Back to GetFilings.com
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2002
--------------
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 0-22258
AVIVA PETROLEUM INC.
(Exact name of registrant as specified in its charter)
Texas 75-1432205
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
8235 Douglas Avenue, 75225
Suite 400, Dallas, Texas (Zip Code)
(Address of principal executive offices)
(214) 691-3464
(Registrant's telephone number, including area code)
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
-- -------
Number of shares of Common Stock, no par value, outstanding at June 30, 2002,
was 46,900,132.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
(in thousands, except number of shares)
(unaudited)
June 30, December 31,
2002 2001
---------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 629 $ 1,010
Accounts receivable 327 187
Inventories 202 209
Prepaid expenses and other 81 140
-------- --------
Total current assets 1,239 1,546
-------- --------
Property and equipment, at cost (note 3):
Oil and gas properties and equipment (full cost method) 20,299 20,244
Other 334 334
-------- --------
20,633 20,578
Less accumulated depreciation, depletion
and amortization (20,129) (19,981)
-------- --------
504 597
Other assets 1,009 991
-------- --------
$ 2,752 $ 3,134
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 550 $ 776
Accrued liabilities 71 37
-------- --------
Total current liabilities 621 813
-------- --------
Other liabilities 366 368
Stockholders' equity:
Common stock, no par value, authorized 348,500,000 shares;
issued 46,900,132 shares 2,345 2,345
Additional paid-in capital 37,710 37,710
Accumulated deficit* (38,290) (38,102)
-------- --------
Total stockholders' equity 1,765 1,953
Commitments and contingencies (note 4)
-------- --------
$ 2,752 $ 3,134
======== ========
* Accumulated deficit of $70,057 was eliminated at December 31, 1992 in
connection with a quasi-reorganization.
See accompanying notes to condensed consolidated financial statements.
2
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Operations
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
-------- --------- -------- ---------
Revenue:
Oil and gas sales $ 534 $ 575 $ 897 $ 1,175
Service fees -- 107 97 273
-------- ----------- -------- ---------
Total revenue 534 682 994 1,448
-------- ----------- -------- ---------
Expense:
Production 331 357 598 715
Depreciation, depletion and amortization 86 65 148 131
General and administrative 218 290 485 580
Recovery of losses on accounts receivable -- (4) -- (29)
-------- ----------- -------- ---------
Total expense 635 708 1,231 1,397
-------- ----------- -------- ---------
Other income (expense):
Interest and other income (expense), net 37 2 90 173
Interest expense (2) (1) (2) (2)
-------- ----------- -------- ---------
Total other income (expense) 35 1 88 171
-------- ----------- -------- ---------
Earnings (loss) before income taxes (66) (25) (149) 222
Income taxes (22) (19) (39) (36)
-------- ----------- -------- ---------
Net earnings (loss) $ (88) $ (44) $ (188) $ 186
======== =========== ======== =========
Weighted average common shares outstanding -
basic and diluted 46,900 46,900 46,900 46,900
======== =========== ======== =========
Basic and diluted net earnings (loss) per
common share $ (.00) $ (.00) $ (.00) $ .00
======== =========== ======== =========
See accompanying notes to condensed consolidated financial statements.
3
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows
(in thousands)
(unaudited)
Six Months Ended
June 30,
2002 2001
---------------- ---------------
Net earnings (loss) $ (188) $ 186
Adjustments to reconcile net earnings (loss) to net
cash used in operating activities:
Depreciation, depletion and amortization 148 131
Changes in working capital and other (290) (469)
---------------- ---------------
Net cash used in operating activities (330) (152)
---------------- ---------------
Cash flows from investing activities:
Property and equipment expenditures (55) (97)
Proceeds from sale of assets - 4
---------------- ---------------
Net cash used in investing activities (55) (93)
---------------- ---------------
Cash flows from financing activities - -
---------------- ---------------
Effect of exchange rate changes on cash and
cash equivalents 4 12
---------------- ---------------
Net decrease in cash and cash equivalents (381) (233)
Cash and cash equivalents at beginning of the period 1,010 820
---------------- ---------------
Cash and cash equivalents at end of the period $ 629 $ 587
================ ===============
See accompanying notes to condensed consolidated financial statements.
4
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders' Equity
(in thousands, except number of shares)
(unaudited)
Common Stock
------------------------------
Additional Total
Number Paid-in Accumulated Stockholders'
of Shares Amount Capital Deficit Equity
------------- ------------ ------------ ------------- ---------------
Balances at December 31, 2001 46,900,132 $ 2,345 $ 37,710 $ (38,102) $ 1,953
Net loss - - - (188) (188)
------------- ------------ ------------ ------------- ---------------
Balances at June 30, 2002 46,900,132 $ 2,345 $ 37,710 $ (38,290) $ 1,765
============= ============ ============ ============= ===============
See accompanying notes to condensed consolidated financial statements.
5
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. General
The condensed consolidated financial statements of Aviva Petroleum Inc. and
subsidiaries (the "Company" or "Aviva") included herein have been prepared
by the Company without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures contained
herein are adequate to make the information presented not misleading. These
condensed consolidated financial statements should be read in conjunction
with the Company's prior audited yearly financial statements and the notes
thereto, included in the Company's latest annual report on Form 10-K.
In the opinion of the Company, all adjustments, consisting of normal
recurring accruals, necessary to present fairly the information in the
accompanying financial statements have been included. The results of
operations for such interim periods are not necessarily indicative of the
results for the full year.
2. Transfer of Partnership Interest
Pursuant to the June 8, 2000 agreements with Crosby Capital L.L.C.
("Crosby"), an additional 7.5% limited partnership interest was transferred
from Crosby to Aviva effective August 14, 2001, when Crosby received in
distributions from Argosy Energy International ("Argosy") an amount equal
to $3,500,000 plus interest at the prime rate plus 1%. Argosy is the Utah
limited partnership that holds the Company's Colombian properties. The
Company's interest in Argosy is 29.6196% after the transfer.
The Company proportionately consolidates its interest in Argosy. The excess
of net assets over the net liabilities of Argosy attributable to the
additional 7.5% partnership interest transferred to the Company effective
August 14, 2001 equaled approximately $340,000. Such amount has been
credited to the Company's Colombian cost center in accordance with the full
cost method of accounting.
3. Property and Equipment
Internal general and administrative costs directly associated with oil and
gas property acquisition, exploration and development activities have been
capitalized in accordance with the accounting policies of the Company. Such
costs totaled $48,000 for the six months ended June 30, 2002 and $31,000
for the six months ended June 30, 2001.
Unevaluated oil and gas properties totaling $313,000 and $303,000 at June
30, 2002 and December 31, 2001, respectively, have been excluded from costs
subject to depletion.
4. Commitments and Contingencies
During the latter part of 2001, an offset operator drilled a successful
exploratory well approximately 4,000 feet from the eastern boundary of the
Company's Breton Sound acreage. Although such operator decided not to
participate in prospects located on Aviva's acreage,
6
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) (continued)
management of the Company is continuing its efforts with other interested
parties, with a view towards negotiating an arrangement to explore the
Company's Breton Sound prospects. At this time it is not possible to
predict the cost, if any, net to the Company, that may arise should
management successfully negotiate such an arrangement.
The Company is also engaged in ongoing operations in Colombia. The
obligations under the Santana contract have been met; however, Argosy plans
to recomplete certain existing wells and engage in various other projects.
The first of these recompletions is scheduled during 2003, and the majority
of the remaining recompletions are scheduled during 2004. The Company's
share of the estimated future costs of these activities is approximately
$0.2 million at June 30, 2002.
The contract obligations of the Rio Magdalena contract require Argosy and
its co-owner to perform 40 kilometers of 2D seismic during the initial
18-month exploration phase of the contract. The Company's current share of
the estimated future costs of this phase is approximately $74,000 at June
30, 2002. Additional expenditures will be required should Argosy decide to
enter into the second phase of the contract.
The Company expects to fund its share of the cost of the recompletions on
the Santana contract and the seismic commitments on the Rio Magdalena
contract using existing cash in Colombia and cash provided from Colombian
operations. Any substantial increase in the amount of the above referenced
expenditures could adversely affect the Company's ability to fund these
activities. Risks that could adversely affect funding of such activities
include, among others, delays in obtaining any required environmental
permits, cost overruns, failure to produce the reserves as projected or a
decline in the sales price of oil. Depending on the results of future
exploration and development activities, substantial expenditures which have
not been included in the Company's projections may be required.
The contract obligations of the Guayuyaco contract (signed August 2, 2002)
require Argosy to drill one exploratory well during the initial 12-month
exploration phase of the contract. Upon completion of the initial
exploration phase, Argosy may relinquish the contract or proceed to the
following 18-month exploration phase, whereunder Argosy will be obligated
to drill a second exploratory well. Argosy plans to involve industry and
service company partners to reduce the cost exposure of the first
exploratory well. A letter of intent has already been signed with
Schlumberger Surenco, S.A. to participate, through provision of services
and materials, in the drilling of an exploratory well on our Inchiyaco
prospect (formerly Mary East). This well, the Inchiyaco #1, is expected to
be an 8,100 foot exploration test of the Villeta U, T, N and Caballos sands
in the Inchiyaco structure approximately 500 meters east of the Mary field.
Depending on definitive service agreements, rig availability and other
contingencies, drilling could commence as early as the fourth quarter of
2002.
Failure by Argosy to meet the obligations under the Guayuyaco contract will
result in the loss of the proposed contract terms. The existing Santana
production will not be affected. Failure by the Company to fund its share
of Argosy's obligations, assuming Argosy funds the obligation, could result
in a decrease in the Company's ownership interest in Argosy.
In order to accumulate the funds necessary to drill the Inchiyaco #1,
management of Argosy has decided to suspend cash distributions from Argosy
to its partners (including Aviva) beginning in June 2002. Accordingly,
Aviva cannot expect to receive cash distributions from Argosy during
7
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) (continued)
the foreseeable future. Even if such an exploratory well were successful,
additional funds may be required to equip and complete such a well prior to
the resumption of cash distributions.
As of June 30, 2002, approximately $261,000 of cash and cash equivalents
included in the Company's consolidated cash and cash equivalents balance
was held by Argosy and is not available to the Company for use outside of
Colombia. The remaining balance of $368,000 is under the direct control of
Aviva and is available for its U.S. operations. As indicated in note 5 to
the condensed consolidated financial statements, the U.S. operations have
suffered a net operating loss of approximately $423,000 for the six-month
period ended June 30, 2002, and are expected to continue to have operating
losses in the foreseeable future. Although the Company is currently
receiving a higher price ($25.02 per barrel) for its Breton Sound oil
production ($22.36 per barrel during the first six months of 2002), it is
unlikely that such improvement in price will result in a significant
improvement in the results of operations for the U.S. Accordingly, if
management is unable to successfully implement its plans as set forth below
or if distributions from Argosy do not resume, the Company's liquidity will
continue to deteriorate and at some point, possibly as early as mid-2003,
the Company may be unable to continue as a going concern.
In order to improve the Company's liquidity, management of the Company is
working to raise additional capital through equity issues, incurring debt
or by sales of assets. Although the ultimate outcome of these matters
cannot be projected with certainty, management believes that the Company's
existing capital resources plus the capital that management expects to
raise, will be adequate to fund the Company's current obligations. There
can be no assurance, however, that such attempts to raise additional
capital will be successful.
During 1998, leftist Colombian guerrillas inflicted significant damage on
Argosy's oil processing and storage facilities. Since that time Argosy has
been subject to lesser attacks on its pipelines and equipment resulting in
only minor interruptions of oil sales. The Colombian army guards the
Company's operations; however, there can be no assurance that such
operations will not be the target of additional guerrilla attacks in the
future. The damages resulting from the above referenced attacks were
covered by insurance. During 2001 the cost of such insurance became
prohibitively high and, accordingly, Argosy has elected to no longer
maintain terrorism insurance.
Under the terms of the contracts with Ecopetrol, a minimum of 25% of all
revenues from oil sold to Ecopetrol is paid in Colombian pesos which may
only be utilized in Colombia. To date, the Company has experienced no
difficulty in repatriating the remaining 75% of such payments, which are
payable in U.S. dollars.
Activities of the Company with respect to the exploration, development and
production of oil and natural gas are subject to stringent foreign,
federal, state and local environmental laws and regulations, including but
not limited to the Oil Pollution Act of 1990, the Outer Continental Shelf
Lands Act, the Federal Water Pollution Control Act, the Resource
Conservation and Recovery Act and the Comprehensive Environmental Response,
Compensation, and Liability Act. Such laws and regulations have increased
the cost of planning, designing, drilling, operating and abandoning wells.
In most instances, the statutory and regulatory requirements relate to air
and water pollution control procedures and the handling and disposal of
drilling and production wastes. Although the Company believes that
compliance with environmental laws and regulations will not have a material
adverse effect on the Company's future operations or
8
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) (continued)
earnings, risks of substantial costs and liabilities are inherent in oil
and gas operations and there can be no assurance that significant costs and
liabilities, including civil or criminal penalties for violations of
environmental laws and regulations, will not be incurred. Moreover, it is
possible that other developments, such as stricter environmental laws and
regulations or claims for damages to property or persons resulting from the
Company's operations, could result in substantial costs and liabilities.
For additional discussions on the applicability of environmental laws and
regulations and other risks that may affect the Company's operations, see
the Company's latest annual report on Form 10-K.
The Company is involved in certain litigation involving its oil and gas
activities. Management of the Company believes that these litigation
matters will not have any material adverse effect on the Company's
financial condition or results of operations.
9
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) (continued)
5. Segment Information
The following is a summary of segment information of the Company as of and
for the six-month periods ended June 30, 2002 and 2001 (in thousands):
United
States Colombia Total
------ -------- -----
2002
- ----
Revenue:
Oil and gas sales $ 339 $ 558 $ 897
Service fees 97 -- 97
------- ------- -------
436 558 994
------- ------- -------
Expense:
Production 355 243 598
Depreciation, depletion and amortization 99 49 148
General and administrative 428 57 485
------- ------- -------
882 349 1,231
------- ------- -------
Interest and other income (expense), net 25 65 90
Interest expense (2) -- (2)
------- ------- -------
Net earnings (loss) before income taxes (423) 274 (149)
Income taxes -- (39) (39)
------- ------- -------
Net earnings (loss) $ (423) $ 235 $ (188)
======= ======= =======
Total assets $ 1,351 $ 1,401 $ 2,752
======= ======= =======
10
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) (continued)
United
States Colombia Total
------ -------- -----
2001
- ----
Revenue:
Oil and gas sales $ 546 $ 629 $ 1,175
Service fees 273 -- 273
------- ------- -------
819 629 1,448
------- ------- -------
Expense:
Production 432 283 715
Depreciation, depletion and amortization 73 58 131
General and administrative 527 53 580
Recovery of losses on accounts receivable (29) -- (29)
------- ------- -------
1,003 394 1,397
------- ------- -------
Interest and other income (expense), net 36 137 173
Interest expense (2) -- (2)
------- ------- -------
Earnings (loss) before income taxes (150) 372 222
Income taxes -- (36) (36)
------- ------- -------
Net earnings (loss) $ (150) $ 336 $ 186
======= ======= =======
Total assets $ 1,724 $ 1,417 $ 3,141
======= ======= =======
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations.
- -------------
Results of Operations
- ---------------------
Three Months Ended June 30, 2002 compared to Three Months Ended June 30, 2001
- -----------------------------------------------------------------------------
United States Colombia
Oil Gas Oil Total
------------- ------------- ------------- -------------
(Thousands)
Oil and gas sales - 2001 $ 228 $ 32 $ 315 $ 575
Volume variance (7) (4) 40 29
Price variance (9) (8) (53) (70)
------------- ------------- ------------- -------------
Oil and gas sales - 2002 $ 212 $ 20 $ 302 $ 534
============= ============= ============= =============
Colombian oil volumes were 15,000 barrels in the second quarter of 2002, an
increase of 2,000 barrels as compared to the second quarter of 2001. Such
increase is due to a 4,000 barrel increase resulting from the transfer of a 7.5%
partnership interest to Aviva from Crosby Capital L.L.C. ("Crosby") (see note 2
to the condensed consolidated financial statements) offset partially by a 2,000
barrel decrease resulting from normal production declines.
U.S. oil volumes were 9,000 barrels in 2002, approximately the same as 2001.
U.S. gas volumes were 6,000 thousand cubic feet (MCF) in 2002, down 1,000 MCF
from 2001.
Colombian oil prices averaged $19.88 per barrel during the second quarter of
2002. The average price for the same period of 2001 was $23.38 per barrel. The
Company's average U.S. oil price decreased to $24.19 per barrel in 2002, down
from $25.12 per barrel in 2001. U.S. gas prices averaged $3.45 per MCF in 2002
compared to $4.85 per MCF in 2001.
Service fees of $107,000 for administering the Colombian assets were received in
2001. The 2001 amount covers three months at a monthly rate of $46,000, net of
Aviva Overseas' 22.1196% (29.6196% after August 14, 2001) share of the fees. No
service fees were recorded in the second quarter of 2002 because the service
contract was cancelled effective March 31, 2002.
Operating costs decreased approximately 7%, or $26,000, primarily as a result of
the absence of Colombian crude oil transportation charges in 2002. Such
transportation charges (approximately $1.82 per barrel in 2001) are included as
a deduction to the oil sales price in 2002 pursuant to the latest oil sales
agreement with Ecopetrol.
Depreciation, depletion and amortization ("DD&A") increased by 32%, or $21,000,
due to an increase in the U.S. DD&A rate per barrel that resulted from a
decrease in the U.S. proved reserves.
General and administrative ("G&A") expense decreased $72,000 or 25% primarily
due to lower public ownership costs, lower insurance costs, and an increase in
the amount of G&A expense capitalized for Colombian activities.
12
Six Months Ended June 30, 2002 compared to Six Months Ended June 30, 2001
- -------------------------------------------------------------------------
United States Colombia
Oil Gas Oil Total
------------- ------------- ------------- -------------
(Thousands)
Oil and gas sales - 2001 $ 478 $ 68 $ 629 $ 1,175
Volume variance (119) (9) 66 (62)
Price variance (50) (29) (137) (216)
------------- ------------- ------------- -------------
Oil and gas sales - 2002 $ 309 $ 30 $ 558 $ 897
============= ============= ============= =============
Colombian oil volumes were 31,000 barrels in the first half of 2002, an increase
of 3,000 barrels as compared to the first half of 2001. Such increase is due to
an 8,000 barrel increase resulting from the transfer of a 7.5% partnership
interest to Aviva from Crosby (see note 2 to the condensed consolidated
financial statements) offset partially by a 5,000 barrel decrease resulting from
production declines.
U.S. oil volumes were 14,000 barrels in 2002, down approximately 4,000 barrels
from 2001. Such decrease is primarily due to the Company's Breton Sound 31
field, and certain wells therein, being shut-in for various periods during the
first half of 2002 as a result of equipment failures. U.S. gas volumes were
10,000 MCF in 2002, down 2,000 MCF from 2001 as a result of the aforementioned
equipment failures.
Colombian oil prices averaged $18.10 per barrel during the first half of 2002.
The average price for the same period of 2001 was $22.58 per barrel. The
Company's average U.S. oil price decreased to $22.36 per barrel in 2002, down
from $25.97 per barrel in 2001. U.S. gas prices averaged $2.96 per MCF in 2002
compared to $5.70 per MCF in 2001.
Service fees of $97,000 for administering the Colombian assets were received in
2002 compared to $273,000 in 2001. The 2002 amount covered three months at an
average monthly rate of $46,000, whereas the 2001 amount covered six months,
three months at a monthly rate of $71,000 and three months at a monthly rate of
$46,000. These amounts are net of Aviva Overseas' 22.1196% (29.6196% after
August 14, 2001) share of the fees. The service contract was cancelled effective
March 31, 2002.
Operating costs decreased approximately 16%, or $117,000, primarily as a result
of a decrease in the cost of lease fuel in the U.S. due to lower gas prices and
the absence of Colombian crude oil transportation charges in 2002. Such
transportation charges (approximately $1.82 per barrel in 2001) are included as
a deduction to the oil sales price in 2002 pursuant to the latest oil sales
agreement with Ecopetrol.
DD&A increased by 13%, or $17,000, due to an increase in the U.S. DD&A rate per
barrel that resulted from a decrease in the U.S. proved reserves.
G&A expenses decreased $95,000, or 16%, primarily due to lower public ownership
costs, lower insurance costs, and an increase in the amount of G&A expense
capitalized for Colombian activities.
13
New Accounting Pronouncements
- -----------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 143 "Accounting for Asset
Retirement Obligations" which establishes requirements for the accounting of
removal-type costs associated with asset retirements. The standard is effective
for fiscal years beginning after June 15, 2002, with earlier application
encouraged. The Company is currently assessing the impact on its financial
statements.
On October 3, 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets" which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001 and interim periods
within those fiscal years. The Company adopted SFAS No. 144 in the first quarter
of 2002. The adoption had no material impact on the Company's financial
statements.
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents totaled $629,000 and $1,010,000 at June 30, 2002 and
December 31, 2001, respectively, a portion of which is only available for
Colombian operations as discussed below. The decrease in cash and cash
equivalents resulted primarily from net cash used in operating activities
($330,000) and property additions ($55,000).
Net cash used in operating activities was ($330,000) in 2002, compared to
($152,000) net cash used in operating activities for 2001. This decrease
resulted primarily from lower oil and gas prices received for the Company's
production and lower U.S. oil volumes resulting from equipment failures during
the first half of 2002. These decreases were partially offset by a smaller
change in working capital.
During the latter part of 2001, an offset operator drilled a successful
exploratory well approximately 4,000 feet from the eastern boundary of the
Company's Breton Sound acreage. Although such operator decided not to
participate in prospects located on Aviva's acreage, management of the Company
is continuing its efforts with other interested parties with a view towards
negotiating an arrangement to explore the Company's Breton Sound prospects. At
this time it is not possible to predict the cost, if any, net to the Company,
that may arise should management successfully negotiate such an arrangement.
The Company is also engaged in ongoing operations in Colombia. The obligations
under the Santana contract have been met; however, Argosy plans to recomplete
certain existing wells and engage in various other projects. The first of these
recompletions is scheduled during 2003, and the majority of the remaining
recompletions are scheduled during 2004. The Company's share of the estimated
future costs of these activities is approximately $0.2 million at June 30, 2002.
The contract obligations of the Rio Magdalena contract require Argosy and its
co-owner to perform 40 kilometers of 2D seismic during the initial 18-month
exploration phase of the contract. The Company's current share of the estimated
future costs of this phase is approximately $74,000 at June 30, 2002. Additional
expenditures will be required should Argosy decide to enter into the second
phase of the contract.
The Company expects to fund its share of the cost of the recompletions on the
Santana contract and the seismic commitments on the Rio Magdalena contract using
existing cash in Colombia and cash provided from Colombian operations. Any
substantial increase in the amount of the above referenced expenditures could
adversely affect the Company's ability to fund these activities. Risks that
could
14
adversely affect funding of such activities include, among others, delays in
obtaining any required environmental permits, cost overruns, failure to produce
the reserves as projected or a decline in the sales price of oil. Depending on
the results of future exploration and development activities, substantial
expenditures which have not been included in the Company's projections may be
required.
The contract obligations of the Guayuyaco contract (signed August 2, 2002)
require Argosy to drill one exploratory well during the initial 12-month
exploration phase of the contract. Upon completion of the initial exploration
phase, Argosy may relinquish the contract or proceed to the following 18-month
exploration phase, whereunder Argosy will be obligated to drill a second
exploratory well. Argosy plans to involve industry and service company partners
to reduce the cost exposure of the first exploratory well. A letter of intent
has already been signed with Schlumberger Surenco, S.A. to participate, through
provision of services and materials, in the drilling of an exploratory well on
our Inchiyaco prospect (formerly Mary East). This well, the Inchiyaco #1, is
expected to be an 8,100 foot exploration test of the Villeta U, T, N and
Caballos sands in the Inchiyaco structure approximately 500 meters east of the
Mary field. Depending on definitive service agreements, rig availability and
other contingencies, drilling could commence as early as the fourth quarter of
2002.
Failure by Argosy to meet the obligations under the Guayuyaco contract will
result in the loss of the proposed contract terms. The existing Santana
production will not be affected. Failure by the Company to fund its share of
Argosy's obligations, assuming Argosy funds the obligation, could result in a
decrease in the Company's ownership interest in Argosy.
In order to accumulate the funds necessary to drill the Inchiyaco #1, management
of Argosy has decided to suspend cash distributions from Argosy to its partners
(including Aviva) beginning in June 2002. Accordingly, Aviva cannot expect to
receive cash distributions from Argosy during the foreseeable future. Even if
such an exploratory well were successful, additional funds may be required to
equip and complete such a well prior to the resumption of cash distributions.
As of June 30, 2002, approximately $261,000 of cash and cash equivalents
included in the Company's consolidated cash and cash equivalents balance was
held by Argosy and is not available to the Company for use outside of Colombia.
The remaining balance of $368,000 is under the direct control of Aviva and is
available for its U.S. operations. As indicated in note 5 to the condensed
consolidated financial statements, the U.S. operations have suffered a net
operating loss of approximately $423,000 for the six-month period ended June 30,
2002, and are expected to continue to have operating losses in the foreseeable
future. Although the Company is currently receiving a higher price ($25.02 per
barrel) for its Breton Sound oil production ($22.36 per barrel during the first
six months of 2002), it is unlikely that such improvement in price will result
in a significant improvement in the results of operations for the U.S.
Accordingly, if management is unable to successfully implement its plans as set
forth below or if distributions from Argosy do not resume, the Company's
liquidity will continue to deteriorate and at some point, possibly as early as
mid-2003, the Company may be unable to continue as a going concern.
In order to improve the Company's liquidity, management of the Company is
working to raise additional capital through equity issues, incurring debt or by
sales of assets. Although the ultimate outcome of these matters cannot be
projected with certainty, management believes that the Company's existing
capital resources plus the capital that management expects to raise, will be
adequate to fund the Company's current obligations. There can be no assurance,
however, that such attempts to raise additional capital will be successful.
During 1998, leftist Colombian guerrillas inflicted significant damage on
Argosy's oil processing and storage facilities. Since that time Argosy has been
subject to lesser attacks on its pipelines and
15
equipment resulting in only minor interruptions of oil sales. The Colombian army
guards the Company's operations; however, there can be no assurance that such
operations will not be the target of additional guerrilla attacks in the future.
The damages resulting from the above referenced attacks were covered by
insurance. During 2001 the cost of such insurance became prohibitively high and,
accordingly, Argosy has elected to no longer maintain terrorism insurance.
Under the terms of the contracts with Ecopetrol, a minimum of 25% of all
revenues from oil sold to Ecopetrol is paid in Colombian pesos which may only be
utilized in Colombia. To date, the Company has experienced no difficulty in
repatriating the remaining 75% of such payments, which are payable in U.S.
dollars.
Activities of the Company with respect to the exploration, development and
production of oil and natural gas are subject to stringent foreign, federal,
state and local environmental laws and regulations, including but not limited to
the Oil Pollution Act of 1990, the Outer Continental Shelf Lands Act, the
Federal Water Pollution Control Act, the Resource Conservation and Recovery Act
and the Comprehensive Environmental Response, Compensation, and Liability Act.
Such laws and regulations have increased the cost of planning, designing,
drilling, operating and abandoning wells. In most instances, the statutory and
regulatory requirements relate to air and water pollution control procedures and
the handling and disposal of drilling and production wastes. Although the
Company believes that compliance with environmental laws and regulations will
not have a material adverse effect on the Company's future operations or
earnings, risks of substantial costs and liabilities are inherent in oil and gas
operations and there can be no assurance that significant costs and liabilities,
including civil or criminal penalties for violations of environmental laws and
regulations, will not be incurred. Moreover, it is possible that other
developments, such as stricter environmental laws and regulations or claims for
damages to property or persons resulting from the Company's operations, could
result in substantial costs and liabilities. For additional discussions on the
applicability of environmental laws and regulations and other risks that may
affect the Company's operations, see the Company's latest annual report on Form
10-K.
The Company is involved in certain litigation involving its oil and gas
activities. Management of the Company believes that these litigation matters
will not have any material adverse effect on the Company's financial condition
or results of operations.
With the exception of historical information, the matters discussed in this
quarterly report contain forward-looking statements that involve risks and
uncertainties. Although the Company believes that its expectations are based on
reasonable assumptions, it can give no assurance that its goals will be
achieved. Important factors that could cause actual results to differ materially
from those in the forward-looking statements herein include, among other things,
general economic conditions, volatility of oil and gas prices, the impact of
possible geopolitical occurrences world-wide and in Colombia, imprecision of
reserve estimates, changes in laws and regulations, unforeseen engineering and
mechanical or technological difficulties in drilling, working-over and operating
wells during the periods covered by the forward-looking statements, as well as
other factors described in the Company's annual report on Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
The Company is exposed to market risk from changes in commodity prices. The
Company produces and sells crude oil and natural gas. These commodities are sold
based on market prices established with the buyers. The Company does not use
financial instruments to hedge commodity prices.
16
PART II - OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
a) Exhibits
- ------------
**99.1 Certification of Chief Executive Officer.
**99.2 Certification of Chief Financial Officer.
----------
** Filed herewith
b) Reports on Form 8-K
- ----------------------
The Company did not file any Current Reports on Form 8-K during or subsequent to
the end of the second quarter of 2002.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVIVA PETROLEUM INC.
Date: August 9, 2002 /s/ Ronald Suttill
-------------------------------------------
Ronald Suttill
President and Chief Executive Officer
/s/ James L. Busby
-------------------------------------------
James L. Busby
Secretary, Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
18
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
- ------ ----------------------
**99.1 Certification of Chief Executive Officer.
**99.2 Certification of Chief Financial Officer.
- ----------
** Filed herewith
19