20030515134307 ACCESSION NUMBER: 0000950134-03-008115 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PETROQUEST ENERGY INC CENTRAL INDEX KEY: 0000872248 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 721440714 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19020 FILM NUMBER: 03703166 BUSINESS ADDRESS: STREET 1: 400 E KALISTE SALOOM RD SUITE 6000 CITY: LAFAYETTE STATE: LA ZIP: 70508 BUSINESS PHONE: 3372327028 MAIL ADDRESS: STREET 1: 400 E KALISTE SALOOM RD SUITE 6000 CITY: LAFAYETTE STATE: LA ZIP: 70508 FORMER COMPANY: FORMER CONFORMED NAME: OPTIMA PETROLEUM CORP DATE OF NAME CHANGE: 19950726 10-Q 1 d06006e10vq.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: March 31, 2003 [ ] 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: 019020 PETROQUEST ENERGY, INC. (Exact name of registrant as specified in its charter) DELAWARE 72-1440714 (State of Incorporation) (I.R.S. Employer Identification No.) 400 E. KALISTE SALOOM RD., SUITE 6000 LAFAYETTE, LOUISIANA 70508 (Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (337) 232-7028 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes X No ------- ------- As of May 9, 2003, there were 42,852,394 shares of the registrant's common stock, par value $.001 per share, outstanding. PETROQUEST ENERGY, INC. Table of Contents
Part I. Financial Information Page No. Item 1. Financial Statements Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002.................................................... 1 Consolidated Statements of Operations for the Three Months Ended March 31, 2003 and 2002.............................................. 2 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002............................................. 3 Notes to Consolidated Financial Statements.................................................. 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk................................. 13 Item 4. Controls and Procedures.................................................................... 13 Part II. Other Information Item 1. Legal Proceedings........................................................................... 14 Item 2. Changes in Securities and Use of Proceeds................................................... 14 Item 3. Defaults upon Senior Securities............................................................. 14 Item 4. Submission of Matters to a Vote of Security Holders........................................ 14 Item 5. Other Information........................................................................... 14 Item 6. Exhibits and Reports on Form 8-K............................................................ 14
PETROQUEST ENERGY, INC. Consolidated Balance Sheets (Amounts in Thousands)
March 31, December 31, 2003 2002 --------- --------- (unaudited) (Note 1) ASSETS Current assets: Cash and cash equivalents $ 1,255 $ 1,137 Oil and gas revenue receivable 6,787 6,500 Joint interest billing receivable 2,441 2,165 Other current assets 1,472 310 --------- --------- Total current assets 11,955 10,112 --------- --------- Oil and gas properties: Oil and gas properties, full cost method 232,405 214,543 Unevaluated oil and gas properties 11,738 15,653 Accumulated depreciation, depletion and amortization (115,194) (109,450) --------- --------- Oil and gas properties, net 128,949 120,746 --------- --------- Other assets, net of accumulated depreciation and amortization of $3,003 and $2,851, respectively 1,103 1,205 --------- --------- Total assets $ 142,007 $ 132,063 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 11,919 $ 18,337 Advances from co-owners 2,808 940 Current portion of long-term debt 10,000 6,600 --------- --------- Total current liabilities 24,727 25,877 --------- --------- Long-term debt -- 2,400 Asset retirement obligation 9,607 -- Deferred income taxes 6,826 5,461 Other liabilities 555 555 Commitments and contingencies -- -- Stockholders' equity: Common stock, $.001 par value; authorized 75,000 shares; issued and outstanding 42,852 and 42,852 shares, respectively 43 43 Paid-in capital 106,134 106,173 Other comprehensive income (1,715) (1,197) Unearned deferred compensation (251) (337) Accumulated deficit (3,919) (6,912) --------- --------- Total stockholders' equity 100,292 97,770 --------- --------- Total liabilities and stockholders' equity $ 142,007 $ 132,063 ========= =========
See accompanying Notes to Consolidated Financial Statements. 1 PETROQUEST ENERGY, INC. Consolidated Statements of Operations (unaudited) (Amounts in Thousands, Except Per Share Data)
Three Months Ended ----------------------- March 31, ----------------------- 2003 2002 -------- -------- Revenues: Oil and gas sales $ 16,154 $ 10,509 Interest and other income (24) (12) -------- -------- 16,130 10,497 -------- -------- Expenses: Lease operating expenses 2,762 2,349 Production taxes 210 202 Depreciation, depletion and amortization 8,473 7,094 General and administrative 1,223 1,200 Accretion of asset retirement obligation 140 -- Interest expense 23 211 -------- -------- 12,831 11,056 -------- -------- Income from operations 3,299 (559) Income tax expense (benefit) 1,155 (195) -------- -------- Income (loss) before cumulative effect of change in accounting principle $ 2,144 $ (364) Cumulative effect of change in accounting principle $ 849 $ -- -------- -------- Net income (loss) $ 2,993 $ (364) ======== ======== Earnings (loss) per common share: Basic Income (loss) before cumulative effect of change in accounting principle $ 0.05 $ (0.01) Cumulative effect of change in accounting principle $ 0.02 $ -- -------- -------- Net income (loss) $ 0.07 $ (0.01) ======== ======== Diluted Income (loss) before cumulative effect of change in accounting principle $ 0.05 $ (0.01) Cumulative effect of change in accounting principle $ 0.02 $ -- -------- -------- Net income (loss) $ 0.07 $ (0.01) ======== ======== Weighted average number of common shares: Basic 42,852 34,724 ======== ======== Diluted 44,168 34,724 ======== ========
See accompanying Notes to Consolidated Financial Statements. 2 PETROQUEST ENERGY, INC. Consolidated Statements of Cash Flows (unaudited) (Amounts in Thousands)
Three Months Ended ---------------------- March 31, ---------------------- 2003 2002 ------- -------- Cash flows from operating activities: Net income (loss) $ 2,993 $ (364) Adjustments to reconcile net income to net cash provided by operating activities: Deferred tax expense (benefit) 1,155 (195) Depreciation, depletion and amortization 8,473 7,094 Cumulative effect of change in accounting principle (849) -- Accretion of asset retirement obligation 140 -- Amortization of debt issuance costs 45 118 Compensation expense 86 86 Derivative mark to market (41) 6 Changes in working capital accounts: Accounts receivable (286) 193 Joint interest billing receivable (275) 3,642 Other assets (51) (241) Accounts payable and accrued liabilities (5,679) (3,788) Advances from co-owners 2,139 (1,624) Plugging and abandonment escrow -- 349 Other (1,162) (1,209) ------- -------- Net cash provided by operating activities 6,688 4,067 ------- -------- Cash flows from investing activities: Investment in oil and gas properties (7,564) (12,777) Sale of oil and gas properties, net -- 17,320 ------- -------- Net cash (used in) provided by investing activities (7,564) 4,543 ------- -------- Cash flows from investing activities: Exercise of options and warrants -- 137 Proceeds from borrowings 3,000 -- Repayment of debt (2,000) (31,329) Issuance of common stock, net of expenses (6) 21,834 ------- -------- Net cash provided by (used in) financing activities 994 (9,358) ------- -------- Net increase (decrease) in cash and cash equivalents 118 (748) Cash balance and cash equivalents, beginning of period 1,137 1,063 ------- -------- Cash balance and cash equivalents, end of period $ 1,255 $ 315 ======= ======== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 76 $ 370 ======= ======== Income taxes $ -- $ -- ======= ========
See accompanying Notes to Consolidated Financial Statements. 3 PETROQUEST ENERGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 BASIS OF PRESENTATION The consolidated financial information for the three-month periods ended March 31, 2003 and 2002, respectively, have been prepared by the Company and was not audited by its independent public accountants. In the opinion of management, all normal and recurring adjustments have been made to present fairly the financial position, results of operations, and cash flows of the Company at March 31, 2003 and for all reported periods. Results of operations for the interim periods presented are not necessarily indicative of the operating results for the full year or any future periods. The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and related notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. Unless the context otherwise indicates, any references in this Quarterly Report on Form 10-Q to "PetroQuest" or the "Company" refer to PetroQuest Energy, Inc. (Delaware) and its wholly-owned consolidated subsidiaries, PetroQuest Energy, L.L.C. (a single member Louisiana limited liability company) and PetroQuest Oil & Gas, L.L.C. (a single member Louisiana limited liability company). NOTE 2 EARNINGS PER SHARE Basic earnings or loss per common share was computed by dividing net income or loss by the weighted average number of shares of common stock outstanding during the relevant periods. Diluted earnings or loss per common share is determined on a weighted average basis using common shares issued and outstanding adjusted for the effect of stock options considered dilutive computed using the treasury stock method. Options to purchase 1,325,587 shares of common stock were outstanding during the three-month period ended March 31, 2003, but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market prices of the common shares during the periods. These options' exercise prices were between $3.13-$7.65 and expire in 2010-2012. For the three months ended March 31, 2002, 3,391,665 of the Company's options and warrants were not included in the computation of diluted loss per share because the effect of the assumed exercise of these stock options as of the beginning of the year would have an antidilutive effect. NOTE 3 LONG-TERM DEBT The Company entered into a new bank credit facility on May 14, 2003 with a group of two banks, which replaces the current credit facility. The Company will expense approximately $200,000 of deferred financing costs during the quarter ended June 30, 2003 relating to the previous credit facility. Pursuant to the new credit facility agreement, PetroQuest and our subsidiary PetroQuest Energy, L.L.C. (the "Borrower") have a $75 million revolving credit facility with a group of two banks which permits the Borrower to borrow amounts from time to time based on its available borrowing base as determined in the credit facility. The credit facility is secured by a mortgage on substantially all of the Borrower's oil and gas properties, a pledge of the membership interest of the Borrower and PetroQuest's corporate guarantee of the indebtedness of the Borrower. The borrowing base under this credit facility is based upon the valuation as of January 1 and July 1 of each year of the Borrower's mortgaged properties, projected oil and gas prices, and any other factors deemed relevant by the lenders. The Company or the lenders may also request additional borrowing base redeterminations. The initial borrowing base under this credit facility is $15.5 million and is subject to monthly reductions of $1.25 million beginning June 1, 2003. The banks will determine future monthly reductions in connection with each borrowing base redetermination. Outstanding balances on the revolving credit facility bear interest at either the bank's prime rate plus a margin (based on a sliding scale of 0.75% to 1.25% based on borrowing base usage but never less than the Federal Funds Effective Rate plus 0.5%) 4 or the Eurodollar rate plus a margin (based on a sliding scale of 2.0% to 2.5% depending on borrowing base usage). The credit facility also allows the Company to use up to $5 million of the borrowing base for letters of credit for fees equal to the applicable margin rate for Eurodollar advances. At May 14, 2003, the Company had $9 million of borrowings and a $2.6 million letter of credit issued pursuant to the credit facility. The Company is subject to certain restrictive financial and non-financial covenants under the credit facility, including a minimum current ratio, a minimum tangible net worth, maximum debt to EBITDA ratio, maximum G&A expenses, and limiting authorization for expenditures on dry hole costs, all as defined in the credit facility. The credit facility also requires the Borrower to establish and maintain commodity hedges covering at least 50% of its proved developed producing reserves on a rolling twelve month basis. The credit facility matures during May 2006. The Company currently has two interest rate swaps covering $5 million of our floating rate debt. The swaps, which expire in November 2003 and 2004, have fixed interest rates of 4.56% and 4.25%-5.665%, respectively. The swaps are stated at their fair value and are marked-to-market through other income in the Company's income statement. At March 31, 2003, the Company recognized a liability of $435,000 related to these derivative instruments. NOTE 4 NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board issued SFAS 143, "Accounting for Asset Retirement Obligations," which requires recording the fair value of an asset retirement obligation associated with tangible long-lived assets in the period incurred. Retirement obligations associated with long-lived assets included within the scope of SFAS 143 are those for which there is a legal obligation to settle under existing or enacted law, statute, written or oral contract or by legal construction under the doctrine of promissory estoppel. The Company adopted SFAS 143 effective January 1, 2003. The net difference between the Company's previously recorded abandonment liability and the amounts estimated under SFAS 143, after taxes, totaled a gain of $849,000, which has been recognized as a cumulative effect of a change in accounting principle. The gain is due to the effect on the historical depletion as a result of the retirement obligation being recorded at fair value. On a pro forma basis, the impact for the quarter ended March 31, 2002 would have increased net income by $90,000. The Company has legal obligations to plug, abandon and dismantle existing wells and facilities that it has acquired and constructed during its existence. As of January 1, 2003, the Company recognized a $9,467,000 liability for its asset retirement obligations and recorded the related additional assets that will be depreciated using the units-of-production method. The following table describes all changes to the Company's asset retirement obligation liability:
Quarter Ended March 31, 2003 -------------- Asset retirement obligation at beginning of year $ -- Liability recognized in transition 9,467,000 Accretion expense 140,000 ---------- Asset retirement obligation at end of period $9,607,000 ==========
If the new accounting rules had been adopted on January 1, 2002, the asset retirement obligation would have approximated $7.3 million. 5 NOTE 5 EQUITY Other Comprehensive Income The following table presents a recap of the Company's comprehensive income for the three-month periods ended March 31, 2003 and 2002 (in thousands):
Three Months Ended March 31, 2003 2002 ------- ----- Net income (loss) $ 2,993 $(364) Change in fair value of derivative instrument, accounted for as hedges, net of taxes (337) (376) ------- ----- Comprehensive income (loss) $ 2,656 $(740)
The Company accounts for derivatives in accordance with Statement of Financial Accounting Standards No. 133, as amended (SFAS 133). When the conditions specified in SFAS 133 are met, the Company may designate these derivatives as hedges. As of March 31, 2003, the Company had fixed price swap contracts with third parties, whereby a fixed price has been established for a certain period. At March 31, 2003 and 2002, the effect of derivative financial instruments is net of deferred income tax benefit of $181,000 and $203,000, respectively. Unearned Deferred Compensation In April 2001, the original owners, (the "Original Owners") of American Explorer L.L.C. entered into an agreement with an officer of the Company whereby the Original Owners granted to the officer an option to acquire, at a fixed price, certain of the shares the Original Owners were issued in the September 1, 1998 merger and reorganization (the "Merger"). As the fixed price of the April grant was below the market price as of the date of grant, the Company is recognizing non-cash compensation expense over the three-year vesting period of the option. In addition, the Original Owners granted to the officer an interest in a portion of the 1,667,001 shares of common stock issuable pursuant to the Contingent Stock Issue Rights (the "CSIRs") issued to the Original Owners in the Merger, if any, that might be issued. This agreement is similar to agreements previously entered into with two other officers of the Company. Non-cash compensation expense is being recognized for the common stock issuable pursuant to the CSIRs granted to the three officers over the three-year vesting period based on the fair value of the common stock issuable pursuant to the CSIRs in May 2001, when the common stock issuable pursuant to the CSIRs was issued to the Original Owners. The Company has recorded the effects of the transactions as deferred compensation until fully amortized. The Company recorded non-cash compensation expense of $86,000 during the quarters ended March 31, 2003 and 2002, respectively, which is included in general and administrative expense. Public Offering During February and March 2002, the Company completed the offering of 5,193,600 shares of its common stock. The shares were sold to the public for $4.40 per share. After underwriting discounts, the Company realized proceeds of approximately $21.9 million. During October and November 2002, the Company completed the offering of 5,000,000 shares of its common stock. The shares were sold to the public for $4.25 per share. After underwriting discounts, the Company realized proceeds of approximately $20.4 million. NOTE 6 STOCK BASED COMPENSATION The Company accounts for its stock-based compensation plans under the principles prescribed by the Accounting Principles Board's Opinion No. 25, "Accounting for Stock Issued to Employees." No stock option compensation cost is reflected in net income (loss), as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The Company is recognizing compensation expense as a result of the Original Owners granting options to three officers as discussed in Note 5. The following table illustrates the effect on net income (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock Based Compensation" 6 pursuant to the disclosure requirements of SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" (in thousands, except per share data):
Three Months Ended ------------------------- March 31, ------------------------- 2003 2002 --------- --------- Net income (loss) 2,993 (364) Stock-based compensation: Add expense included in reported results, net of tax 56 56 Deduct fair value based method, net of tax (112) (226) --------- --------- Pro forma net income (loss) 2,937 (534) Earnings (loss) per common share: Basic - as reported $ 0.07 ($0.01) Basic - pro forma $ 0.07 ($0.02) Diluted - as reported $ 0.07 ($0.01) Diluted - pro forma $ 0.07 ($0.02)
NOTE 7 DISPOSITION OF PROPERTY On March 1, 2002, the Company closed the sale of its interest in Valentine Field for $18.6 million. The transaction had an effective date of January 1, 2002. At December 31, 2001, the Company's independent reservoir engineering firm attributed 7.3 Bcfe of proved reserves net to the Company's interest in this field. Consistent with the full cost method of accounting, the Company did not recognize any gain or loss as a result of this sale. The proceeds were treated as a reduction of the full cost pool through an increase in accumulated depreciation, depletion and amortization. 7 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL PetroQuest Energy, Inc. is an independent oil and gas company engaged in the exploration, development, acquisition and operation of oil and gas properties onshore and offshore in the Gulf Coast Region. The Company and its predecessors have been active in this area since 1986, which gives the Company extensive geophysical, technical and operational expertise in this area. The Company's business strategy is to increase production, cash flow and reserves through exploration, development and acquisition of properties located in the Gulf Coast Region. At March 31, 2003, the Company operated approximately 95% of all of its proved reserves. For the three months ended March 31, 2003, approximately 47% of the Company's equivalent production was oil and 53% was natural gas. CRITICAL ACCOUNTING POLICIES Full Cost Method of Accounting We use the full cost method of accounting for our investments in oil and gas properties. Under this method, all acquisition, exploration and development costs, including certain related employee costs, incurred for the purpose of exploring for and developing and oil and natural gas are capitalized. Acquisition costs include costs incurred to purchase, lease or otherwise acquire property. Exploration costs include the costs of drilling exploratory wells, including those in progress and geological and geophysical service costs in exploration activities. Development costs include the costs of drilling development wells and costs of completions, platforms, facilities and pipelines. Costs associated with production and general corporate activities are expensed in the period incurred. Sales of oil and gas properties, whether or not being amortized currently, are accounted for as adjustments of capitalized costs, with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas. The costs associated with unevaluated properties are not initially included in the amortization base and relate to unevaluated leasehold acreage and delay rentals, seismic data and capitalized interest. These costs are either transferred to the amortization base with the costs of drilling the related well or are assessed quarterly for possible impairment or reduction in value. We compute the provision for depletion of oil and gas properties using the unit-of-production method based upon production and estimates of proved reserve quantities. Unevaluated costs and related carrying costs are excluded from the amortization base until the properties associated with these costs are evaluated. In addition to costs associated with evaluated properties, the amortization base includes estimated future development costs and dismantlement, restoration and abandonment costs, net of estimated salvage values. Our depletion expense is affected by the estimates of future development costs, unevaluated costs and proved reserves, and changes in these estimates could have an impact on our future earnings. We capitalize certain internal costs that are directly identified with the acquisition, exploration and development activities. The capitalized internal costs include salaries, employee benefits, costs of consulting services and other related expenses and do not include costs related to production, general corporate overhead or similar activities. We also capitalize a portion of the interest costs incurred on our debt. Capitalized interest is calculated using the amount of our unevaluated property and our effective borrowing rate. Capitalized costs of oil and gas properties, net of accumulated DD&A and related deferred taxes, are limited to the estimated future net cash flows from proved oil and gas reserves, discounted at 10 percent, plus the lower of cost or fair value of unproved properties, as adjusted for related income tax effects (the full cost ceiling). If capitalized costs exceed the full cost ceiling, the excess is charged to write-down of oil and gas properties in the quarter in which the excess occurs. 8 Given the volatility of oil and gas prices, it is probable that our estimate of discounted future net cash flows from proved oil and gas reserves will change in the near term. If oil or gas prices decline, even for only a short period of time, or if we have downward revisions to our estimated proved reserves, it is possible that write-downs of oil and gas properties could occur in the future. Future Abandonment Costs Future abandonment costs include costs to dismantle and relocate or dispose of our production platforms, gathering systems, wells and related structures and restoration costs of land and seabed. We develop estimates of these costs for each of our properties based upon the type of production structure, depth of water, reservoir characteristics, depth of the reservoir, market demand for equipment, currently available procedures and consultations with construction and engineering consultants. Because these costs typically extend many years into the future, estimating these future costs is difficult and requires management to make estimates and judgments that are subject to future revisions based upon numerous factors, including changing technology and the political and regulatory environment. The accounting for future abandonment costs changed on January 1, 2003, with the adoption of Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations." See New Accounting Standards in the Notes to Consolidated Financial Statements for a further discussion of this accounting standard. Reserve Estimates Our estimates of oil and gas reserves are, by necessity, projections based on geologic and engineering data, and there are uncertainties inherent in the interpretation of such data as well as the projection of future rates of production and the timing of development expenditures. Reserve engineering is a subjective process of estimating underground accumulations of oil and gas that are difficult to measure. The accuracy of any reserve estimate is a function of the quality of available data, engineering and geological interpretation and judgment. Estimates of economically recoverable oil and gas reserves and future net cash flows necessarily depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, the assumed effect of regulations by governmental agencies, and assumptions governing future oil and gas prices, future operating costs, severance taxes, development costs and workover costs, all of which may in fact vary considerably from actual results. The future drilling costs associated with reserves assigned to proved undeveloped locations may ultimately increase to the extent that these reserves may be later determined to be uneconomic. For these reasons, estimates of the economically recoverable quantities of expected oil and gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery, and estimates of the future net cash flows may vary substantially. Any significant variance in the assumptions could materially affect the estimated quantity and value of the reserves, which could affect the carrying value of our oil and gas properties and/or the rate of depletion of such oil and gas properties. Actual production, revenues and expenditures with respect to our reserves will likely vary from estimates, and such variance may be material. Derivative Instruments The estimated fair values of our commodity derivative instruments are recorded in the consolidated balance sheet. All of our commodity derivative instruments represent hedges of the price of future oil and gas production. The changes in fair value of those derivative instruments that qualify for treatment due to being highly effective are recorded to Other Comprehensive Income until the hedged oil or natural gas quantities are produced. Estimating the fair values of hedging derivatives requires complex calculations incorporating estimates of future prices, discount rates and price movements. Instead, we choose to obtain the fair value of our commodity derivatives from the counter parties to those contracts. Since the counter parties are market makers, they are able to provide us with a literal market value, or what they would be willing to settle such contracts for as of the given date. 9 RESULTS OF OPERATIONS The following table (unaudited) sets forth certain operating information with respect to our oil and gas operations for the periods noted:
Three Months Ended -------------------------- March 31, -------------------------- 2003 2002 ---------- ---------- Production: Oil (Bbls) 234,830 234,508 Gas (Mcf) 1,606,318 2,384,964 Total Production (Mcfe) 3,015,298 3,792,012 Sales: Total oil sales $7,235,119 $4,853,441 Total gas sales 8,918,569 5,655,498 Average sales prices: Oil (per Bbl) $ 30.81 $ 20.70 Gas (per Mcf) 5.55 2.37 Per Mcfe 5.36 2.77
The above sales include reductions related to gas hedges of $1,644,000 and $138,000 and oil hedges of $725,000 and zero for the three months ended March 31, 2003 and 2002, respectively. Net income totaled $2,993,000 for the quarter ended March 31, 2003. The Company incurred a net loss of $364,000 for the quarter ended March 31, 2002. The results are attributable to the following components: PRODUCTION. Oil production in 2003 remained relatively flat as compared to the quarter ended March 31, 2002. Natural gas production in 2003 decreased 33% over the quarter ended March 31, 2002. On a Mcfe basis, production for the first quarter decreased 20% over the same period in 2002. The decrease in production for the quarter ended March 31, 2003 as compared to 2002 was due to well performance at our Bordeaux and Berry Lake wells, the consistent decline of our Gulf Coast production and the absence of the addition of a significant amount of new discoveries. PRICES. The average oil price per Bbl for the quarter ended March 31, 2003 was $30.81, as compared to $20.70 for the same period in 2002. Average gas price per Mcf was $5.55 for the quarter ended March 31, 2003, as compared to $2.37 for the same period in 2002. Stated on a Mcfe basis, unit prices received during the first quarter 2003 were 94% higher than the prices received during the comparable 2002 period. REVENUE. Oil and gas sales during the quarter ended March 31, 2003 increased to $16,154,000 as compared to sales of $10,509,000 for the same period in 2002. The increase in commodity prices partially offset by a decrease in production volumes, resulted in an increase in revenue. EXPENSES. Lease operating expenses for the quarter ended March 31, 2003 increased to $2,762,000 as compared to $2,349,000 for the quarter ended March 31, 2002. On a Mcfe basis, lease operating expenses for the quarter ended March 31, 2003 increased to $0.92 as compared to $0.62 for the same period in 2002. The increase is primarily due to the decrease in production volumes without a comparable reduction of the fixed costs in our major fields. General and administrative expenses during the quarter ended March 31, 2003 totaled $1,223,000 as compared to expenses of $1,200,000 during the 2002 period. The Company capitalized $978,000 and $925,000, respectively, of general and administrative costs during the quarters ended March 31, 2003 and 2002. We recognized $86,000 of non-cash compensation expense during the quarters ended March 31, 2003 and 2002. Depreciation, depletion and amortization ("DD&A") expense in 2003 increased 19% over the quarter ended March 31, 2002. On a Mcfe basis, which reflects the changes in production, the DD&A rate for the first quarter of 2003 was $2.81 per Mcfe as compared to $1.87 per Mcfe for the same period in 2002. The increase in 2003 as compared 10 to 2002 is due primarily to the significant capital expended during the previous twelve months without a comparable increase in our reserve base. Interest expense, net of amounts capitalized on unevaluated prospects, decreased $188,000 during the quarter ended March 31, 2003 as compared to same period in 2002. The decrease is the result of a decrease in the average debt levels and interest rates during the current year. We capitalized $124,000 and $164,000 of interest during the three months ended March 31, 2003 and 2002, respectively. Income tax expense of $1,155,000 was recognized during quarter ended March 31, 2003. We recorded an income tax benefit of $195,000 during the quarter ended March 31, 2002. The increase is a result of an increase in the operating profit during the current year. We provide for income taxes at a statutory rate of 35%. LIQUIDITY AND CAPITAL RESOURCES We have financed our exploration and development activities to date principally through cash flow from operations, bank borrowings, private and public offerings of common stock and sales of properties. Source of Capital: Operations Net cash flow from operations during the quarter increased from $4,067,000 in 2002 to $6,688,000 in 2003. This increase resulted primarily from an increase in the average realized commodity prices. Additionally, we utilized discretionary cash flow to reduce our vendor payables during the first quarter of 2003, which decreased our net cash flow from operations. The working capital deficit was reduced from $(15.8) million at December 31, 2002 to $(12.8) million at March 31, 2003. This increase was caused primarily by our effort to utilize cash flow to first reduce our working capital deficit and second to drill prospects. These strategies were partially offset by an increase in the current portion of long-term debt due to the borrowing base reductions as required by our credit facility. In order to reduce expenses for the remainder of 2003, our management team has voluntarily reduced salaries, and we have reduced our staff, which should result in an aggregate annual savings of in excess of $1 million. Source of Capital: Debt We entered into a new bank credit facility on May 14, 2003 with a group of two banks, which replaces our current credit facility. We will expense approximately $200,000 of deferred financing costs during the quarter ended June 30, 2003 relating to our previous credit facility. Pursuant to the new credit facility agreement, PetroQuest and our subsidiary PetroQuest Energy, L.L.C. (the "Borrower") have a $75 million revolving credit facility with a group of two banks which permits us to borrow amounts from time to time based on our available borrowing base as determined in the credit facility. The credit facility is secured by a mortgage on substantially all of the Borrower's oil and gas properties, a pledge of the membership interest of the Borrower and PetroQuest's corporate guarantee of the indebtedness of the Borrower. The borrowing base under this credit facility is based upon the valuation as of January 1 and July 1 of each year of the Borrower's mortgaged properties, projected oil and gas prices, and any other factors deemed relevant by the lenders. We or the lenders may also request additional borrowing base redeterminations. The initial borrowing base under this credit facility is $15.5 million and is subject to monthly reductions of $1.25 million beginning June 1, 2003. The banks will determine future monthly reductions in connection with each borrowing base redetermination. Outstanding balances on the revolving credit facility bear interest at either the bank's prime rate plus a margin (based on a sliding scale of 0.75% to 1.25% based on borrowing base usage but never less than the Federal Funds Effective Rate plus 0.5%) or the Eurodollar rate plus a margin (based on a sliding scale of 2.0% to 2.5% depending on borrowing base usage). The credit facility also allows us to use up to $5 million of the borrowing base for letters of credit for fees equal to the applicable margin rate for Eurodollar advances. At May 14, 2003, we had $9 million of borrowings and a $2.6 million letter of credit issued pursuant to the credit facility. We are subject to certain restrictive financial and non-financial covenants under the credit facility, including a minimum current ratio, a minimum tangible net worth, maximum debt to EBITDA ratio, maximum G&A expenses, and limiting authorization for expenditures on dry hole costs, all as defined in the credit facility. The credit facility also requires the Borrower to establish and maintain commodity hedges covering at least 50% of its proved developed producing reserves on a rolling twelve month basis. The credit facility matures during May 2006. 11 Natural gas and oil prices have a significant impact on our cash flows available for capital expenditures and our ability to borrow and raise additional capital. The amount we can borrow under our credit facility is subject to periodic re-determination based in part on changing expectations of future prices. Lower prices may also reduce the amount of natural gas and oil that we can economically produce. Additionally, the production declines of certain producing wells resulted in lower production in the three months ended March 31, 2003. Lower prices and/or lower production may decrease revenues, cash flows and the borrowing base under the credit facility, thus reducing the amount of financial resources available to meet our capital requirements. Source of Capital: Issuance of Equity Securities We have an effective universal shelf registration statement relating to the potential public offer and sale by PetroQuest of any combination of debt securities, common stock, preferred stock, depositary shares, and warrants from time to time or when financing needs arise. The registration statement does not provide assurance that we will or could sell any such securities. During October and November 2002, we completed the offering of 5,000,000 shares of our common stock. The shares were sold to the public for $4.25 per share. After underwriting discounts, we realized proceeds of approximately $20.4 million. During February and March 2002, we completed the offering of 5,193,600 shares of our common stock. The shares were sold to the public for $4.40 per share. After underwriting discounts, we realized proceeds of approximately $21.9 million. Source of Capital: Sales of Properties On March 1, 2002, we closed the sale of our interest in Valentine Field for $18.6 million. The transaction had an effective date of January 1, 2002. At December 31, 2001, our independent reservoir engineering firm attributed 7.3 Bcfe of proved reserves net to our interest in this field. Consistent with the full cost method of accounting, we did not recognize any gain or loss as a result of this sale. The proceeds were treated as a reduction of the full cost pool. Use of Capital: Exploration and Development We have an exploration and development program budget for the year 2003 that will require significant capital. Our capital budget for direct capital for new projects in 2003 is approximately $25 million of which $4.7 million had been incurred by March 31, 2003. Our management believes that cash flows from operations will be sufficient to fund planned 2003 exploration and development activities. We will actively seek industry partners for certain of our prospects to provide further funding for our 2003 planned activities. In the future, our exploration and development activities could require additional financings, which may include sales of additional equity or debt securities, additional bank borrowings, sales of properties, or joint venture arrangements with industry partners. We cannot assure you that such additional financings will be available on acceptable terms, if at all. If we are unable to obtain additional financing, we could be forced to delay or even abandon some of our exploration and development opportunities or be forced to sell some of our assets on an untimely or unfavorable basis. DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS This Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical facts included in and incorporated by reference into this Form 10-Q are forward-looking statements. These forward-looking statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected. Among those risks, trends and uncertainties are the Company's estimate of the sufficiency of its existing capital sources, its ability to raise additional capital to fund cash requirements for future operations, the uncertainties involved in estimating quantities of proved oil and natural gas reserves, in prospect development and property acquisitions and in projecting future rates of production, the timing of development expenditures and drilling of wells, and the operating hazards attendant to the oil and gas business. In particular, careful consideration should be given to cautionary statements made in the various reports the Company has filed with the Securities and Exchange Commission. The Company undertakes no duty to update or revise these forward-looking statements. 12 When used in the Form 10-Q, the words, "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Because these forward-looking statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking statements for a number of important reasons, including those discussed under "Management's Discussions and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-Q. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company experiences market risks primarily in two areas: interest rates and commodity prices. The Company believes that its business operations are not exposed to significant market risks relating to foreign currency exchange risk. The Company's revenues are derived from the sale of its crude oil and natural gas production. Based on projected annual sales volumes for the remaining nine months of 2003, a 10% change in the prices the Company receives for its crude oil and natural gas production would have an approximate $3 million impact on the Company's revenues. In a typical hedge transaction, the Company will have the right to receive from the counterparts to the hedge, the excess of the fixed price specified in the hedge over a floating price based on a market index, multiplied by the quantity hedged. If the floating price exceeds the fixed price, the Company is required to pay the counterparts this difference multiplied by the quantity hedged. The Company is required to pay the difference between the floating price and the fixed price (when the floating price exceeds the fixed price) regardless of whether the Company has sufficient production to cover the quantities specified in the hedge. Significant reductions in production at times when the floating price exceeds the fixed price could require the Company to make payments under the hedge agreements even though such payments are not offset by sales of production. Hedging will also prevent the Company from receiving the full advantage of increases in oil or gas prices above the fixed amount specified in the hedge. As of March 31, 2003, the Company had open fixed price swap contracts with third parties, whereby a fixed price has been established for a certain period. These agreements in effect for the remainder of 2003 are for oil volume of 1,000 barrels per day at a weighted average price of $25.75, and gas volume of 7,000Mmbtu per day at a weighted average price of $4.02. At March 31, 2003, the Company recognized a liability of $2,639,000 related to these derivative instruments, which have been designated as cash flow hedges. We currently have two interest rate swaps covering $5 million of our floating rate debt. The swaps, which expire in November 2003 and 2004, have fixed interest rates of 4.56% and 4.25%-5.665%, respectively. The swaps are stated at their fair value and are marked-to-market through other income in our income statement. As of March 31, 2003, the fair value of the open interest rate swaps was a liability of $435,000. The Company also evaluated the potential effect that reasonably possible near term changes may have on the Company's credit facility. Debt outstanding under the facility is subject to a floating interest rate and represents 100% of the Company's total debt as of March 31, 2003. Based upon an analysis, utilizing the actual interest rate in effect and balances outstanding as of March 31, 2003 and assuming a 10% increase in interest rates and no changes in the amount of debt outstanding, the potential effect on interest expense for the remaining nine months of 2003 is approximately $26,000. Item 4. CONTROLS AND PROCEDURES Within the 90-day period prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective, in all material respects, with respect to the recording, processing, summarizing and reporting, within the time periods specified in the Securities and Exchange Commission's rules and forms, of information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date the Company carried out its evaluation. 13 PART II Item 1. LEGAL PROCEEDINGS NONE. Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS NONE. Item 3. DEFAULTS UPON SENIOR SECURITIES NONE. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE. Item 5. OTHER INFORMATION NONE. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit 99.1, Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 Exhibit 99.2, Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K: On January 27, 2003, the Company filed a current report on Form 8-K regarding drilling results. On February 18, 2003, the Company filed a current report on Form 8-K regarding its 2002 year-end proved oil and gas reserves. On February 26, 2003, the Company filed a current report on Form 8-K regarding its 2002 year-end and fourth quarter results. 14 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PETROQUEST ENERGY, INC. Date: May 15, 2003 By: /s/ Michael O. Aldridge ------------ --------------------------------- Michael O. Aldridge Senior Vice President, Chief Financial Officer and Treasurer (Authorized Officer and Principal Financial and Accounting Officer) 15 CERTIFICATIONS I, Charles T. Goodson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of PetroQuest Energy, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 By: /s/ Charles T. Goodson --------------------------------------- Charles T. Goodson Chairman of the Board and Chief Executive Officer (Principal Executive Officer) 16 I, Michael O. Aldridge, certify that: 1. I have reviewed this quarterly report on Form 10-Q of PetroQuest Energy, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 By: /s/ Michael O. Aldridge ---------------------------------------- Michael O. Aldridge Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) 17 EX-99.1 3 d06006exv99w1.txt CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of PetroQuest Energy, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2003 (the "Report"), as filed with the Securities and Exchange Commission on the date hereof, I, Charles T. Goodson, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Charles T. Goodson Charles T. Goodson Chief Executive Officer May 14, 2003 EX-99.2 4 d06006exv99w2.txt CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of PetroQuest Energy, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2003 (the "Report"), as filed with the Securities and Exchange Commission on the date hereof, I, Michael O. Aldridge, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Michael O. Aldridge Michael O. Aldridge Chief Financial Officer May 14, 2003 -----END PRIVACY-ENHANCED MESSAGE-----