Back to GetFilings.com
1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2000
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: 019020
PETROQUEST ENERGY, INC.
(Exact name of registrant as specified in its charter)
State of incorporation: Delaware I.R.S. Employer Identification No. 98-0115468
400 E. Kaliste Saloom Road, Suite 3000
Lafayette, Louisiana 70508
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (337) 232-7028
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, Par Value $.001 Per Share
(Title of Class)
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.
[ X ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $152,141,415 as of March 22, 2001 (based on the
last reported sale price of such stock on the Nasdaq National Market System).
As of March 22, 2001, the registrant had outstanding 30,619,656 shares of
Common Stock, par value $.001 per share.
Document incorporated by reference: Proxy Statement of PetroQuest Energy,
Inc. relating to the Annual Meeting of Stockholders to be held on May 23, 2001
which is incorporated into Part III of this Form 10-K.
2
TABLE OF CONTENTS
Page No.
--------
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . 12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . 12
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . 13
Item 7A. Quantitative and Qualitative Disclosure About Market Risks. . . . . . . . . . . . . . . 18
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . 18
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . . . . 18
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . 19
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . 19
Item 13. Certain Relationships and Related Transactions. . . . . . . . . . . . . . . . . . . 19
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . 19
Index to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . F-1
3
This Form 10-K 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-K are forward
looking statements. These forward looking statements include, without
limitation, statements regarding our estimate of the sufficiency of our existing
capital resources and our ability to raise additional capital to fund cash
requirements for future operations, and regarding the uncertainties involved in
estimating quantities of proved oil and natural gas reserves and in projecting
future rates of production and timing of development expenditures. Although we
believe that the expectations reflected in these forward looking statements are
reasonable, we cannot give any assurance that such expectations reflected in
these forward looking statements will prove to have been correct.
When used in this Form 10-K, 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", "Risk Factors" and elsewhere in this Form 10-K.
You should read these statements carefully because they discuss our
expectations about our future performance, contain projections of our future
operating results or our future financial condition, or state other
"forward-looking" information. Before you invest in our common stock, you should
be aware that the occurrence of any of the events described in these risk
factors and elsewhere in this Form 10-K could substantially harm our business,
results of operations and financial condition and that upon the occurrence of
any of these events, the trading price of our common stock could decline, and
you could lose all or part of your investment.
We cannot guarantee any future results, levels of activity, performance
or achievements. Except as required by law, we undertake no obligation to update
any of the forward-looking statements in this Form 10-K after the date of this
Form 10-K.
PART I
ITEM 1. BUSINESS
OVERVIEW
PetroQuest Energy, Inc. ("PetroQuest" or the "Company") is incorporated
in the State of Delaware and is an independent oil and gas company engaged in
the generation, exploration, development, acquisition and operation of oil and
gas properties onshore and offshore in the Gulf Coast Region. PetroQuest and its
predecessors have been active in this area since 1986. The Company's business
strategy is to increase production, cash flow and reserves through generation,
exploration, development and acquisition of properties located in the Gulf Coast
Region.
On September 1, 1998, the Company completed a merger and reorganization
(the "Merger") pursuant to a Plan and Agreement of Merger (the "Merger Plan")
dated February 11, 1998 by and among the Company, Optima Energy (U.S.)
Corporation ("Optima (U.S.)"), Goodson Exploration Company ("Goodson"), NAB
Financial, L.L.C. ("NAB") and Dexco Energy, Inc. ("Dexco"), pursuant to which
Optima (U.S.) merged into a newly formed Louisiana corporation from Nevada to
Louisiana and changing its name to PetroQuest Energy, Inc. ("PetroQuest
Louisiana"). Concurrently, PetroQuest Louisiana, through a merger of PetroQuest
Louisiana with Goodson, NAB and Dexco, acquired 100% of the ownership interests
of American Explorer L.L.C. ("American Explorer"), all which were owned by
Goodson, NAB and Dexco prior to the Merger. Concurrent with the Merger,
PetroQuest continued from a Canadian corporation to a Delaware corporation,
converted each share of Optima no par value common stock into one share of the
Company's $.001 par value common stock, changed its name to "PetroQuest Energy,
Inc." and adopted a new certificate of incorporation. The operating results of
American have been consolidated in the Company's consolidated statement of
operations since September 1, 1998.
Pursuant to the Merger, the Company issued to the original owners of
American and their respective affiliates, certain of whom currently serve as
officers and directors of the Company, 7,335,001 shares of Company common stock,
par value $.001 per share (the "Common Stock"), and 1,667,001 Contingent Stock
Issue Rights (the "CSIRs"). The CSIRs entitle the holders to receive an
additional 1,667,001 shares of Common Stock at such time within three years of
the anniversary date of the issuance of the CSIRs as the trading price for the
Common Stock is $5.00 or higher for 20 consecutive trading days. Should these
rights become exchangeable, the Company will be required to issue 1,667,001
shares of Common Stock for no net proceeds.
In addition, management of PetroQuest was changed to the management of
American. The Canadian offices were closed and the Company's headquarters were
moved to Lafayette, Louisiana. PetroQuest maintains an offshore exploration
office in Houston, Texas.
1
4
On December 31, 2000, the Company underwent a subsequent corporate
reorganization. The Company's subsidiary, PetroQuest Energy, Inc., a Louisiana
corporation, was merged into PetroQuest Energy One, L.L.C., a Louisiana limited
liability company. In addition, PetroQuest Energy One, L.L.C. changed its name
to PetroQuest Energy, L.L.C., a single-member Louisiana limited liability
company, and PetroQuest Energy, Inc., a Delaware corporation, continues to be
its sole member.
DEFINED TERMS
Natural gas is stated in billion cubic feet ("Bcf"), million cubic feet
("MMcf") or thousand cubic feet ("Mcf"). Oil is stated in barrels ("Bbl") or
thousand barrels ("MBbl). Mmcfe and Mcfe represent the equivalent of one million
and one thousand cubic feet of natural gas, respectively. Oil is converted to
gas at a ratio of one barrel of liquids per six Mcf of gas, based on relative
energy content. "Net" acres, production or wells refers to the total acres,
production or wells in which PetroQuest has a working interest, multiplied by
the percentage working interest owned by PetroQuest.
EXPLORATION AND DEVELOPMENT
The Company is engaged in the exploration, development, acquisition and
operation of oil and gas properties onshore and offshore in the Gulf Coast
Region. As of December 31, 2000, the Company's estimated proved reserves totaled
3,115 MBbl of oil and 30,135 MMcf of natural gas, with pre-tax present value
discounted at 10% of the estimated future net revenues based on constant prices
in effect at year-end ("discounted cash flow") of $256,867,000. Approximately
67% of the Company's reserves are proved developed reserves. The Company
operates 13 fields representing approximately 89% of the total discounted cash
flow attributable to estimated proved reserves.
SIGNIFICANT PROPERTIES
VALENTINE FIELD, LAFOURCHE PARISH, LA. The Valentine Field has to date
produced in excess of one trillion cubic feet of gas equivalent. For the month
of December 2000, production averaged 135 Bbls of oil per day and 5,280 Mcf of
natural gas per day from 9 wells. When the Company acquired its interest in this
field in 1993, virtually no deep exploration had ever occurred because only
three 2-D seismic lines were shot over this south Louisiana salt dome structure,
and thus virtually no deep exploration occurred. PetroQuest and a major oil and
gas company acquired an 86 square mile 3-D survey in November 1998. The Company
acquired the major oil and gas company's interest in this field in August 1999,
and the Company's current industry partner acquired the interest in October
1999. The Company continues to evaluate the data and maintains a 35% to 50%
working interest in various prospects identified as a result of the 3D survey.
During 2000, the first well to be drilled as a result of the new 3-D survey was
completed and produced an average of 22 Bbls of oil per day and 2230 Mcf of
natural gas per day. A second exploratory well at this field is currently being
drilled and the Company plans to drill a minimum of two more new wells in this
field in 2001.
TURTLE BAYOU FIELD, TERREBONNE PARISH, LA. To date, the Company has
participated in the drilling of sixteen wells in the Turtle Bayou Field. As of
December 31, 2000, there are 6 producing wells in the field in which we hold a
working interest. Collectively, the 6 producing wells averaged approximately
31,900 Mcf of natural gas and 740 barrels of oil per day for the month of
December 2000. Our working interest varies between 14% and 43% with a weighted
average working interest of approximately 36.5%. PetroQuest acquired a 3-D
regional seismic survey shot in 1998 which incorporates the Turtle Bayou Field.
As a result of studying this data, six additional prospects with multiple
objectives have been identified. The first four wells have been drilled and
completed and a fifth well is expected to begin drilling in the second quarter
of 2001.
SHIP SHOAL 72, FEDERAL OUTER CONTINENTAL SHELF WATERS. PetroQuest
acquired an 85% working interest in 14,000 acres in the fourth quarter of 2000
and an additional 5% working interest in this field during the first quarter of
2001. This field has produced in excess of 345 billion cubic feet equivalent to
date. The Company's 2001 plans include one recompletion, reactivation of three
gas lift wells and four development opportunities. PetroQuest expects that these
activities will add production of 7,000 Mcfe during the second quarter of 2001
and 7,000 Mcfe in the third quarter of 2001 net to the Company. Additional
proved undeveloped opportunities in new fault blocks and exploration potential
in a deeper horizon have been identified and are being further evaluated for
future drilling.
2
5
EUGENE ISLAND 147, FEDERAL OUTER CONTINENTAL SHELF WATERS. PetroQuest
initially had a 25% working interest in this lease and acquired the remaining
75% working interest from a major oil and gas company. A 63.5% working interest
was subsequently sold to other oil and gas companies and we currently hold a
36.5% working interest. During 2000, we drilled two successful wells on this
offshore block and production is planned for the second quarter of 2001 at an
expected rate of approximately 4,500-5,000 Mcfe per day net to PetroQuest.
Additional exploration opportunities have been identified and are currently
being evaluated.
VERMILION BLOCK 376, FEDERAL OUTER CONTINENTAL SHELF WATERS ("FALCON
PROSPECT"). The Company and its partners drilled a well on this property in the
fourth quarter of 1999 and logged 285 feet of gross hydrocarbon column (136 feet
net). An additional well was drilled in the second quarter of 2000 logging 112
feet of gross hydrocarbon pay (74 feet net). PetroQuest is the operator of the
project and owns a 43% working interest. During 2000, an approximately 2,500 ton
production platform was fabricated and placed in service. The field began
production on December 8, 2000, and was producing at an average rate for
December of approximately 2700 Bbls per day of oil and 500 Mcf per day of
natural gas.
MARKETS
PetroQuest's ability to market oil and gas from the Company's wells
depends upon numerous factors beyond the Company's control, including the extent
of domestic production and imports of oil and gas, the proximity of the gas
production to gas pipelines, the availability of capacity in such pipelines, the
demand for oil and gas by utilities and other end users, the availability of
alternative fuel sources, the effects of inclement weather, state and federal
regulation of oil and gas production and federal regulation of gas sold or
transported in interstate commerce. No assurance can be given that PetroQuest
will be able to market all of the oil or gas produced by the Company or that
favorable prices can be obtained for the oil and gas PetroQuest produces.
In view of the many uncertainties affecting the supply and demand for
oil, gas and refined petroleum products, the Company is unable to predict future
oil and gas prices and demand or the overall effect such prices and demand will
have on the Company. For the year ended December 31, 2000, the Company had three
customers who accounted for 58%, 15% and 11% of total revenues, respectively.
For the year ended December 31, 1999, the Company had three customers who
accounted for 22%, 12%, 10% of total revenues, respectively. PetroQuest does not
believe that the loss of any of the Company's oil purchasers would have a
material adverse effect on the Company's operations. The marketing of oil and
gas by PetroQuest can be affected by a number of factors which are beyond the
Company's control, the exact effects of which cannot be accurately predicted.
FEDERAL REGULATIONS
SALES AND TRANSPORTATION OF NATURAL GAS. Historically, the
transportation ans sales for resale of natural gas in interstate commerce have
been regulated pursuant to the Natural Gas Act of 1938 ("NGA"), the Natural Gas
Policy Act of 1978 ("NGPA") and Federal Energy Regulatory Commission ("FERC")
regulations. Effective January 1, 1993, the Natural Gas Wellhead Decontrol Act
deregulated price for all "first sales" of natural gas. Thus, all sales of gas
by the Company may be made at market prices, subject to applicable contract
provisions. Sales of natural gas are affected by the availability, terms and
cost of pipeline transportation. Since 1985, the FERC has implemented
regulations intended to make natural gas transportation more accessible to gas
buyers and sellers on an open-access, non-discriminatory basis.
Beginning in April 1992, the FERC issued Order No. 636 and a series of
related orders, which required interstate pipelines to provide open-access
transportation on a not unduly discriminatory basis for all natural gas
shippers. The FERC has stated that it intends for Order No. 636 and its future
restructuring activities to foster increased competition within all phases of
the natural gas industry. Although Order No. 636 does not directly regulate our
production and marketing activities, it does affect how buyers and sellers gain
access to the necessary transportation facilities and how we and our competitors
sell natural gas in the marketplace.
3
6
The courts have largely affirmed the significant features of Order No.
636 and the numerous related orders pertaining to individual pipelines. However,
some appeals remain pending and the FERC continues to review and modify its
regulations regarding the transportation of natural gas. For example, the FERC
issued Order No. 637 which;
o lifts the cost-based cap on pipeline transportation rates in the
capacity release market until September 30, 2002, for short-term
releases of pipeline capacity of less than one year,
o permits pipelines to file for authority to charge different
maximum cost-based rates for peak and off-peak periods,
o encourages, but does not mandate, auctions for pipeline capacity,
o requires pipelines to implement imbalance management services,
o restricts the ability of pipelines to impose penalties for
imbalances, overruns and non-compliance with operational flow
orders, and
o implements a number of new pipeline reporting requirements.
Order No. 637 also requires the FERC staff to analyze whether the FERC
should implement additional fundamental policy changes. These include whether to
pursue performance-based or other non-cost based ratemaking techniques and
whether the FERC should mandate greater standardization in terms and conditions
of service across the interstate pipeline grid.
In April 1999 the FERC issued Order No. 603, which implemented new
regulations governing the procedure for obtaining authorization to construct new
pipeline facilities. In September 1999, the FERC issued a related policy
statement establishing a presumption in favor of requiring owners of new
pipeline facilities to charge rates for service on new pipeline facilities based
solely on the costs associated with such new pipeline facilities.
We cannot predict what further action the FERC will take on these
matters, nor can we accurately predict whether the FERC's actions will achieve
the goal of increasing competition in markets in which our natural gas is sold.
However, we do not believe that any action taken will affect the Company in a
way that materially differs from the way it affects other natural gas producers,
gatherers and marketers.
The Outer Continental Shelf Lands Act, which the FERC implements as to
transportation and pipeline issues, requires that all pipelines operating on or
across the Outer Continental Shelf provide open-access, non-discriminatory
service. Historically, the FERC has opted not to impose regulatory requirements
under its Outer Continental Shelf Lands Act authority on gatherers and other
entities outside the reach of its NGA jurisdiction. However, the FERC recently
issued Order No. 639, requiring that virtually all non-proprietary pipeline
transporters of natural gas on the Outer Continental Shelf report information on
their affiliations, rates and conditions of service. The reporting requirements
established by the FERC in Order No. 639 may apply, in certain circumstances, to
operators of production platforms and other facilities on the Outer Continental
Shelf, with respect to gas movements across such facilities. Among the FERC's
stated purposes in issuing such rules was the desire to increase transparency in
the market, to provide producers and shippers on the Outer Continental Shelf
with greater assurance of (a) open-access services on pipelines located on the
Outer Continental Shelf and (b) non-discriminatory rates and conditions of
service on such pipelines.
4
7
The FERC retains authority under the Outer Continental Shelf Lands Act
to exercise jurisdiction over gatherers and other entities outside the reach of
its NGA jurisdiction if necessary to ensure non-discriminatory access to service
on the Outer Continental Shelf. We do not believe that any FERC action taken
under its Outer Continental Shelf Lands Act jurisdiction will affect us in a way
that materially differs from the way it affects other natural gas producers,
gatherers and marketers.
Additional proposals and proceedings that might affect the natural gas
industry are pending before Congress, the FERC and the courts. The natural gas
industry historically has been very heavily regulated; therefore, there is no
assurance that the less stringent regulatory approach recently pursued by the
FERC and Congress will continue.
SALES AND TRANSPORTATION OF CRUDE OIL. Sales of crude oil, condensate
and natural gas liquids by the Company are not currently regulated, and are
subject to applicable contract provisions made at market prices. In a number of
instances, however, the ability to transport and sell such products is dependent
on pipelines whose rates, terms and conditions of service are subject to the
FERC's jurisdiction under the Interstate Commerce Act. In other instances, the
ability to transport and sell such products is dependent on pipelines whose
rates, terms and conditions of service are subject to regulation by state
regulatory bodies under state statutes.
The regulation of pipelines that transport crude oil, condensate and
natural gas liquids is generally more light-handed than the FERC's regulation of
gas pipelines under the NGA. Regulated pipelines that transport crude oil,
condensate, and natural gas liquids are subject to common carrier obligations
that generally ensure non-discriminatory access. With respect to interstate
pipeline transportation subject to regulation of the FERC under the Interstate
Commerce Act, rates generally must be cost-based, although market-based rates or
negotiated settlement rates are permitted in certain circumstances. Pursuant to
FERC Order No. 561, pipeline rates are subject to an indexing methodology. Under
this indexing methodology, pipeline rates are subject to changes in the Producer
Price Index for Finished Goods, minus one percent. A pipeline can seek to
increase its rates above index levels provided that the pipeline can establish
that there is a substantial divergence between the actual costs experienced by
the pipeline and the rate resulting from application of the index. A pipeline
can seek to charge market-based rates if it establishes that it lacks
significant market power. In addition, a pipeline can establish rates pursuant
to settlement if agreed upon by all current shippers. A pipeline can seek to
establish initial rates for new services through a cost-of-service proceeding, a
market-based rate proceeding, or through an agreement between the pipeline and
at least one shipper not affiliated with the pipeline. The FERC indicated in
Order No. 561 that it will assess in 2000 how the rate-indexing method is
operating. The FERC issued a Notice of Inquiry on July 27, 2000 seeking comment
on whether to retain or to change the existing index. After consideration of all
the initial and reply comments, the FERC concluded on December 14, 2000 that the
PPI-1 index has reasonably approximated the actual cost changes in the oil
pipeline industry during the preceding five year period, and that it should be
continued for the subsequent five year period.
5
8
FEDERAL LEASES. The Company maintains operations located on federal oil
and gas leases, which are administered by the Minerals Management Service
pursuant to the Outer Continental Shelf Lands Act. These leases are issued
through competitive bidding and contain relatively standardized terms. These
leases require compliance with detailed Minerals Management Service regulations
and orders that are subject to interpretation and change by the Minerals
Management Service.
For offshore operations, lessees must obtain Minerals Management
Service approval for exploration, development and production plans prior to the
commencement of such operations. In addition to permits required from other
agencies such as the Coast Guard, the Army Corps of Engineers and the
Environmental Protection Agency, lessees must obtain a permit from the Minerals
Management Service prior to the commencement of drilling. The Minerals
Management Service has promulgated regulations requiring offshore production
facilities located on the Outer Continental Shelf to meet stringent engineering
and construction specifications. The Minerals Management Service also has
regulations restricting the flaring or venting of natural gas, and has proposed
to amend such regulations to prohibit the flaring of liquid hydrocarbons and oil
without prior authorization. Similarly, the Minerals Management Service has
promulgated other regulations governing the plugging and abandonment of wells
located offshore and the installation and removal of all production facilities.
To cover the various obligations of lessees on the Outer Continental
Shelf, the Minerals Management Service generally requires that lessees have
substantial net worth or post bonds or other acceptable assurances that such
obligations will be met. The cost of these bonds or assurances can be
substantial, and there is no assurance that they can be obtained in all cases.
Under some circumstances, the Minerals Management Service may require operations
on federal leases to be suspended or terminated.
The Minerals Management Service also administers the collection of
royalties under the terms of the Outer Continental Shelf Lands Act and the oil
and gas leases issued under the Act. The amount of royalties due is based upon
the terms of the oil and gas leases as well as of the regulations promulgated by
the Minerals Management Service. These regulations are amended from time to
time, and the amendments can affect the amount of royalties that we are
obligated to pay to the Minerals Management Service. However, we do not believe
that these regulations or any future amendments will affect the Company in a way
that materially differs from the way it affects other oil and gas producers,
gathers and marketers.
STATE REGULATIONS
Most states regulate the production and sale of oil and natural gas,
including requirements for obtaining drilling permits, the method of developing
new fields, the spacing and operation of wells and the prevention of waste of
oil and gas resources. The rate of production may be regulated and the maximum
daily production allowable from both oil and gas wells may be established on a
market demand or conservation basis or both.
The Company may enter into agreements relating to the construction or
operation of a pipeline system for the transportation of natural gas. To the
extent that such gas is produced, transported and consumed wholly within one
state, such operations may, in certain instances, be subject to the jurisdiction
of such state's administrative authority charged with the responsibility of
regulating intrastate pipelines. In such event, the rates which the Company
could charge for gas, the transportation of gas, and the construction and
operation of such pipeline would be subject to the rules and regulations
governing such matters, if any, of such administrative authority.
6
9
LEGISLATIVE PROPOSALS
In the past, Congress has been very active in the area of natural gas
regulation. There are legislative proposals pending in the various state
legislatures which, if enacted, could significantly affect the petroleum
industry. At the present time it is impossible to predict what proposals, if
any, might actually be enacted by Congress or the various state legislatures and
what effect, if any, such proposals might have on the Company's operations.
ENVIRONMENTAL REGULATIONS
GENERAL. The Company's activities are subject to existing federal,
state and local laws and regulations governing environmental quality and
pollution control. Although no assurances can be made, the Company believes
that, absent the occurrence of an extraordinary event, compliance with existing
federal, state and local laws, regulations and rules regulating the release of
materials in the environment or otherwise relating to the protection of the
environment will not have a material effect upon the capital expenditures,
earnings or the competitive position of the Company with respect to its existing
assets and operations. The Company cannot predict what effect additional
regulation or legislation, enforcement policies thereunder, and claims for
damages to property, employees, other persons and the environment resulting from
the Company's operations could have on its activities.
Activities of PetroQuest with respect to natural gas facilities,
including the operation and construction of pipelines, plants and other
facilities for transporting, processing, treating or storing natural gas and
other products, are subject to stringent environmental regulation by state and
federal authorities including the United States Environmental Protection Agency
("EPA"). Such regulation can increase the cost of planning, designing,
installation and operation of such facilities. In most instances, the regulatory
requirements relate to water and air pollution control measures. Although the
Company believes that compliance with environmental regulations will not have a
material adverse effect on it, risks of substantial costs and liabilities are
inherent in oil and gas production operations, and there can be no assurance
that significant costs and liabilities will not be incurred. Moreover it is
possible that other developments, such as stricter environmental laws and
regulations, and claims for damages to property or persons resulting from oil
and gas production, would result in substantial costs and liabilities to the
Company.
SOLID AND HAZARDOUS WASTE. The Company owns or leases numerous
properties that have been used for production of oil and gas for many years.
Although the Company has utilized operating and disposal practices standard in
the industry at the time, hydrocarbons or other solid wastes may have been
disposed or released on or under these properties. In addition, many of these
properties have been operated by third parties. The Company had no control over
such entities' treatment of hydrocarbons or other solid wastes and the manner in
which such substances may have been disposed or released. State and federal laws
applicable to oil and gas wastes and properties have gradually become stricter
over time. Under these new laws, the Company could be required to remove or
remediate previously disposed wastes (including wastes disposed or released by
prior owners or operators) or property contamination (including groundwater
contamination by prior owners or operators) or to perform remedial plugging
operations to prevent future contamination.
The Company generates wastes, including hazardous wastes, that are
subject to the Federal Resource Conservation and Recovery Act ("RCRA") and
comparable state statutes. The EPA has limited the disposal options for certain
hazardous wastes. Furthermore, it is possible that certain wastes currently
exempt from regulation as "hazardous wastes" generated by the Company's oil and
gas operations may in the future be designated as "hazardous wastes" under RCRA
or other applicable statutes, and therefore be subject to more rigorous and
costly disposal requirements.
SUPERFUND. The Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), also known as the "Superfund" law, imposes liability,
without regard to fault or the legality of the original conduct, on certain
persons with respect to the release or threatened release of a "hazardous
substance" into the environment. These persons include the owner and operator of
a site and persons that disposed or arranged for the disposal of the hazardous
substances found at a site. CERCLA also authorizes the EPA and, in some cases,
third parties to take actions in response to threats to the public health or the
environment and to seek to recover from the responsible persons the costs of
such action. Neither the Company nor its predecessors have been designated as a
potentially responsible party by the EPA under CERCLA with respect to any such
site.
OIL POLLUTION ACT. The Oil Pollution Act of 1990 (the "OPA") and
regulations thereunder impose a variety of regulations on "responsible parties"
related to the prevention of oil spills and liability for damages resulting from
such spills in United States waters. A "responsible party" includes the owner or
operator of a facility or vessel, or the lessee or permittee of the area in
which an offshore facility is located. The OPA assigns liability to each
responsible party for oil removal costs and a variety of public and private
damages. While liability limits apply in some circumstances, a party cannot take
advantage of liability limits if the spill was caused by gross negligence or
willful misconduct or resulted from violation of a federal safety, construction
or operating regulation. If the party fails to report a spill or to cooperate
fully in the cleanup, liability limits likewise do not apply. Few defenses exist
to the liability imposed by the OPA.
7
10
The OPA establishes a liability limit for onshore facilities of $350
million and for offshore facilities of all removal costs plus $75 million, and
lesser limits for some vessels depending upon their size. The regulations
promulgated under OPA impose proof of financial responsibility requirements that
can be satisfied through insurance, guarantee, indemnity, surety bond, letter of
credit, qualification as a self-insurer, or a combination thereof. The amount of
financial responsibility required depends upon a variety of factors including
the type of facility or vessel, its size, storage capacity, oil throughput,
proximity to sensitive areas, type of oil handled, history of discharges and
other factors. The Company believes it currently has established adequate
financial responsibility. While financial responsibility requirements under OPA
may be amended to impose additional costs on the Company, the impact of any
change in these requirements should not be any more burdensome to the Company
than to others similarly situated.
CLEAN WATER ACT. The Clean Water Act ("CWA") regulates the discharge
of pollutants to waters of the United States, including wetlands, and requires a
permit for the discharge of pollutants, including petroleum, to such waters.
Certain facilities that store or otherwise handle oil are required to prepare
and implement Spill Prevention, Control and Countermeasure Plans and Facility
Response Plans relating to the possible discharge of oil to surface waters. The
Company is required to prepare and comply with such plans and to obtain and
comply with discharge permits. The Company believes it is in substantial
compliance with these requirements and that any noncompliance would not have a
material adverse effect on it. The CWA also prohibits spills of oil and
hazardous substances to waters of the United States in excess of levels set by
regulations and imposes liability in the event of a spill. State laws further
provide civil and criminal penalties and liabilities for spills to both surface
and groundwaters and require permits that set limits on discharges to such
waters.
AIR EMISSIONS. The operations of the Company are subject to local,
state and federal regulations for the control of emissions from sources of air
pollution. Administrative enforcement actions for failure to comply strictly
with air regulations or permits may be resolved by payment of monetary fines and
correction of any identified deficiencies. Alternatively, regulatory agencies
could impose civil and criminal liability for non-compliance. An agency could
require the Company to forego construction or operation of certain air emission
sources. The Company believes that it is in substantial compliance with air
pollution control requirements and that, if a particular permit application were
denied, it would have enough permitted or permittable capacity to continue its
operations without a material adverse effect on any particular producing field.
OSHA. The Company is subject to the requirements of the federal
Occupational Safety and Health Act ("OSHA") and comparable state statutes. The
OSHA hazard communication standard, the EPA community right-to-know regulations
under Title III of the federal Superfund Amendments and Reauthorization Act and
similar state statutes require the Company to organize and/or disclose
information about hazardous materials used or produced in its operations.
Certain of this information must be provided to employees, state and local
governmental authorities and local citizens.
Management believes that the Company is in substantial compliance with
current applicable environmental laws and regulations and that continued
compliance with existing requirements will not have a material adverse impact on
the Company.
EMPLOYEES
The Company had 43 employees as of December 31, 2000. In addition to
the services of its full time employees, the Company utilizes the services of
independent contractors to perform certain services. PetroQuest believes that
its relationships with its employees are satisfactory. None of the Company's
employees are covered by a collective bargaining agreement.
RISK FACTORS
VOLATILITY OF OIL AND GAS PRICES; MARKETABILITY OF PRODUCTION. The
Company's revenues, profitability and future growth and the carrying value of
its oil and gas properties are substantially dependent on prevailing prices of
oil and gas. The Company's ability to maintain or increase its borrowing
capacity and to obtain additional capital on attractive terms is also
substantially dependent upon oil and gas prices. Prices for oil and gas are
subject to large fluctuations in response to relatively minor changes in the
supply of and demand for oil and gas, market uncertainty and a variety of
additional factors beyond the control of the Company. These factors include
weather conditions in the United States, the condition of the United States
economy, the action of the Organization of Petroleum Exporting Countries,
governmental regulation, political stability in the Middle East and elsewhere,
the foreign supply of oil and gas, the price of foreign imports and the
availability of alternate fuel sources. Any substantial short-term or extended
decline in the price of oil or gas would have an adverse effect on the Company's
carrying value of its proved reserves, borrowing capacity, revenues,
profitability and cash flows from operations.
In addition, the marketability of the Company's production depends upon
the availability and capacity of gas gathering systems, pipelines and processing
facilities. Federal and state regulation of oil and gas production and
transportation, general economic conditions and changes in supply and demand all
could adversely affect the Company's ability to produce and market its oil and
natural gas. If market factors were to change dramatically, the financial impact
on the Company could be substantial. The availability of markets and the
volatility of product prices are beyond the control of the Company and represent
a significant risk.
OPERATING HAZARDS, OFFSHORE OPERATIONS AND UNINSURED RISKS.
PetroQuest's operations are subject to risks inherent in the oil and gas
industry, such as blowouts, cratering, explosions, uncontrollable flows of oil,
gas or well fluids, fires, pollution and other environmental risks. These risks
could result in substantial losses to the Company due to injury and loss of
8
11
life, severe damage to and destruction of property and equipment, pollution and
other environmental damage and suspension of operations. Moreover, a portion of
the Company's operations are offshore and therefore are subject to a variety of
operating risks peculiar to the marine environment, such as hurricanes or other
adverse weather conditions, to more extensive governmental regulation, including
regulations that may, in certain circumstances, impose strict liability for
pollution damage, and to interruption or termination of operations by
governmental authorities based on environmental or other considerations.
The Company maintains insurance of various types to cover its
operations, including maritime employer's liability and comprehensive general
liability. Amounts in excess of base coverages are provided by primary and
excess umbrella liability policies with maximum limits of $35 million. In
addition, the Company maintains operator's extra expense coverage, which
provides coverage for the control of wells drilled and/or producing and
redrilling expenses and pollution coverage for wells out of control.
No assurances can be given that PetroQuest will be able to maintain
adequate insurance in the future at rates the Company considers reasonable. The
occurrence of a significant event not fully insured or indemnified against could
materially and adversely affect the Company's financial condition and results of
operations.
ESTIMATES OF OIL AND GAS RESERVES. This Form 10-K contains estimates of
oil and gas reserves, and the future net cash flows attributable to those
reserves, prepared by the Ryder Scott Company, independent petroleum and
geological engineers ("Ryder Scott"). There are numerous uncertainties inherent
in estimating quantities of proved reserves and cash flows attributable to such
reserves, including factors beyond the control of the Company and Ryder Scott.
Reserve engineering is a subjective process of estimating underground
accumulations of oil and gas that cannot be measured in an exact manner. The
accuracy of an estimate of quantities of reserves, or of cash flows attributable
to such reserves, is a function of the available data, assumptions regarding
future oil and gas prices and expenditures for future development and
exploitation activities, and of engineering and geological interpretation and
judgment. Additionally, reserves and future cash flows may be subject to
material downward or upward revisions, based upon production history,
development and exploitation activities and prices of oil and gas. Actual future
production, revenue, taxes, development expenditures, operating expenses,
quantities of recoverable reserves and the value of cash flows from such
reserves may vary significantly from the assumptions and estimates set forth
herein. In addition, reserve engineers may make different estimates of reserves
and cash flows based on the same available data. In calculating reserves on a
Mcfe basis, oil was converted to gas equivalent at the ratio of six Mcf of gas
to one Bbl of oil. While this ratio approximates the energy equivalency of gas
to oil on a Btu basis, it may not represent the relative prices received by the
Company on the sale of its oil and gas production.
The estimated quantities of proved reserves and the discounted present
value of future net cash flows attributable to estimated proved reserves set
forth in this Form 10-K were prepared by Ryder Scott in accordance with the
rules of the Securities and Exchange Commission (the "Commission"), and are not
intended to represent the fair market value of such reserves.
ABILITY TO REPLACE RESERVES. The Company's future success depends upon
its ability to find, develop and acquire additional oil and gas reserves that
are economically recoverable. As is generally the case in the Gulf Coast region,
many of the Company's producing properties are characterized by a high initial
production rate, followed by a steep decline in production. As a result, the
Company must locate and develop or acquire new oil and gas reserves to replace
those being depleted by production. Without successful exploration or
acquisition activities, the Company's reserves and revenues will decline
rapidly. No assurances can be given that the Company will be able to find and
develop or acquire additional reserves at an acceptable cost.
SUBSTANTIAL CAPITAL REQUIREMENTS. PetroQuest makes, and will continue
to make, substantial capital expenditures for the exploitation, exploration,
acquisition and production of oil and gas reserves. Historically, the Company
has financed these expenditures primarily with cash generated by operations and
proceeds from bank borrowings and equity offerings. If revenues or the Company's
borrowing base decrease as a result of lower oil and gas prices, operating
difficulties or declines in reserves, the Company may have limited ability to
expend the capital necessary to undertake or complete future drilling programs.
There can be no assurance that additional debt or equity financing or cash
generated by operations will be available to meet these requirements.
CONTROL BY MANAGEMENT. Executive officers and directors of the Company
beneficially own approximately 31% of the outstanding Common Stock. This
percentage ownership is based on the number of shares of Common Stock
outstanding at March 17, 2000 and the beneficial ownership of such persons at
such date. As a result, these persons may be in a position to control the
Company through their ability to determine the outcome of elections of the
Company's directors and certain other matters requiring the vote or consent of
the Company's stockholders.
9
12
COMPETITION. The Company operates in the highly competitive areas of
oil and gas exploration, development and production. The availability of funds
and information relating to a property, the standards established by the Company
for the minimum projected return on investment, the availability of alternate
fuel sources and the intermediate transportation of gas are factors which affect
the Company's ability to compete in the marketplace. The Company's competitors
include major integrated oil companies, substantial independent energy
companies, affiliates of major interstate and intrastate pipelines and national
and local gas gatherers, many of which possess greater financial and other
resources than the Company.
ENVIRONMENTAL AND OTHER REGULATIONS. PetroQuest's operations are
subject to numerous laws and regulations governing the discharge of materials
into the environment or otherwise relating to environmental protection. These
laws and regulations may require the acquisition of a permit before drilling
commences, restrict the types, quantities and concentration of various
substances that can be released into the environment in connection with drilling
and production activities, limit or prohibit drilling activities on certain
lands lying within wilderness, wetlands and other protected areas, require
remedial measures to mitigate pollution from former operations, such as plugging
abandoned wells, and impose substantial liabilities for pollution resulting from
the Company's operations. Moreover, the trend toward stricter standards in
environmental legislation and regulation is likely to continue. The enactment of
stricter legislation or the adoption of stricter regulation could have a
significant impact on the operating costs of the Company, as well as on the oil
and gas industry in general.
The Company's operations could result in liability for personal
injuries, property damage, oil spills, discharge of hazardous materials,
remediation and clean-up costs and other environmental damages. Moreover, the
Company could be liable for environmental damages caused by previous property
owners. As a result, substantial liabilities to third parties or governmental
entities may be incurred; the payment of which could have a material adverse
effect on the Company's financial condition and results of operations. The
Company maintains insurance coverage for its operations, including limited
coverage for sudden and accidental environmental damages, but does not believe
that insurance coverage for environmental damages that occur over time is
available at a reasonable cost. Moreover, the Company does not believe that
insurance coverage for the full potential liability that could be caused by
sudden and accidental environmental damages is available at a reasonable cost.
Accordingly, the Company may be subject to liability or may lose the privilege
to continue exploration or production activities upon substantial portions of
its properties in the event of certain environmental damages.
The Oil Pollution Act of 1990 imposes a variety of regulations on
"responsible parties" related to the prevention of oil spills. The
implementation of new, or the modification of existing, environmental laws or
regulations, including regulations promulgated pursuant to the Oil Pollution Act
of 1990, could have a material adverse impact on the Company.
ITEM 2. PROPERTIES
For a description of the Company's exploration and development
activities and its significant properties, see Item 1. Business-Exploration and
Development and - Significant Properties.
OIL AND GAS RESERVES
The following table sets forth certain information about the estimated
proved reserves of the Company as of December 31, 2000.
Oil (Mbbls) Gas (MMcfs)
----------- -----------
Proved developed: 2,355 18,679
Proved undeveloped: 760 11,456
Total proved: 3,115 30,135
Estimated pre-tax future net cash flows $ 324,956,000
Discounted pre-tax future net cash flows $ 256,867,000
Standardized measure of discounted future
net cash flows $ 178,323,000
10
13
Ryder Scott Company prepared the estimates of proved reserves and
future net cash flows (and present value thereof) attributable to such proved
reserves at December 31, 2000. Reserves were estimated using oil and gas prices
and production and development costs in effect at December 31, 2000 without
escalation, and were prepared in accordance with Securities and Exchange
Commission regulations regarding disclosure of oil and gas reserve information.
The product prices used in developing the above estimates averaged $25.29 per
Bbl of oil and $10.00 per MMBtu of gas. Because of the high Btu content of the
Company's Gulf Coast gas, this equates to an average price realized of
approximately $10.35 per Mcf.
The Company has not filed any reports with other federal agencies which
contain an estimate of total proved net oil and gas reserves.
OIL AND GAS DRILLING ACTIVITY
The following table sets forth the wells drilled and completed by the
Company during the periods indicated. All such wells were drilled in the
continental United States:
2000 1999 1998
Gross Net Gross Net Gross Net
----- ---- ----- ---- ----- ----
Exploration:
Productive 3 1.32 4 1.33 2 0.74
Non-productive 1 0.40 1 0.05 -- --
----- ---- ----- ---- ----- ----
Total 4 1.72 5 1.38 2 0.74
===== ==== ===== ==== ===== ====
Development:
Productive 3 1.23 1 0.41 -- --
Non-productive 1 0.40 -- -- -- --
----- ---- ----- ---- ----- ----
Total 4 1.63 1 0.41 -- --
===== ==== ===== ==== ===== ====
The Company owned working interests in 48 gross (25.6 net) producing
oil and gas wells at December 31, 2000. At December 31, 2000, the Company had no
wells in progress.
LEASEHOLD ACREAGE
The following table shows the approximate developed and undeveloped
(gross and net) leasehold acreage of the Company as of December 31, 2000:
Leasehold Acreage
--------------------------------------
Developed Undeveloped
------------------ -----------------
Gross Net Gross Net
------ ------ ------ ------
Mississippi (onshore) 721 396 9,191 4,561
Louisiana (onshore) 7,910 3,604 22,177 10,874
Texas (offshore) 1,440 636 -- --
Federal Waters 40,970 18,493 51,561 27,616
------ ------ ------ ------
Total 51,041 23,129 82,929 43,051
In addition, PetroQuest has 2,460 gross acres and 1,279 net acres under
option in Louisiana.
TITLE TO PROPERTIES
The Company believes that the title to its oil and gas properties is
good and defensible in accordance with standards generally accepted in the oil
and gas industry, subject to such exceptions which, in the opinion of the
Company, are not so material as to detract substantially from the use or value
of such properties. The Company's properties are typically subject, in one
degree or another, to one or more of the following: royalties and other burdens
and obligations, express or implied, under oil and gas leases; overriding
royalties and other burdens created by the Company or its predecessors in title;
a variety of contractual obligations (including, in some cases, development
obligations) arising under operating agreements, farmout
11
14
agreements, production sales contracts and other agreements that may affect the
properties or their titles; back-ins and reversionary interests existing under
purchase agreements and leasehold assignments; liens that arise in the normal
course of operations, such as those for unpaid taxes, statutory liens securing
obligations to unpaid suppliers and contractors and contractual liens under
operating agreements; pooling, unitization and communitization agreements,
declarations and orders; and easements, restrictions, rights-of-way and other
matters that commonly affect property. To the extent that such burdens and
obligations affect the Company's rights to production revenues, they have been
taken into account in calculating the Company's net revenue interests and in
estimating the size and value of the Company's reserves. The Company believes
that the burdens and obligations affecting its properties are conventional in
the industry for properties of the kind owned by the Company.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings to which the Company or its subsidiaries
is a party or by which any of its property is subject, other than ordinary and
routine litigation due to the business of producing and exploring for oil and
natural gas, except as follows:
PetroQuest Energy, Inc. f/k/a Optima Energy (U.S.) Corp. v. The
Meridian Resource & Exploration Company f/k/a Texas Meridian Resources
Exploration, Inc., was filed on February 24, 2000, bearing Civil Action No.
99-2394 of the United States District Court for the Western District of
Louisiana. The Company asserts a claim for damages against Meridian resulting
from defendant's activities as operator of the Southwest Holmwood property,
Calcasieu Parish, Louisiana which resulted in a final judgment of the United
States District Court for the Western District of Louisiana ordering
cancellation of the parties' productive oil and gas lease and joint exploration
agreement with Amoco Production Company, forfeiture to two producing wells on
the lease and substantial damages against the defendant causing the Company the
loss of its investment and profits.
The Meridian Resource & Exploration Company v. PetroQuest Energy, Inc.,
was filed on December 17, 1999, bearing Docket No. 996192A of the 15th Judicial
District Court in and for the Parish of Lafayette, Louisiana. Meridian asserts
that the Company is responsible as an investor under its participation agreement
with Meridian for $530,004 of the losses, costs, expense and liability of
Meridian resulting from the final judgment that was rendered in favor of Amoco
and against Meridian in legal proceedings relative to the Southwest Holmwood
Field, Calcasieu Parish, Louisiana in the matter "Amoco Production Company v.
Texas Meridian Resource & Exploration Company," bearing Civil Action No. 96-1639
in the United States District Court for the Western District of Louisiana (Civil
Action No. 98-30724 in the United States Court of Appeals for the Fifth
Circuit). Although the Company accrued $555,000 when the district court decision
was rendered against Meridian in December, 1997, the Company denies liability to
Meridian for losses sustained by Meridian as operator as a result of the Amoco
litigation and is vigorously defending the lawsuit. The plaintiff has withheld
$737,620 from production revenues due the Company from other properties and the
Company is pursuing recovery of these amounts from Meridian.
PetroQuest Energy, Inc. and PetroQuest Energy One, L.L.C. v.
Schlumberger Technology Corporation, et al, was filed on December 29, 2000,
bearing Civil Action No. 00-2823 of the United States District Court, Western
District of Louisiana. This matter is a lawsuit filed by the Company's
subsidiaries, PetroQuest Energy, Inc., a Louisiana corporation, and PetroQuest
Energy One, L.L.C. (now PetroQuest Energy, L.L.C.) seeking to recover cost
overruns in the amount of approximately $2,850,000 which were incurred in the
completion of the No. 2 Well located at Eugene Island Block 147. The Company
asserts that cost overruns were incurred due to the negligence of Schlumberger
Technology Corporation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE OF AND DIVIDENDS ON COMMON STOCK
The Company's Common Stock trades on The Nasdaq Stock Market under the
symbol "PQUE". On January 19, 2001, the Company voluntarily delisted its Common
Stock from the Toronto Stock Exchange (TSE) where it formally traded under the
symbol "PQU." The Company delisted its stock from the TSE because it no longer
had Canadian operations and substantially all of its trading volume was on The
Nasdaq Stock Market. The following table lists high and low sales prices per
share for the periods indicated:
12
15
Nasdaq Stock Market Toronto Stock Exchange
----------------------- ----------------------
Quarter Ended High Low High Low
------- ------- ------- -------
(U.S.$) (U.S.$) (CDN$) (CDN$)
1999
1st Quarter 1.06 0.63 1.25 0.78
2nd Quarter 1.19 0.38 1.65 0.75
3rd Quarter 1.75 0.78 2.50 1.20
4th Quarter 1.97 1.28 3.00 2.00
2000
1st Quarter 2.25 1.38 3.00 2.10
2nd Quarter 3.00 1.38 4.50 2.05
3rd Quarter 4.38 2.13 6.75 2.50
4th Quarter 4.94 2.81 6.80 4.00
As of February 16, 2001, there were approximately 3,335 common
stockholders of record.
The Company has not paid dividends on the Common Stock and intends to
retain its cash flow from operations for the future operation and development of
its business. In addition, the Company's credit facility with Hibernia National
Bank restricts the declaration or payment of any dividends or distributions in
excess of 50% of consolidated net income during the most recent fiscal quarter
without prior written consent of Hibernia National Bank.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, as of the dates and for the periods
indicated, selected financial information for the Company. The financial
information for each of the five years in the period ended December 31, 2000
have been derived from the audited Consolidated Financial Statements of the
Company for such periods. The information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and notes thereto. The
following information is not necessarily indicative of future results of the
Company. All amounts are stated in U.S. dollars unless otherwise indicated.
Years Ended December 31,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- --------- -------- --------
(in thousands except share data)
Revenues $ 22,561 $ 8,607 $ 3,377 $ 4,145 $ 7,982
Net Income (Loss) 9,924 (310) (16,240) (2,914) 169
Net Income (Loss) per share:
Basic 0.37 (0.01) (1.20) (0.26) 0.01
Diluted 0.35 (0.01) (1.20) (0.26) 0.01
Oil and Gas Properties, net 56,344 21,490 17,423 12,862 24,909
Total Assets 83,072 29,901 20,066 20,163 29,641
Long-term Debt 6,804 2,927 1,300 100 4,488
Stockholders' Equity 41,456 18,105 13,336 18,740 22,314
ITEM 7. 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
13
16
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.
MERGER OF OPTIMA ENERGY (U.S.) CORPORATION
On September 1, 1998, the Company completed a merger and reorganization
(the "Merger") pursuant to a Plan and Agreement of Merger (the "Merger Plan")
dated February 11, 1998 by and among the Company, Optima Energy (U.S.)
Corporation ("Optima (U.S.)"), Goodson Exploration Company ("Goodson"), NAB
Financial, L.L.C. ("NAB") and Dexco Energy, Inc. ("Dexco"), pursuant to which
Optima (U.S.) merged into a newly formed Louisiana corporation from Nevada to
Louisiana and changing its name to PetroQuest Energy, Inc. ("PetroQuest
Louisiana). Concurrently, PetroQuest Louisiana, through a merger of PetroQuest
Louisiana with Goodson, NAB and Dexco, acquired 100% of the ownership interests
of American Explorer L.L.C. ("American Explorer"), all which were owned by
Goodson, NAB and Dexco prior to the Merger.
Pursuant to the Merger, the Company issued to the original owners of
American and their respective affiliates, certain of whom currently serve as
officers and directors of the Company, 7,335,001 shares of Company common stock,
par value $.001 per share (the "Common Stock"), and 1,667,001 Contingent Stock
Issue Rights (the "CSIRs"). The CSIRs entitle the holders to receive an
additional 1,667,001 shares of Common Stock at such time within three years of
the anniversary date of the issuance of the CSIRs as the trading price for the
Common Stock is $5.00 or higher for 20 consecutive trading days. Should these
rights become exchangeable, the Company will be required to issue 1,667,001
shares of Common Stock for no net proceeds.
On December 31, 2000, the Company underwent a subsequent corporate
reorganization. PetroQuest Energy, Inc., a Louisiana corporation, was merged
into PetroQuest Energy One, L.L.C., a Louisiana limited liability company. In
addition, PetroQuest Energy One, L.L.C. changed its name to PetroQuest Energy,
L.L.C., a single-member Louisiana limited liability company, and PetroQuest
Energy, Inc., a Delaware corporation, continues to be its sole member.
NEW ACCOUNTING STANDARDS
On January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, as amended (SFAS 133) pertaining to the accounting
for derivative instruments and hedging activities. SFAS 133 requires an entity
to recognize all of its derivatives as either assets or liabilities on its
balance sheet and measure those instruments at fair value. If the conditions
specified in SFAS 133 are met, those instruments may be designated as hedges.
Changes in the value of hedge instruments would not impact earnings, except to
the extent that the instrument is not perfectly effective as a hedge. At January
1, 2001, the Company recognized a liability of $609,295 related to costless
collars; the cumulative catch-up adjustment is recorded as a charge to other
comprehensive income. To the extent of intrinsic value, these collars have been
designated as cash flow hedges.
As of December 31, 2000, the Company had open collar contracts with
third parties whereby minimum floor prices and maximum ceiling prices are
contracted and applied to related contract volumes. These agreements in effect
for 2001 are for gas volume of 6,000 MMBtu per day beginning in January 2001
through December 2001 at (a weighted average) a ceiling price of $8.93 and floor
price of $4.00. The Company had no open oil hedging contracts at December 31,
2000.
14
17
RESULTS OF OPERATIONS
The following table sets forth certain operating information with
respect to the oil and gas operations of the Company for the years ended
December 31, 2000, 1999 and 1998:
Year Ended December 31,
----------------------------------------------------
2000 1999 1998
----------------- --------------- --------------
Production:
Oil (Bbls) 160,631 104,761 83,637
Gas (Mcf) 3,984,461 2,830,803 1,049,247
Total Production (Mcfe) 4,948,246 3,459,369 1,551,063
Sales:
Total oil sales $ 4,809,382 $ 1,933,192 $ 1,069,570
Total gas sales 17,457,307 6,583,026 2,173,620
Average sales prices:
Oil (per Bbl) $ 29.94 $ 18.45 $ 12.79
Gas (per Mcf) 4.38 2.33 2.07
Per Mcfe 4.50 2.46 2.09
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000
AND 1999
The net income for the year ended December 31, 2000 was $9,924,000 as
compared to a net loss of $310,000 for the same period ended 1999. The positive
results are due to the following components:
Production
Oil production in 2000 increased 53% over the year ended December 31,
1999. Natural gas production in 2000 increased 41% over the year ended December
31, 1999. On an Mcfe basis, production for the year ended December 31, 2000
increased 43% over the same period in 1999. The increase in 2000 production
volumes, as compared to 1999, was primarily due to three new wells that were not
producing in 1999. CL&F #14 and CL&F #15 at Turtle Bayou and Valentine Sugars #1
came on-line during December 1999, May 2000, and August 2000, respectively.
Prices
Average oil and natural gas prices realized by the Company were $29.94
and $4.38 for the year ended December 31, 2000, as compared to $18.45 and $2.33
for the same period ended 1999. This represents price increases of 62% for oil,
88% for natural gas and 83% on an Mcfe basis.
Oil and Gas Revenues
Oil and gas sales increased from $8,516,000 to $22,267,000 in 2000 or
an increase of 162%. This increase is the result of both increases in production
volumes and higher product prices for both oil and gas.
Lease Operating Expenses
Lease operating expenses increased 7% from $2,638,000 to $2,831,000.
This resulted from the additional wells discussed above as well as high initial
costs of three new wells drilled in the fourth quarter of 2000. On an Mcfe
basis, operating expenses for the year decreased from $.76 in 1999 to $.57 in
2000 as a result of increased production.
15
18
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization (DD&A) increased 43% from
$4,472,000 to $6,386,000. This is due to the increased production for the year
and capital additions to property. On a Mcfe basis, which reflects changes in
production, the DD&A rate for 2000 and 1999 was $1.29 per Mcfe.
General and Administrative Expenses
Expensed general and administrative costs increased from $1,625,000 in
1999 to $3,248,000 in 2000. In 2000 and 1999, $2,084,000 and $1,361,000 of
general and administrative costs were capitalized as related directly to the
acquisition, exploration and development efforts of the Company's resources.
Total general and administrative costs increased in 2000 due to an increase of
79% in staffing levels related to the generation of prospects, exploration for
oil and gas reserves and operation of properties.
Interest Expense
Interest expense increased from $0 in 1999 to $78,000 in 2000, net of
amounts capitalized, as a result of interest incurred on producing properties.
The Company capitalized interest of $434,000 in 1999, as compared to $439,169 in
2000.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND
1998
Oil and Gas Revenues
Oil and gas revenues increased from $3,263,000 in 1998 to $8,516,000 in
1999, or an increase of 161%. This increase is the result of both increases in
production volumes and higher product prices for both oil and gas. Production
volumes increased primarily due to three new discoveries beginning production.
Also, the American properties were added in September, 1998. Product prices
increased 18% on an Mcfe basis from 1998 to 1999, reflecting higher product
prices for both oil and gas.
Lease Operating Expenses
Lease operating expenses increased 96% from $1,349,000 to $2,638,000.
This resulted from the additional discoveries discussed above. On an Mcfe basis,
operating expenses for the year decreased from $.87 in 1998 to $.76 in 1999.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization (DD&A) increased 58% from
$2,801,000 to $4,472,000. This is due to the increased production for the year
and additions to property costs for the American properties and new discoveries.
On an Mcfe basis, which reflects changes in production, the DD&A rate for 1999
was $1.29 per Mcfe compared to $1.81 for 1998.
Full Cost Ceiling Write-Down
The full cost ceiling write-down in 1998 of $13,431,000 was primarily
attributable to cost in excess of net book value recorded in the 1998 merger
with American and significant declines in oil and gas prices at year-end 1998.
General and Administrative Expenses
Expensed general and administrative costs decreased from $1,779,000 in
1998 to $1,625,000 in 1999. In 1999 and 1998, $1,361,000 and $438,000,
respectively of general and administrative costs were capitalized as related
directly to the acquisition, exploration and development effort. Total general
and administrative costs increased in 1999 due to additional staffing levels
related to the generation of prospects, exploration for oil and gas reserves and
operation of properties.
Interest Expense
Interest expense decreased because the Company capitalized interest of
$434,000 in 1999. No interest was capitalized in 1998.
16
19
LIQUIDITY AND CAPITAL RESOURCES
Working Capital and Cash Flow
The Company has financed its exploration and development activities to
date principally through:
o bank borrowings
o cash flow from operations, and
o private placements of our Common Stock.
Working capital (before considering debt) decreased from $1.6 million
in 1999 to ($1.9) million in 2000. This was caused primarily by significant
capital expenditures related to offshore wells being drilled during the fourth
quarter of 2000.
On December 21, 2000, the Company (the "Guarantor") and its
subsidiaries PetroQuest, Inc., a Louisiana corporation ("PetroQuest-LA") and
PetroQuest Energy One, L.L.C. ("PetroQuest-One") (PetroQuest-LA and
PetroQuest-One collectively the "Borrower") entered into a $50 million revolving
credit facility with Hibernia National Bank. As a result of the reorganization
of the Company's subsidiaries in December 2000, the credit agreement was amended
on December 31, 2000 to reflect PetroQuest Energy, L.L.C. as the borrower. In
the reorganization, PetroQuest-One was the survivor of the merger between itself
and PetroQuest-LA, and subsequently changed it name to PetroQuest Energy, L.L.C.
The borrowing base under this reducing revolving line of credit is based upon
the valuation of the Borrower's mortgaged properties, projected oil and gas
prices, and any other factors deemed relevant by Hibernia National Bank. The
initial borrowing base, consisting of two separate facilities, is $15,620,000
and is scheduled for redetermination semi-annually on September 30 and March 31.
The borrowing base is also subject to quarterly reductions initially set at
$1,320,000 effective March 31, 2001. The borrowing base availability for
Facility A is $14,120,000. The Borrower can choose to borrow on the line of
credit under Facility A bearing interest at either the prime rate or the
Eurodollar rate plus a margin (based on a sliding scale of 1.375% to 2.125%
depending on borrowing base usage). Facility A matures on December 31, 2003. The
borrowing base availability for Facility B is $1,500,000 and can only be
utilized after Facility A is exhausted. The interest rate for Facility B is the
prime rate plus 0.5% and matures on December 31, 2001. In addition, the credit
facility allows the Borrower to use up to $7,500,000 of the borrowing base for
letters of credit for fees of 2% per annum. 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 PetroQuest Energy, L.L.C. and all of the
membership interest owned now or in the future by the Company in PetroQuest
Energy, L.L.C. In addition, the Company agreed to guarantee the indebtedness of
the Borrower. The credit facility contains covenants and restrictions common to
borrowings of this type, as well as maintenance of certain financial ratios. The
Company was in compliance with all of its covenants at December 31, 2000.
At December 31, 2000, approximately $6,000,000 was outstanding under
Facility A and classified as long-term debt. The $6,000,000 is scheduled for
payment during 2002. A $1,500,000 letter of credit, which expired February 1,
2001, was issued to secure credit exposure associated with certain hedging
transactions. Also, a $3,000,000 letter of credit, which expires on December 31,
2001, was issued to secure several plug and abandonment bonds totaling
$7,650,000 as required by the Minerals Management Service related to Ship Shoal
Block 72. The unused portion of Facilities A and B at December 31, 2000 was
$5,120,000.
On December 21, 2000, the Company and the Borrower also entered into a
$10,000,000 subordinated bridge facility with EnCap Energy Capital Fund III,
L.P., which matures on September 18, 2001, subject to two extensions of thirty
days each. Initially, $7,500,000 was drawn on the bridge facility and a
$1,000,000 commitment fee was paid to the lender. If the remaining $2,500,000 is
drawn on the bridge facility, an additional $200,000 in commitment fees will
have to be paid. The loan carries a fixed interest rate of 10%, and is secured
by a second mortgage on substantially all of the Borrower's oil and gas
properties. In addition, the Company agreed to guarantee the indebtedness of the
Borrower. The proceeds from the bridge facility were primarily used to purchase
and develop the interests acquired in the Ship Shoal 72 Field. The Company
intends to make payments through cash flow from operations, by drawing on the
Hibernia National Bank facility, or by obtaining additional financing which
could include the sale of property interests, additional equity and debt
securities, and additional bank financing.
On April 21, 1999, the Company entered into a loan agreement for
non-recourse financing to fund completion, flow line and facility costs of its
High Island Block 494 property. The property is security for the loan. Interest
is payable at 12% and the lender receives a 2 1/2% overriding royalty interest
in the property. For the first three production months, all of the net cash flow
from the property was dedicated to payment of principal and interest on the
loan. Subsequently, 85% of the net cash flow from the property (assuming
production levels of 12.5 MMcf/day) is dedicated to debt service. The well began
producing during July 1999. At December 31, 2000, $1,157,534 remains outstanding
under this loan.
Net cash flow from operations before working capital changes increased
from $4,280,000 in 1999 to $15,927,000 in 2000. Operations in 2000 improved
because of better product prices and increased production as the result of
successful exploration activities.
On July 20, 2000, the Company completed a private placement of 4.89
million shares of Common Stock to accredited investors at a purchase price of
$2.50 per share for a total consideration of $12,225,000 before fees and
expenses. After fees and expenses, including $644,168 in commissions, proceeds
to the Company were $11,294,000. The proceeds were used to
17
20
build and install production facilities, and for development drilling and
completion activities. The issuance of the Common Stock was exempt from
registration under Section 4 (2) of the Securities Act of 1933, as amended, and
the Company has registered the resale of the Common Stock with the Securities
and Exchange Commission on Form S-3.
The Company has budgeted for capital expenditures for 2001 and has an
exploration and development program for the year 2001 which will require
significant capital. Our budget for direct capital for new projects in 2001 is
approximately $45,000,000. This represents twenty-one projects exposing the
Company to 200 Bcfe of net unrisked reserve potential. In order to fund its cash
requirements for continued oil and gas exploration and development activities,
the Company plans to utilize available cash flow, obtain additional financing
which could include the sale of property interests, additional equity and debt
securities, and additional bank financing. The sale of additional debt or equity
securities could be dilutive to the Company's present stockholders. There is no
assurance that such plans will be successful. If the Company is unable to obtain
additional financing, it could be forced to delay or even abandon some of its
exploration and development opportunities.
FULL COST CEILING WRITE-DOWN
The Company uses the full cost method of accounting for its investment
in oil and natural gas properties. Under the full cost method of accounting, all
costs of acquisition, exploration and development of oil and natural gas
reserves are capitalized into a "full cost pool" (the pool) as incurred, and
properties in the pool are depleted and charged to operations using the units of
production method based on the ratio of current production to total proved
future production. To the extent that costs capitalized in the pool (net of
accumulated depreciation, depletion and amortization) exceed the present value
(using a 10% discount rate) of estimated future net cash flow from proved oil
and natural gas reserves, and the lower of cost and fair value of unproved
properties, excess costs are charged to operations. Once incurred, a write-down
of oil and natural gas properties is not reversible at a later date even if oil
or natural gas prices increase. The Company was required to write-down its asset
base in 1998 due primarily to the cost in excess of net book value recorded in
the merger with American and significant declines in oil prices during 1998.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
The Company's indebtedness under its line of credit is variable rate
financing. The Company believes that its exposure to market risk relating to
interest rate risk is not material. The Company believes that its business
operations are not exposed to market risks relating to foreign currency exchange
risk or equity price 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 2001, a 10%
decline in the prices the Company receives for its crude oil and natural gas
production would have an approximate $3,900,000 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 December 31,
2000, the Company had open collar contracts with third parties whereby minimum
floor prices and maximum ceiling prices are contracted and applied to related
contract volumes. These agreements in effect for 2001 are for gas volume of
6,000 MMBtu per day beginning in January 2001 through December 2001 at (a
weighted average) a ceiling price of $8.93 and floor price of $4.00. The Company
had no open oil hedging contracts at December 31, 2000. At January 1, 2001, the
Company recognized a liability of $609,295 related to these costless collars;
the cumulative catch-up adjustment is recorded as a charge to other
comprehensive income. To the extent of intrinsic value, these collars have been
designated as cash flow hedges.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information concerning this Item begins on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
21
PART III
ITEMS 10, 11, 12 & 13
For information concerning Item 10. Directors and Executive Officers of
the Registrant, Item 11. Executive Compensation, Item 12. Security Ownership of
Certain Beneficial Owners and Management and Item 13. Certain Relationships and
Related Transactions, see the definitive Proxy Statement of PetroQuest Energy,
Inc. relating to the Annual Meeting of Stockholders to be held May 23, 2001,
which will be filed with the Securities and Exchange Commission and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following financial statements of the Company and the Report of
the Company's Independent Public Accountants thereon are included on pages F-1
through F-17 of this Form 10-K.
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Operations for the three years
ended December 31, 2000
Consolidated Statements of Stockholder's Equity for the three
years ended December 31, 2000
Consolidated Statements of Cash Flows for the three years
ended December 31, 2000
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES:
All schedules are omitted because the required information is
inapplicable or the information is presented in the Financial Statements or the
notes thereto.
3. EXHIBITS:
2.1 Plan and Agreement of Merger by and among Optima Petroleum
Corporation, Optima Energy (U.S.) Corporation, its
wholly-owned subsidiary, and Goodson Exploration Company, NAB
Financial L.L.C., Dexco Energy, Inc., American Explorer,
L.L.C. (incorporated herein by reference to Appendix G of the
Proxy Statement on Schedule 14A filed July 22, 1998).
3.1 Certificate of Incorporation of the Company (incorporated
herein by reference to Exhibit 4.1 to Form 8-K dated September
16, 1998).
3.2 Bylaws of the Company (incorporated herein by reference to
Exhibit 4.2 to Form 8-K dated September 16, 1998).
3.3 Certificate of Domestication of Optima Petroleum Corporation
(incorporated herein by reference to 4.4 to Form 8-K dated
September 16, 1998).
4.1 Registration Rights Agreement dated as of September 1, 1998
among Optima Petroleum Corporation, Charles T. Goodson, Alfred
J. Thomas, II, Ralph J. Daigle, Janell B. Thomas, Alfred J.
Thomas, III, Blaine A. Thomas, and Natalie A. Thomas
(incorporated herein by reference to Exhibit 99.1 to Form 8-K
dated September 16, 1998).
4.2 Form of Certificate of Contingent Stock Issue Right
(incorporated herein by reference to Exhibit 4.3 to Form 8-K
dated September 16, 1998).
4.3 Form of Warrant to Purchase Shares of Common Stock of
PetroQuest Energy, Inc. (incorporated herein by reference to
Exhibit 4.1 to Form 8-K dated August 9, 1999)
4.4 Form of Placement Agent Warrant to Purchase Shares of Common
Stock of PetroQuest Energy, Inc. incorporated herein by
reference to Exhibit 4.2 to Form 8-K dated August 9, 1999)
19
22
10.1 1998 Stock Option Plan (incorporated herein by reference to
Exhibit 10.2 to Form 8-K dated September 16, 1998).
10.2 First Amendment to PetroQuest Energy, Inc. 1998 Incentive Plan
(incorporated by reference to Exhibit 4.1 to the Form S-8 filed
December 22, 2000).
10.3 Employment Agreement dated September 1, 1998, between PetroQuest
Energy, Inc. and Alfred J. Thomas, II (incorporated herein by
reference to Exhibit 10.3 to Form 8-K dated September 16, 1998).
10.4 Employment Agreement dated September 1, 1998, between PetroQuest
Energy, Inc. and Charles T. Goodson (incorporated herein by
reference to Exhibit 10.2 to Form 8-K dated September 16, 1998).
10.5 Employment Agreement dated September 1, 1998, between PetroQuest
Energy, Inc. and Ralph J. Daigle (incorporated herein by
reference to Exhibit 10.4 to Form 8-K dated September 16, 1998).
10.6 Employment Agreement dated September 1, 1998, between PetroQuest
Energy, Inc. and Robert R. Brooksher (incorporated herein by
reference to Exhibit 10.5 to Form 8-K dated September 16, 1998).
10.7 First Amendment to Employment agreement dated September 1, 1998
between PetroQuest Energy, Inc. and Charles T. Goodson dated
July 30, 1999 (incorporated herein by reference to Exhibit 10.1
to For 8-K dated August 9, 1999)
10.8 First Amendment to Employment Agreement dated September 1, 1998
between PetroQuest Energy, Inc. and Alfred J. Thomas, II dated
July 30, 1999 (incorporated herein by reference to Exhibit 10.2
to Form 8-K dated August 9, 1999).
10.9 First Amendment to Employment Agreement dated September 1, 1998
between PetroQuest Energy, Inc. and Ralph J. Daigle dated July
30, 1999 (incorporated herein by reference to Exhibit 10.3 to
Form 8-K dated August 9, 1999).
10.10 First amendment to Employment Agreement dated September 1, 1998
between PetroQuest Energy, Inc. and Robert R. Brooksher dated
July 30, 1999 (incorporated herein by reference to Exhibit 10.4
to Form 8-K dated August 9, 1999)
10.11 Employment Agreement dated May 8, 2000 between PetroQuest
Energy, Inc. and Michael O. Aldridge (incorporated by reference
to Exhibit 10.1 to the Form 10-Q filed August 14, 2000).
*10.12 Employment Agreement dated December 15, 2000 between PetroQuest
Energy, Inc. and Arthur M. Mixon, III.
10.13 Credit Agreement dated as of December 21, 2000, by and among
PetroQuest Energy One, L.L.C., a Louisiana limited liability
company, PetroQuest Energy, Inc., a Louisiana corporation,
PetroQuest Energy, Inc., a Delaware corporation, and Hibernia
National Bank, a national banking association (incorporated by
reference to Exhibit 10.1 to the Form 8-K/A-1 filed January 8,
2001).
*10.14 First Amendment to Credit Agreement dated and effective as of
December 31, 2000, by and among PetroQuest Energy, L.L.C., a
Louisiana limited liability company, PetroQuest Energy, Inc.,
a Delaware corporation, and Hibernia National Bank, a national
banking association.
10.15 Credit Agreement made as of December 21, 2000, by and among
PetroQuest Energy, Inc., a Louisiana corporation, PetroQuest
Energy One, L.L.C., a Louisiana limited liability company,
PetroQuest Energy, Inc., a Delaware corporation, and EnCap
Energy Capital Fund III, L.P. (incorporated by reference to
Exhibit 10.2 to the Form 8-K/A-1 filed January 8, 2001).
*10.16 First Amendment to Credit Agreement dated and effective as of
December 31, 2000, by and among PetroQuest Energy, L.L.C., a
Louisiana limited liability company, PetroQuest Energy, Inc., a
Delaware corporation, and EnCap Energy Capital Fund III, L.P.
10.17 Revolving Note dated December 21, 2000 in the principal amount
of $50,000,000.00 payable to Hibernia National Bank
(incorporated by reference to Exhibit 10.2 to the Form 8-K/A-1
filed January 8, 2001).
10.18 Promissory Note dated December 21, 2000 in the principal amount
of $10,000,000 payable to EnCap Energy Capital Fund III, L.P.
(incorporated by reference to Exhibit 10.3 to the Form 8-K/A-1
filed January 8, 2001).
10.19 Continuing Guaranty made as of December 21, 2000, by PetroQuest
Energy, Inc., a Delaware corporation, in favor of Hibernia
National Bank (incorporated by reference to Exhibit 10.4 to the
Form 8-K/A-1 filed January 8, 2001).
20
23
10.20 Guaranty made as of December 21, 2000, by PetroQuest Energy,
Inc., a Delaware corporation, in favor of EnCap Energy Capital
Fund III, L.P. (incorporated by reference to Exhibit 10.5 to the
Form 8-K/A-1 filed January 8, 2001).
10.21 Subordination Agreement effective as of December 21, 2000, by
and among Hibernia National Bank, EnCap Energy Capital Fund III,
L.P., PetroQuest Energy, Inc., a Louisiana corporation,
PetroQuest Energy One, L.L.C., a Louisiana limited liability
company, and PetroQuest Energy, Inc., a Delaware corporation
(incorporated by reference to Exhibit 10.6 to the Form 8-K/A-1
filed January 8, 2001).
10.22 Termination Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Charles T. Goodson (incorporated
herein by reference to Exhibit 10.7 to the Form 10-K filed March
31, 1999).
10.23 Termination Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Alfred J. Thomas, II (incorporated
herein by reference to Exhibit 10.8 to the Form 10-K filed March
31, 1999).
10.24 Termination Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Ralph J. Daigle (incorporated herein
by reference to Exhibit 10.9 to the Form 10-K filed March 31,
1999).
10.25 Termination Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Robert R. Brooksher (incorporated
herein by reference to Exhibit 10.10 to the Form 10-K filed
March 31, 1999).
10.26 First Amendment to Termination Agreement dated December 16,
1998, between PetroQuest Energy, Inc. and Charles T. Goodson
dated July 30, 1999 (incorporated herein by reference to Exhibit
10.5 to Form 8-K dated August 9, 1999).
10.27 First Amendment to Termination Agreement dated December 16,
1998, between PetroQuest Energy, Inc. and Alfred J. Thomas, II
dated July 30, 1999 (incorporated herein by reference to Exhibit
10.6 to Form 8-K dated August 9, 1999).
10.28 First Amendment to Termination Agreement dated December 16,
1998, between PetroQuest Energy, Inc. and Ralph J. Daigle dated
July 30, 1999 (incorporated herein by reference to Exhibit 10.7
to Form 8-K dated August 9, 1999).
10.29 First Amendment to Termination Agreement dated December 16,
1998, between PetroQuest Energy, Inc. and Robert R. Brooksher
dated July 30, 1999 (incorporated herein by reference to Exhibit
10.8 to Form 8-K dated August 9, 1999).
10.30 Termination Agreement dated May 8, 2000 between PetroQuest
Energy, Inc. and Michael O. Aldridge (incorporated by reference
to Exhibit 10.2 to the Form 10-Q filed August 14, 2000).
*10.31 Termination Agreement dated December 15, 2000 between
PetroQuest Energy, Inc. and Arthur M. Mixon.
10.32 Indemnification Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Charles T. Goodson (incorporated
herein by reference to Exhibit 10.11 to the Form 10-K filed
March 31, 1999).
10.33 Indemnification Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Alfred J. Thomas, II (incorporated
herein by reference to Exhibit 10.12 to the Form 10-K filed
March 31, 1999).
10.34 Indemnification Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Ralph J. Daigle (incorporated herein
by reference to Exhibit 10.13 to the Form 10-K filed March 31,
1999).
10.35 Indemnification Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Robert R. Brooksher (incorporated
herein by reference to Exhibit 10.14 to the Form 10-K filed
March 31, 1999).
10.36 Indemnification Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Daniel G. Fournerat (incorporated
herein by reference to Exhibit 10.15 to the Form 10-K filed
March 31, 1999).
10.37 Indemnification Agreement dated April 3, 2000, between
PetroQuest Energy, Inc. and E. Wayne Nordberg (incorporated by
reference to Exhibit 10.1 to the Form 8-K filed April 20, 2000).
10.38 Indemnification Agreement dated April 3, 2000, between
PetroQuest Energy, Inc. and Jay B. Langner (incorporated by
reference to Exhibit 10.2 to the Form 8-K filed April 20, 2000).
21
24
10.39 Indemnification Agreement dated April 3, 2000, between
PetroQuest Energy, Inc. and Francisco A. Garcia (incorporated
by reference to Exhibit 10.3 to the Form 8-K filed April 20,
2000).
10.40 Indemnification Agreement dated April 3, 2000, between
PetroQuest Energy, Inc. and William W. Rucks, IV (incorporated
by reference to Exhibit 10.4 to the Form 8-K filed April 20,
2000).
10.41 Indemnification Agreement dated August 11, 2000 between
PetroQuest Energy, Inc. and Michael O. Aldridge (incorporated
by reference to Exhibit 10.3 to the Form 10-Q filed August 14,
2000).
*10.42 Indemnification Agreement entered into March 26, 2001 and
effective January 1, 2001 between PetroQuest Energy, Inc. and
Arthur M. Mixon, III.
*21.1 Subsidiaries of the Company
*23.1 Consent of Independent Public Accountants
- ----------
* Filed herewith.
22
25
REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on December 27, 2000 announcing
the acquisition of assets and a new credit facility.
The Company filed a report on Form 8-K on January 8, 2001, amending its
report on Form 8-K filed on December 27, 2000 relating to the acquisition of
assets and a new credit facility.
The Company filed a report on Form 8-K on January 10, 2001 announcing
the voluntary delisting of the Company's common stock from the Toronto Stock
Exchange.
The Company filed a report on Form 8-K on March 1, 2001, amending its
report on Form 8-K filed on December 27, 2000 relating to the acquisition of
assets and a new credit facility.
23
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on March 30, 2001.
PETROQUEST ENERGY, INC.
By: /s/ Charles T. Goodson
-----------------------------------------
CHARLES T. GOODSON
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on March 30, 2001.
By: /s/ Charles T. Goodson Chairman of the Board, Chief Executive Officer and
------------------------------------------------------ Director (Principal Executive Officer)
CHARLES T. GOODSON
By: /s/ Alfred J. Thomas, II President, Chief Operating Officer and Director
------------------------------------------------------
ALFRED J. THOMAS, II
By: /s/ Ralph J. Daigle Senior Vice President-Exploration and Director
------------------------------------------------------
RALPH J. DAIGLE
By: /s/ Michael O. Aldridge Chief Financial Officer, Secretary and Director
------------------------------------------------------ (Principal Financial and Accounting Officer)
MICHAEL O. ALDRIDGE
By: /s/ Daniel G. Fournerat Director
------------------------------------------------------
DANIEL G. FOURNERAT
By: /s/ Francisco A. Garcia Director
------------------------------------------------------
FRANCISCO A. GARCIA
By: /s/ Jay B. Langner Director
------------------------------------------------------
JAY B. LANGNER
By: Director
------------------------------------------------------
E. WAYNE NORDBERG
By: /s/ William W. Rucks, IV Director
------------------------------------------------------
WILLIAM W. RUCKS, IV
24
27
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets of PetroQuest Energy, Inc. as of December 31, 2000 and 1999. . . . . F-3
Consolidated Statements of Operations of PetroQuest Energy, Inc.
for the years ended December 31, 2000, 1999 and 1998 . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity of PetroQuest Energy, Inc.
for the years ended December 31, 2000, 1999 and 1998 . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows of PetroQuest Energy, Inc.
for the years ended December 31, 2000, 1999 and 1998 . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
F-1
28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
PetroQuest Energy, Inc.:
We have audited the accompanying consolidated balance sheets of PetroQuest
Energy, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2000
and 1999, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PetroQuest Energy, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the consolidated results of
their operations and their cash flow for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
ARTHUR ANDERSEN LLP
New Orleans, Louisiana
March 2, 2001
F-2
29
PETROQUEST ENERGY, INC.
Consolidated Balance Sheets
(Amounts in Thousands)
December 31, December 31,
2000 1999
--------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,549 $ 3,006
Oil and gas revenue receivable 5,148 2,337
Joint interest billing receivable 10,151 2,190
Other current assets 1,432 235
--------------- ----------------
Total current assets 24,280 7,768
--------------- ----------------
Oil and gas properties:
Oil and gas properties, full cost method 85,443 51,149
Unevaluated oil and gas properties 12,431 5,753
Accumulated depreciation, depletion and amortization (41,530) (35,412)
--------------- ----------------
Oil and gas properties, net 56,344 21,490
Plugging and abandonment escrow 495 255
Other assets, net of accumulated depreciation and amortization 1,953 388
of $558 and $379, respectively --------------- ----------------
Total Assets $ 83,072 $ 29,901
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 18,893 $ 3,021
Advances from co-owners 7,297 3,157
Current portion of long-term debt 7,873 1,942
--------------- ----------------
Total current liabilities 34,063 8,120
--------------- ----------------
Commitments and contingencies -- --
Long-term debt 6,804 2,927
Other liabilities 749 749
Stockholders' equity:
Common stock, $.001 par value; authorized 75,000
shares; issued and outstanding 30,256 and 23,943
shares, respectively 30 24
Paid-in capital 62,290 48,869
Accumulated deficit (20,864) (30,788)
--------------- ----------------
Total stockholders' equity 41,456 18,105
--------------- ----------------
Total liabilities and stockholders' equity $ 83,072 $ 29,901
=============== ================
See accompanying Notes to Consolidated Financial Statements.
F-3
30
PETROQUEST ENERGY, INC.
Consolidated Statements of Operations
(Amounts in Thousands, Except Per Share Data)
Year Ended December 31,
-----------------------------------------------
2000 1999 1998
-------------- ------------ -------------
Revenues:
Oil and gas sales $ 22,267 $ 8,516 $ 3,263
Interest income 294 91 114
-------------- ------------ -------------
22,561 8,607 3,377
-------------- ------------ -------------
Expenses:
Lease operating expenses 2,831 2,638 1,349
Production taxes 944 406 219
Depreciation, depletion and amortization 6,386 4,472 2,801
Full cost ceiling write-down -- -- 13,431
General and administrative 3,248 1,625 1,779
Revenue in dispute -- (145) --
Interest expense 78 -- 116
Other income -- (79) (151)
-------------- ------------ -------------
13,487 8,917 19,544
-------------- ------------ -------------
Income (loss) from operations 9,074 (310) (16,167)
Income tax expense (benefit) (850) -- 73
-------------- ------------ -------------
Net income (loss) $ 9,924 $ (310) $ (16,240)
============== =========== ============
Earnings (loss) per common share:
Basic $ 0.37 $ (0.01) $ (1.20)
============== =========== ============
Diluted $ 0.35 $ (0.01) $ (1.20)
============== =========== ============
Weighted average number of common shares:
Basic 26,919 21,528 13,528
Diluted 28,249 21,528 13,528
See accompanying Notes to Consolidated Financial Statements.
F-4
31
PETROQUEST ENERGY, INC.
Consolidated Statements of Stockholders' Equity
(Amounts in Thousands, Except Share Data)
Total
Common Paid-In Retained Stockholders'
Stock Capital Deficit Equity
------------ ----------- ----------- ---------------
December 31, 1997 $ 32,450 $ 528 $ (14,238) $ 18,740
Conversion of common shares (Note 3):
Optima no par shares surrendered (32,450) (528) -- (32,978)
PetroQuest Energy, Inc. ($.001 par value)
shares issued 11 32,967 -- 32,978
American merger issuance of shares (Note 3) 8 10,828 -- 10,836
Net loss -- -- (16,240) (16,240)
------------ ----------- ----------- ---------------
December 31, 1998 $ 19 $ 43,795 $ (30,478) $ 13,336
------------ ----------- ----------- ---------------
Options Exercised -- 76 -- 76
Stock based employee compensation (78,375 shares) -- 118 -- 118
Stock issued for oil and gas properties -- 413 -- 413
Sale of common stock and warrants 5 4,467 -- 4,472
Net loss -- -- (310) (310)
------------ ----------- ----------- ---------------
December 31, 1999 $ 24 $ 48,869 $ (30,788) $ 18,105
------------ ----------- ----------- ---------------
Options and warrants exercised 1 1,586 -- 1,587
Stock based employee compensation (221,500 shares) -- 555 -- 555
Sale of common stock 5 11,280 -- 11,285
Net income -- -- 9,924 9,924
------------ ----------- ----------- ---------------
December 31, 2000 $ 30 $ 62,290 $ (20,864) $ 41,456
============ =========== =========== ===============
See accompanying Notes to Consolidated Financial Statements.
F-5
32
PETROQUEST ENERGY, INC.
Consolidated Statements of Cash Flows
(Amounts in Thousands)
Year Ended December 31,
-----------------------------------------
2000 1999 1998
------------ --------- -----------
Cash flows from operating activities:
Net income (loss) $ 9,924 $ (310) $ (16,240)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Deferred tax benefit (850) -- --
Depreciation, depletion and amortization and full
cost ceiling write-down 6,386 4,472 16,232
Stock based compensation 555 118 --
Plugging and abandonment costs (89) -- --
Changes in working capital accounts:
Accounts receivable (2,811) (1,321) 1,174
Joint interest billing receivable (7,961) (2,190) --
Other current assets (347) (58) (6)
Accounts payable and accrued liabilities 15,870 885 (229)
Other assets (1,744) -- --
Advances from co-owners 4,140 3,157 --
Provision for revenue dispute -- (145) --
Plugging and abandonment escrow (240) 34 (284)
Other -- (241) 231
------------ --------- -----------
Net cash provided by operating activities 22,835 4,401 878
------------ --------- -----------
Cash flows from investing activities:
Investment in oil and gas properties (40,972) (10,062) (3,612)
Sale of Canadian properties -- 1,868 --
Cash cost of American merger transaction, net of
cash received (Note 3) -- -- (1,800)
------------ --------- -----------
Net cash used in investing activities (40,972) (8,194) (5,412)
------------ --------- -----------
Cash flows from financing activities:
Exercise of options and warrants 1,587 76 --
Proceeds from borrowing 22,620 8,220 1,600
Repayment of debt (12,812) (7,050) (440)
Issue of common stock 11,285 4,472 --
------------ --------- -----------
Net cash provided by financing activities 22,680 5,718 1,160
------------ --------- -----------
Net increase (decrease) in cash and cash equivalents 4,543 1,925 (3,374)
Cash and cash equivalents balance beginning of period 3,006 1,081 4,455
------------ --------- -----------
Cash and cash equivalents balance end of period $ 7,549 $ 3,006 $ 1,081
============ ========= ===========
Supplemental disclosure of cash flow information
Cash paid during the period from:
Interest $ 409 $ 233 $ 83
============ ========== ===========
Income taxes $ -- $ -- $ 120
============ ========== ===========
See accompanying Notes to Consolidated Financial Statements.
F-6
33
PETROQUEST ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
PetroQuest Energy, Inc. (a Delaware Corporation) ("PetroQuest" or the
"Company") is an independent oil and gas company headquartered in Lafayette,
Louisiana with an exploration office in Houston, Texas. It is engaged in the
exploration, development, acquisition and operation of oil and gas properties
onshore and offshore in the Gulf Coast Region. PetroQuest and its predecessors
have been active in this area since 1986. The financial statements reflect the
results of the Company and its predecessor entity, Optima Petroleum Corporation
("Optima"), for all periods presented.
On December 31, 2000, the Company underwent a subsequent corporate
reorganization. The Company's subsidiary, PetroQuest Energy, Inc., a Louisiana
corporation, was merged into PetroQuest Energy One, L.L.C., a Louisiana limited
liability company. In addition, PetroQuest Energy One, L.L.C. changed its name
to PetroQuest Energy, L.L.C., a single-member Louisiana limited liability
company, and PetroQuest Energy, Inc., a Delaware corporation, continues to be
its sole member.
A new single-member Louisiana limited liability company called
PetroQuest Oil & Gas, L.L.C. was created on December 31, 2000. PetroQuest
Energy, Inc. (a Delaware corporation) is the sole member of PetroQuest Oil &
Gas, L.L.C.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principals of Consolidation
The Consolidated Financial Statements include the accounts of the
Company and its subsidiaries, PetroQuest Energy, L.L.C. and PetroQuest Oil &
Gas, L.L.C. All intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Oil and Gas Properties
The Company utilizes the full cost method of accounting, which involves
capitalizing all acquisition, exploration and development costs incurred for the
purpose of finding oil and gas reserves including the costs of drilling and
equipping productive wells, dry hole costs, lease acquisition costs and delay
rentals. The Company also capitalizes the portion of general and administrative
costs, which can be directly identified with acquisition, exploration or
development of oil and gas properties. Unevaluated property costs are
transferred to evaluated property costs at such time as wells are completed on
the properties, the properties are sold, or management determines these costs to
have been impaired. Interest is capitalized on unevaluated property costs.
Depreciation, depletion and amortization of oil and gas properties is
computed using the unit-of-production method based on estimated proved reserves.
All costs associated with evaluated oil and gas properties, including an
estimate of future development, restoration, dismantlement and abandonment costs
associated therewith, are included in the computation base. The costs of
investments in unproved properties are excluded from this calculation until the
project is evaluated and proved reserves established or impaired. Oil and gas
reserves are estimated annually by independent petroleum engineers.
Additionally, the capitalized costs of proved oil and gas properties cannot
exceed the present value of the estimated net cash flow from its proved reserves
(the full cost ceiling). The Company was required to write-down its asset base
in 1998 due primarily to the cost in excess of net book value recorded in the
Merger with American and significant declines in oil prices during 1998.
Transactions involving sales of reserves in place, unless significant, are
recorded as adjustments to accumulated depreciation, depletion and amortization.
F-7
34
Upon the acquisition or discovery of oil and gas properties, management
estimates the future net costs to be incurred to dismantle, abandon and restore
the property using geological, engineering and regulatory data available. Such
cost estimates are periodically updated for changes in conditions and
requirements. Such estimated amounts are considered as part of the full cost
pool for purposes of amortization upon acquisition or discovery. Such costs are
capitalized as oil and gas properties as the actual restoration, dismantlement
and abandonment activities take place.
Other Assets
Other Assets consist primarily of furniture and fixtures (net of
accumulated depreciation) which are depreciated over their useful lives ranging
from 3-7 years and loan costs which are amortized over the life of the related
loan.
Cash and Cash Equivalents
The Company considers all highly liquid investments in overnight
securities made through its commercial bank accounts, which result in available
funds the next business day, to be cash and cash equivalents. The Company holds
a minimal amount of cash denominated in Canadian dollars for settlement of
Canadian obligations incurred prior to the Merger (Note 3). The impact of
exchange rate changes on these amounts is insignificant and is included in
results of operations for all periods shown.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109. Provisions for income taxes
include deferred taxes resulting primarily from temporary differences due to
different reporting methods for oil and gas properties for financial reporting
purposes and income tax purposes. For financial reporting purposes, all
exploratory and development expenditures are capitalized and depreciated,
depleted and amortized on the future gross revenue method. For income tax
purposes, only the equipment and leasehold costs relative to successful wells
are capitalized and recovered through depreciation or depletion. Generally, most
other exploratory and development costs are charged to expense as incurred;
however, the Company may use certain provisions of the Internal Revenue Code
which allow capitalization of intangible drilling costs where management deems
appropriate. Other financial and income tax reporting differences occur as a
result of statutory depletion.
Revenue Recognition
The Company records natural gas and oil revenue under the sales method
of accounting. Under the sales method, the Company recognizes revenues based on
the amount of natural gas or oil sold to purchasers, which may differ from the
amounts to which the Company is entitled based on its interest in the
properties. Gas balancing obligations as of December 31, 2000, 1999 and 1998
were not significant.
Certain Concentrations
During 2000, 1999 and 1998, 84%, 44% and 51%, respectively, of the
Company's oil and gas production was sold to three customers. Based on the
current demand for oil and gas, the Company does not believe the loss of any of
these customers would have a significant financially disruptive effect on its
business or financial condition.
Fair Value of Financial Instruments
The fair value of accounts receivable and accounts payable approximate
book value at December 31, 2000 and 1999 due to the short-term nature of these
accounts. The fair value of the note payable and non-recourse financing
approximates book value due to the variable rate of interest charged.
New Accounting Standards
On January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, as amended (SFAS 133) pertaining to the accounting
for derivative instruments and hedging activities. SFAS 133 requires an entity
to recognize all of its derivatives as either assets or liabilities on its
balance sheet and measure those instruments at fair value. If the conditions
specified in SFAS 133 are met, those instruments may be designated as hedges.
Changes in the value of hedge instruments would not impact earnings, except to
the extent that the instrument is not perfectly effective as a hedge. At January
1, 2001, the
F-8
35
Company recognized a liability of $609,295 related to costless collars; the
cumulative catch-up adjustment was recorded as a charge to other comprehensive
income. To the extent of intrinsic value, these collars have been designated as
cash flow hedges.
As of December 31, 2000, the Company had open collar contracts with
third parties whereby minimum floor prices and maximum ceiling prices are
contracted and applied to related contract volumes. These agreements in effect
for 2001 are for gas volume of 6,000 MMBtu per day beginning in January 2001
through December 2001 at (on average) a ceiling price of $8.93 and floor price
of $4.00. The Company had no open oil hedging contracts at December 31, 2000 nor
any hedging contracts which settled in any period prior to December 31, 2000.
Earnings per Common Share Amounts
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 year. 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 common stock
equivalents computed using the treasury stock method. For purposes of computing
earnings per share in a loss year, common stock equivalents have been excluded
from the computation of weighted average common shares outstanding because their
effect is antidilutive.
Options to purchase 682,500 shares of common stock at $3.13 to $3.44
per share were outstanding during 2000 but were not included in the computation
of diluted earnings per share because the options' exercise prices were greater
than the average market price of the common shares. These options, which expire
in 2010, remained outstanding at the end of 2000. For 1999 and 1998, all 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. The
contingent stock rights assigned in connection with the Merger (see Note 3) are
also excluded from the calculation of diluted earnings per share.
NOTE 3 -- MERGER OF OPTIMA ENERGY (U.S.) CORPORATION
On September 1, 1998, the Company completed a merger and reorganization
(the "Merger") pursuant to a Plan and Agreement of Merger (the "Merger Plan")
dated February 11, 1998 by and among the Company, Optima Energy (U.S.)
Corporation ("Optima (U.S.)"), Goodson Exploration Company ("Goodson"), NAB
Financial, L.L.C. ("NAB") and Dexco Energy, Inc. ("Dexco"), pursuant to which
Optima (U.S.) merged into a newly formed Louisiana corporation from Nevada to
Louisiana and changing its name to PetroQuest Energy, Inc. ("PetroQuest
Louisiana"). Concurrently, PetroQuest Louisiana, through a merger of PetroQuest
Louisiana with Goodson, NAB and Dexco, acquired 100% of the ownership interests
of American Explorer L.L.C. ("American Explorer"), all which were owned by
Goodson, NAB and Dexco prior to the Merger. Concurrent with the Merger,
PetroQuest continued from a Canadian corporation to a Delaware corporation,
converted each share of Optima no par value common stock into one share of the
Company's $.001 par value common stock, changed its name to "PetroQuest Energy,
Inc." and adopted a new certificate of incorporation. The operating results of
American have been consolidated in the Company's consolidated statement of
operations since September 1, 1998.
Pursuant to the Merger, the Company issued to the original owners of
American and their respective affiliates, certain of whom currently serve as
officers and directors of the company, 7,335,001 shares of Company common stock,
par value $.001 per share (the "Common Stock"), and 1,667,001 Contingent Stock
Issue Rights (the "CSIRs"). The CSIRs entitle the holders to receive an
additional 1,667,001 shares of Common Stock at such time within three years of
the anniversary date of the issuance of the CSIRs as the trading price for the
Common Stock is $5.00 or higher for 20 consecutive trading days. Should these
rights become exchangeable, the Company will be required to issue 1,667,001
shares of Common Stock for no net proceeds.
The operating results of American have been consolidated in the
Company's statement of operations since September 1, 1998. The following
summarized unaudited proforma income statement data reflects the impact the
transaction would have had on the Company's results of operations for the year
ended December 31, 1998 had the transaction occurred January 1, 1998. These
unaudited proforma results have been prepared for comparative purposes only and
do not purport to be indicative of the amounts which actually would have
resulted had the transaction occurred on January 1, 1998, or which may result in
the future.
F-9
36
Proforma Results for the
Year Ended December 31, 1998
----------------------------
Revenues $ 7,469
Net loss $ (8,357)
Earnings per common share
Basic $ (0.45)
Diluted $ (0.45)
NOTE 4 -- DEBT
On December 21, 2000, the Company (the "Guarantor") and its
subsidiaries, PetroQuest, Inc., a Louisiana corporation ("PetroQuest-LA") and
PetroQuest Energy One, L.L.C. ("PetroQuest-One") (PetroQuest-LA and
PetroQuest-One collectively the "Borrowers") entered into a $50 million
revolving credit facility with Hibernia National Bank. As a result of the
reorganization of the Company's subsidiaries in December 2000, the credit
agreement was amended on December 31, 2000 to reflect PetroQuest Energy, L.L.C.
as the borrower. In the reorganization, PetroQuest One was the survivor of the
merger between itself and PetroQuest-LA, and subsequently changed its name to
PetroQuest Energy, L.L.C. The borrowing base under this reducing revolving line
of credit is based upon the valuation of the Borrower's mortgaged properties,
projected oil and gas prices, and any other factors deemed relevant by Hibernia
National Bank. The initial borrowing base, consisting of two separate
facilities, is $15,620,000 and is scheduled for redetermination semi-annually on
September 30 and March 31. The borrowing base is also subject to quarterly
reductions initially set at $1,320,000 effective March 31, 2001. The borrowing
base availability for Facility A is $14,120,000. The Borrower can choose to
borrow on the line of credit under Facility A bearing interest at either the
prime rate or the Eurodollar rate plus a margin (based on a sliding scale of
1.375% to 2.125% depending on borrowing base usage). Facility A matures on
December 31, 2003. The borrowing base availability for Facility B is $1,500,000
and can only be utilized after Facility A is exhausted. The interest rate for
Facility B is the prime rate plus 0.5% and matures on December 31, 2001. In
addition, the credit facility allows the Borrower to use up to $7,500,000 of the
borrowing base for letters of credit for fees of 2% per annum. 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 PetroQuest Energy, L.L.C.
and all of the membership interest owned now or in the future by the Company in
PetroQuest Energy, L.L.C. In addition, the Company agreed to guarantee the
indebtedness of the Borrower. The credit facility contains covenants and
restrictions common to borrowings of this type, as well as maintenance of
certain financial ratios. The Company was in compliance with all of its
covenants at December 31, 2000.
At December 31, 2000, approximately $6,000,000 was outstanding under
Facility A and classified as long-term debt. The $6,000,000 is scheduled for
payment during 2002. A $1,500,000 letter of credit, which expired February 1,
2001, was issued to secure credit exposure associated with certain hedging
transactions. Also, a $3,000,000 letter of credit, which expires on December 31,
2001, was issued to secure several plug and abandonment bonds totaling
$7,650,000 as required by the Minerals Management Service related to Ship Shoal
Block 72. The unused portion of Facilities A and B at December 31, 2000 was
$5,120,000.
On December 21, 2000, the Company and the Borrower also entered into a
$10,000,000 subordinated bridge facility with EnCap Energy Capital Fund III,
L.P., which matures on September 18, 2001, subject to two extensions of thirty
days each. Initially, $7,500,000 was drawn on the bridge facility and a
$1,000,000 commitment fee was paid to the lender. If the remaining $2,500,000 is
drawn on the bridge facility, and additional $200,000 in commitment fees will
have to be paid. The loan carries a fixed interest rate of 10%, and is secured
by a second mortgage on substantially all of the Borrower's oil and gas
properties. In addition, the Company agreed to guarantee the indebtedness of the
Borrower. The proceeds from the bridge facility were primarily used to purchase
and develop the interests acquired in the Ship Shoal 72 Field. The Company
intends to make payments through cash flow from operations, by drawing on the
Hibernia National Bank facility, or by obtaining additional financing which
could include the sale of property interests, additional equity and debt
securities, and additional bank financing.
On April 21, 1999, the Company entered into a loan agreement for
non-recourse financing to fund completion, flow line and facility costs of its
High Island Block 494 property. The property is security for the loan. Interest
is payable at 12% and the lender receives a 2 1/2% overriding royalty interest
in the property. For the first three production months, all of the net cash flow
from the property was dedicated to payment of principal and interest on the
loan. Subsequently, 85% of the net cash flow from the property (assuming
production levels of 12.5 MMcf/day) is dedicated to debt service. The well began
producing during July 1999. At December 31, 2000, $1,158,000 remains outstanding
under this loan.
F-10
37
Maturity of the non-recourse financing is dependant on production and
operating costs as discussed above. Amounts due to the lender under this
agreement through December 31, 2000 and 1999, of which $373,000 and $562,000
respectively are included in current maturity of long-term debt in the
accompanying balance sheet. Remaining amounts due are entirely dependent on the
performance of the related property. The Company estimates the remaining
payments of $785,000 will be paid in 2001. This amount is included in long-term
debt at December 31, 2000. Changes in estimated production rates and estimated
operating costs could cause these estimated payments to change.
NOTE 5 -- RELATED PARTY TRANSACTIONS
In conjunction with the Merger discussed at Note 3, the employees and
consultants of Optima were terminated. American had no employees. Its properties
(and certain of Optima's properties) were operated by American Explorer, Inc.
(AEI), a corporation owned by two officers of the Company and former members of
American. During the transition period, from September 1, 1998 through December
31, 1998, the Company's properties were operated by AEI. The officers of AEI are
also the officers of the Company. AEI charged the Company a management and
overhead reimbursement fee to cover its costs of services for the Company
($600,000 for the four months ended December, 1998). Of this amount $365,000 was
capitalized as part of the acquisition, exploration and development effort (See
Note 2). The remainder is included in general and administrative expense.
Beginning January 1, 1999 the Company assumed the operating functions of AEI,
whose employees became employees of the Company.
In 1998, three of the officers of the Company contributed their
interests in a lease at the Turtle Bayou Field to the Company in return for a
30% interest after payout of 100% of the related well cost. The Company promoted
this interest to industry partners thereby reducing its cost in the well. A
producing well was drilled and completed on the lease. No cost was recorded for
the contribution of this lease in the accompanying financial statements because
it was treated as an ordinary farmout agreement.
Certain officers and directors and their affiliates are working
interest owners in properties operated by the Company and are billed for and pay
their proportionate share of drilling and operating costs in the normal course
of business.
During 2000, 1999 and 1998, the Company was charged consulting expenses
of $10,000, $143,462 and $124,500, respectively, by companies owned by former
directors. Office expense includes $1,662, $18,500 and $51,500 for 2000, 1999
and 1998, respectively, paid to a company owned by a former director.
During 2000, 1999 and 1998 the Company paid fees of $208,789, $139,001
and $20,480, respectively to Onebane, Bernard, Torian, Diaz, McNamara & Abell to
perform various legal services for the Company. A member of the Company's Board
of Directors is of counsel with Onebane, Bernard, Torian, Diaz, McNamara &
Abell.
NOTE 6 -- COMMON STOCK AND WARRANTS
On July 20, 2000, the Company completed a private placement of 4.89
million shares of common stock to accredited investors at a purchase price of
$2.50 per share for a total consideration of $12,225,000 before fees and
expenses. After fees and expenses, including $644,168 in commissions, proceeds
to the Company were $11,294,000. The proceeds were used to build and install
production facilities, and for development drilling and completion activities.
The issuance of the common stock was exempt from registration under Section 4
(2) of the Securities Act of 1933, as amended, and the Company has registered
the resale of the common stock with the Securities and Exchange Commission on
Form S-3.
In a private placement during the fourth quarter of 1999, the Company
issued 238,500 shares of common stock (with a fair market value $413,000) in
exchange for additional working interests in producing properties. The effective
date of these acquisitions was June 1, 1999. The net operating income of $89,000
attributable to these interests during the period from the effective date to the
closing date was recorded as an adjustment to the purchase price of the
properties.
In August 1999, the Company received the funding of a private placement
of 5 million units at a purchase price of $1.00 per unit for a total
consideration of $5,000,000 before fees and expenses. Net proceeds of $4,508,000
from sale of the units were allocated between the stock and warrants based on
their relative fair market value on the date of the transaction. The proceeds
from the private placement were used for drilling and exploration costs, delay
rentals on oil and gas leases, working capital and general corporate purposes.
F-11
38
Each unit sold in the private placement consists of one share of the
Company's common stock and one warrant exercisable to purchase one-half a share
of the Company's common stock. Each warrant is exercisable at any time through
the fourth year after issuance to purchase one-half of a share of the Company's
common stock at a per share purchase price of $1.25. In addition, the Company
issued to the placement agents of the units, warrants to purchase 500,000 shares
of the Company's common stock. The warrants received by the placement agents are
exercisable at any time for a period of five years to purchase one share of the
Company's common stock at a per share purchase price of $1.25 per share.
NOTE 7 -- INVESTMENT IN OIL AND GAS PROPERTIES
The following table discloses certain financial data relative to the Company's
evaluated oil and gas producing activities, which are located onshore and
offshore the continental United States:
Costs Incurred in Oil and Gas Property Acquisition,
Exploration and Development Activities
(amounts in thousands)
2000 1999 1998
------------- ------------- ----------
Acquisition costs:
Proved $ 6,154 $ 546 $ 12,302
Unproved 4,670 954 1,060
Exploration costs 9,625 8,477 2,645
Development costs 18,000 1,170 4,189
Other costs 2,523 1,795 438
------------- ------------- ----------
Total costs incurred $ 40,972 $ 12,942 $ 20,634
============= ============= ==========
Other costs for the year ended December 31, 2000 include $2,084,000 and
$439,000 of capitalized general and administrative costs and interest costs
respectively. Other costs for the year ended December 31, 1999 include
$1,361,000 and $434,000 of capitalized general and administrative costs and
interest costs respectively. Other costs for the year ended December 31, 1998
include $438,000 of capitalized general and administrative costs.
At December 31, 2000 and 1999, unevaluated oil and gas properties with
capitalized costs of $12,431,000 and $5,753,000 respectively, were not subject
to depletion. Of the $12,431,000 of unevaluated oil and gas property costs at
December 31, 2000, not subject to depletion, $7,566,000 was incurred in 2000 and
$4,865,000 was incurred in prior years. Management expects that these properties
will be evaluated over the next one to three years.
NOTE 8 -- INCOME TAXES
The Company follows the provisions of SFAS No. 109, "Accounting For
Income Taxes," which provides for recognition of a deferred tax asset for
deductible temporary timing differences, operating loss carryforwards, statutory
depletion carryforwards and tax credit carryforwards net of a "valuation
allowance." An analysis of the Company's deferred taxes follows (amounts in
thousands):
December 31,
---------------------------
2000 1999
------------- -----------
Net operating loss carryforwards $ 9,284 $ 6,467
Statutory depletin carryforward 441 441
Alternative minimum tax credit 29 4
Temporary differences:
Oil and gas properties -- full cost (8,904) (2,766)
------------- -----------
850 4,146
Valuation allowance -- (4,146)
------------- -----------
$ 850 $ --
============= ===========
For tax reporting purposes, the Company had operating loss
carryforwards of $26,525,000 and $18,476,000 at December 31, 2000 and 1999
respectively. If not utilized, such carryforwards would begin expiring in 2009
and would
F-12
39
completely expire by the year 2020. The Company had available for tax reporting
purposes $1,261,000 in statutory depletion deductions that may be carried
forward indefinitely. A valuation allowance was provided as of December 31, 1999
for all the net deferred tax asset as it was deemed more likely than not that it
would not be realized given the Company's history of losses. Due to the
Company's earnings during the current year and the strong commodity prices
expected in the future, management has determined the remaining deferred tax
asset will more likely than not be realized, therefore the valuation allowance
previously provided was reversed in 2000.
Income tax expense (benefit) for each of the years ended December 31,
2000, 1999 and 1998 (amounts in thousands) was different than the amount
computed using the Federal statutory rate (35%) for the following reasons:
For the Year-Ended December 31,
------------------------------------------
2000 1999 1998
------------- -------------- ----------
Amount computed using the statutory rate $ 3,176 $ (109) $ (5,658)
Increase (reduction) in taxes resulting from:
State & local taxes 120 (5) (185)
Increase (decrease) in deferred tax asset valuation
allowance (4,146) 114 5,916
------------ ------------- ----------
Income tax expense (benefit) $ (850) $ -- $ 73
============ ============= ==========
NOTE 9 -- COMMITMENTS AND CONTINGENCIES
PetroQuest Energy, Inc. f/k/a Optima Energy (U.S.) Corp. v. The
Meridian Resource & Exploration Company f/k/a Texas Meridian Resources
Exploration, Inc., was filed on February 24, 2000, bearing Civil Action No.
99-2394 of the United States District Court for the Western District of
Louisiana. The Company asserts a claim for damages against Meridian resulting
from defendant's activities as operator of the Southwest Holmwood property,
Calcasieu Parish, Louisiana which resulted in a final judgment of the United
States District Court for the Western District of Louisiana ordering
cancellation of the parties' productive oil and gas lease and joint exploration
agreement with Amoco Production Company, forfeiture to two producing wells on
the lease and substantial damages against the defendant causing the Company the
loss of its investment and profits.
The Meridian Resource & Exploration Company v. PetroQuest Energy, Inc.,
was filed on December 17, 1999, bearing Docket No. 996192A of the 15th Judicial
District Court in and for the Parish of Lafayette, Louisiana. Meridian asserts
that the Company is responsible as an investor under its participation
agreement with Meridian for $530,004 of the losses, costs, expense and
liability of Meridian resulting from the final judgment that was rendered in
favor of Amoco and against Meridian in legal proceedings relative to the
Southwest Holmwood Field, Calcasieu Parish, Louisiana in the matter "Amoco
Production Company v. Texas Meridian Resource & Exploration Company," bearing
Civil Action No. 96-1639 in the United States District Court for the Western
District of Louisiana (Civil Action No. 98-30724 in the United States Court of
Appeals for the Fifth Circuit). Although the Company accrued $555,000 when the
district court decision was rendered against Meridian in December, 1997, the
Company denies liability to Meridian for losses sustained by Meridian as
operator as a result of the Amoco litigation and is vigorously defending the
lawsuit. The plaintiff has withheld $737,620 from production revenues due the
Company from other properties and the Company is pursuing recovery of these
amounts from Meridian.
PetroQuest Energy, Inc. and PetroQuest Energy One, L.L.C. v.
Schlumberger Technology Corporation, et al, was filed on December 29, 2000,
bearing Civil Action No. 00-2823 of the United States District Court, Western
District of Louisiana. This matter is a lawsuit filed by the Company's
subsidiaries, PetroQuest Energy, Inc., a Louisiana corporation, and PetroQuest
Energy One, L.L.C. (now PetroQuest Energy, L.L.C.) seeking to recover cost
overruns in the amount of approximately $2,850,000 which were incurred in the
completion of the No. 2 Well located at Eugene Island Block 147. The Company
asserts that cost overruns were incurred due to the negligence of Schlumberger
Technology Corporation.
ABANDONMENT
The Company maintains abandonment escrows that have been established
for future abandonment obligations of certain oil and gas properties of the
Company. The management of the Company believes the escrows will be sufficient
to offset those future abandonment liabilities; however, the Company is
responsible for any abandonment expenses in excess of the escrow balances. As of
December 31, 2000 and 1999, total estimated site restoration, dismantlement and
abandonment costs were approximately $12,439,000 and $3,538,000 respectively,
net of expected salvage value.
F-13
40
LEASE COMMITMENTS
The Company leases certain office space under operating lease
arrangements which require future minimum rental payments of $346,000, $388,000,
$324,000 and $313,000 in each of the years 2001 through 2004, respectively.
Total rent expense under operating leases was approximately $345,000, $193,000
and $113,000 in 2000, 1999 and 1998, respectively.
NOTE 10 -- EMPLOYEE BENEFIT PLANS
In March, 1998, management of the Company, in conjunction with the
proposed Merger, adopted a new stock option plan (the "New Plan") which was
effective upon the closing of the Merger in order to attract new management and
retain key employees. Key employees, including officers (whether or not they are
directors), and consultants of the Company and outside directors are eligible to
participate in the New Plan. The Company's stock option plans reserved 1,950,000
common shares for issuance. Prior to the Merger, 787,000 common shares had been
issued pursuant to the exercise of options granted under previous Plans and
options exercisable into 782,500 shares were outstanding, leaving 380,500
options available for issuance. Under the New Plan, as amended, 2,400,000 common
shares had been allotted and reserved for future issuance.
On the closing of the Merger, options to purchase a total of 1,052,700
shares of Common Stock were outstanding. Of these options, 500,000 vested
immediately on grant, and 512,300 vest one third on each of December 31, 1998,
1999 and 2000.
Generally, options must be exercised within 10 years of the grant date
and may be granted only to employees, directors and consultants. The exercise
price of each option may not be less than 100% of the fair market value of a
share of Common Stock on the date of grant.
Upon a change in control of the Company, all outstanding options become
immediate exercisable.
If the compensation cost for the Company's 2000, 1999 and 1998 grants
for stock-based compensation plans had been determined consistent with SFAS No.
123, the Company's 2000, 1999 and 1998 net income and basic and diluted earnings
per common share would have approximated the pro forma amounts below (in
thousands, except per share amounts):
Year Ended December 31,
------------------------------------------------------------------------------
2000 1999 1998
------------------------ ----------------------- ------------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
---------- ------------ ---------- ----------- ---------- -----------
Net income (loss) $ 9,924 $ 9,112 $ (310) $ (978) $ (16,240) $ (17,182)
Earnings (loss) per common share
Basic $ 0.37 $ 0.34 $ (0.01) $ 0.05 $ (1.20) $ (1.27)
Diluted $ 0.35 $ 0.32 $ (0.01) $ (0.05) $ (1.20) $ (1.27)
The contingent stock rights assigned in connection with the Merger are
excluded from the calculation of pro forma net loss and loss per share.
F-14
41
A summary of the Company's stock options as of December 31, 2000, 1999
and 1998 and changes during the years ended on those dates is presented below:
Year Ended December 31,
-----------------------------------------------------------------------------------
2000 1999 1998
-------------------------- -------------------------- -----------------------------
Number of Wgtd. Avg. Number of Wgtd. Avg. Number of Wgtd. Avg.
Options Price Options Price Options Price
------------ ------------ ------------- ----------- --------------- ------------
Outstanding at beginning of year 1,126,200 $ 0.95 1,052,700 $ 0.85 1,163,000 $ 2.73
Granted 1,027,500 2.67 188,000 1.42 1,052,700 0.85
Expired/cancelled/forfeitures (24,866) 1.04 (25,500) 0.85 (1,163,000) 2.73
Exercised (266,934) 0.85 (89,000) 0.85 - -
------------ ------------ ------------- ----------- --------------- ------------
Outstanding at end of year 1,861,900 1.92 1,126,200 0.95 1,052,700 0.85
Options exercisable at year-end 800,733 0.97 897,433 0.93 694,100 0.85
Options available for future grant 182,166 584,800 747,300
Weighted average fair value of
options granted during the year $ 1.99 $ 0.47 $ 0.58
The fair value of each option granted during the periods presented is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions: (a) divided yield of 0% (b) expected volatility range
of 56.99% - 59.88%, (c) risk-free interest rate range of 5.39% - 6.96%, 5.31% -
6.33% and 5.30% in 2000, 1999 and 1998, respectively, and (d) expected life of
10 years for all grants.
The following table summarizes information regarding stock options
outstanding at December 31, 2000:
Range of Options Wgtd. Avg. Wgtd. Avg. Options Wgtd. Avg.
Exercise Outstanding Remaining Exercise Exercisable Exercise
Price At 12/31/00 Contractual Life Price At 12/31/00 Price
- -------- ----------- ---------------- ---------- ----------- ---------
$0.81-$0.94 681,400 6.45 Years $0.87 681,400 $0.87
$1.44-$1.88 498,000 9.68 Years $1.68 119,333 $1.57
$3.13-$3.44 682,500 10 Years $3.15 - -
1,861,900 8.62 Years $1.92 800,733 $0.97
NOTE 11 - OIL AND GAS RESERVE INFORMATION - UNAUDITED
A majority of the Company's net proved oil and gas reserves at December
31, 2000 have been estimated by independent petroleum consultants in accordance
with guidelines established by the Securities and Exchange Commission ("SEC").
Accordingly, the following reserve estimates are based upon existing economic
and operating conditions at the respective dates.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in providing the future rates of production and timing of
development expenditures. The following reserve data represents estimates only
and should not be construed as being exact. In addition, the present values
should not be construed as the current market value of the Company's oil and gas
properties or the cost that would be incurred to obtain equivalent reserves.
F-15
42
The following table (amounts in thousands) sets forth an analysis of
the Company's estimated quantities of net proved and proved developed oil
(including condensate) and gas reserves, all located onshore and offshore the
continental United States:
Oil Natural
In Gas in
MBbls MMcf
--------- ----------
Proved reserves as of December 31, 1997 654 2,447
Revisions of previous estimates (134) (602)
Extensions, discoveries and other additions 5 874
Purchase of producing properties 63 8,891
Production (84) (1,049)
-------- --------
Proved reserves as of December 31, 1998 504 10,561
Revisions of previous estimates 199 128
Extensions, discoveries and other additions 1,596 7,257
Purchase of producing properties -- 13
Production (105) (2,831)
-------- --------
Proved reserves as of December 31, 1999 2,194 15,128
Revisions of previous estimates (760) 6,638
Extensions, discoveries and other additions 110 3,476
Purchase of producing properties 1,732 8,865
Production (161) (3,972)
-------- --------
Proved reserves as of December 31, 2000 3,115 30,135
-------- --------
Proved developed reserves
As of December 31, 1998 275 7,722
-------- --------
As of December 31, 1999 400 6,456
-------- --------
As of December 31, 2000 2,355 18,679
-------- --------
The following tables (amounts in thousands) present the standardized
measure of future net cash flows related to proved oil and gas reserves together
with changes therein, as defined by the FASB. The oil, condensate and gas price
structure utilized to project future net cash flows reflects current prices at
each year end and has been escalated only where known and determinable price
changes are provided by contracts and law. Future production and development
costs are based on current costs with no escalations. No future income taxes
were included in the computation of standardized measure in 1999 and 1998
because the Company's tax basis in oil and gas properties, along with its other
tax preference attributes, net, exceeded pretax estimated discounted future net
cash flows. Estimated future cash flows have been discounted to their present
values based on a 10% annual discount rate.
F-16
43
STANDARD MEASURE December 31,
--------------------------------------
2000 1999 1998
--------- ----------- -----------
Future cash flows $ 391,078 $ 92,788 $ 28,958
Future production and development costs (66,095) (33,732) (14,208)
Future income taxes (98,190) - -
--------- ----------- -----------
Future net cash flows 226,793 59,056 14,750
10% annual discount (48,470) (15,987) (3,074)
--------- ----------- -----------
Standardized measure of discounted future net cash flows $ 178,323 $ 43,069 $ 11,676
========= =========== ===========
CHANGES IN STANDARDIZED MEASURE Year Ended December 31,
--------------------------------------------
2000 1999 1998
------------- -------------- -----------
Standarized measure at beginning of year $ 43,069 $ 11,676 $ 9,057
Sales and transfers of oil and gas produced,
net of production costs (18,492) (5,472) (1,752)
Changes in price, net of future production costs 104,695 7,691 (3,350)
Extensions and discoveries, net of future
production and development costs 27,575 25,974 850
Changes in estimated future development costs,
net of development costs incurred during this period 2,801 1,013 237
Revisions of quantity estimates 12,818 2,547 (1,592)
Accretion of discount 4,307 1,168 906
Net change in income taxes (78,544) -- --
Purchase of reserves in place 67,052 179 7,566
Changes in production rates (timing) and other 13,042 (1,707) (246)
------------- -------------- -----------
Standardized measure at end of year $ 178,323 $ 43,069 $ 11,676
============= ============== ===========
The weighted average prices of oil and gas used with the above tables at
December 31, 2000, 1999 and 1998 were $25.29, $25.21 and $9.84 respectively, per
barrel and $10.35, $2.48 and $2.27, respectively, per Mcf. Oil prices have
remained relatively stable and natural gas prices have declined almost 50%
subsequent to December 31, 2000. Accordingly, the discounted future net cash
flows would be decreased if the standardized measure were calculated at a later
date.
NOTE 12 - SUMMARIZED QUARTERLY FINANCIAL INFORMATION - UNAUDITED
Summarized quarterly financial information is as follows (amounts in
thousands except per share data):
Quarter Ended
--------------------------------------------------------------
March-31 June-30 September-30 December-31
--------------- -------------- ------------ -------------
2000:
Revenues $ 3,151 $ 3,859 $ 6,132 $ 9,419
Expenses (2,521) (2,823) (3,113) (4,180)
--------------- -------------- --------- -------------
Net income 630 1,036 3,019 5,239
=============== ============== ========= =============
Earnings per Share:
Basic $ 0.03 $ 0.04 $ 0.10 $ 0.20
Diluted $ 0.02 $ 0.04 $ 0.10 $ 0.19
1999:
Revenues $ 1,237 $ 1,541 $ 2,576 $ 3,253
Expenses (1,770) (2,336) (2,364) (2,447)
--------------- -------------- --------- -------------
Net income (loss) (533) (795) 212 806
=============== ============== ========= =============
Earnings (loss) per Share:
Basic $ (0.02) $ (0.04) $ 0.01 $ 0.04
Diluted $ (0.02) $ (0.04) $ 0.01 $ 0.04
F-17
44
INDEX TO EXHIBITS
2.1 Plan and Agreement of Merger by and among Optima Petroleum Corporation,
Optima Energy (U.S.) Corporation, its wholly-owned subsidiary, and
Goodson Exploration Company, NAB Financial L.L.C., Dexco Energy, Inc.,
American Explorer, L.L.C. (incorporated herein by reference to Appendix
G of the Proxy Statement on Schedule 14A filed July 22, 1998).
3.1 Certificate of Incorporation of the Company (incorporated herein by
reference to Exhibit 4.1 to Form 8-K dated September 16, 1998).
3.2 Bylaws of the Company (incorporated herein by reference to Exhibit 4.2
to Form 8-K dated September 16, 1998).
3.3 Certificate of Domestication of Optima Petroleum Corporation
(incorporated herein by reference to 4.4 to Form 8-K dated September
16, 1998).
4.1 Registration Rights Agreement dated as of September 1, 1998 among
Optima Petroleum Corporation, Charles T. Goodson, Alfred J. Thomas, II,
Ralph J. Daigle, Janell B. Thomas, Alfred J. Thomas, III, Blaine A.
Thomas, and Natalie A. Thomas (incorporated herein by reference to
Exhibit 99.1 to Form 8-K dated September 16, 1998).
4.2 Form of Certificate of Contingent Stock Issue Right (incorporated
herein by reference to Exhibit 4.3 to Form 8-K dated September 16,
1998).
4.3 Form of Warrant to Purchase Shares of Common Stock of PetroQuest
Energy, Inc. (incorporated herein by reference to Exhibit 4.1 to Form
8-K dated August 9, 1999)
4.4 Form of Placement Agent Warrant to Purchase Shares of Common Stock of
PetroQuest Energy, Inc. incorporated herein by reference to Exhibit 4.2
to Form 8-K dated August 9, 1999)
45
10.1 1998 Stock Option Plan (incorporated herein by reference to Exhibit
10.2 to Form 8-K dated September 16, 1998).
10.2 First Amendment to PetroQuest Energy, Inc. 1998 Incentive Plan
(incorporated by reference to Exhibit 4.1 to the Form S-8 filed
December 22, 2000).
10.3 Employment Agreement dated September 1, 1998, between PetroQuest
Energy, Inc. and Alfred J. Thomas, II (incorporated herein by reference
to Exhibit 10.3 to Form 8-K dated September 16, 1998).
10.4 Employment Agreement dated September 1, 1998, between PetroQuest
Energy, Inc. and Charles T. Goodson (incorporated herein by reference
to Exhibit 10.2 to Form 8-K dated September 16, 1998).
10.5 Employment Agreement dated September 1, 1998, between PetroQuest
Energy, Inc. and Ralph J. Daigle (incorporated herein by reference to
Exhibit 10.4 to Form 8-K dated September 16, 1998).
10.6 Employment Agreement dated September 1, 1998, between PetroQuest
Energy, Inc. and Robert R. Brooksher (incorporated herein by reference
to Exhibit 10.5 to Form 8-K dated September 16, 1998).
10.7 First Amendment to Employment agreement dated September 1, 1998 between
PetroQuest Energy, Inc. and Charles T. Goodson dated July 30, 1999
(incorporated herein by reference to Exhibit 10.1 to For 8-K dated
August 9, 1999)
10.8 First Amendment to Employment Agreement dated September 1, 1998 between
PetroQuest Energy, Inc. and Alfred J. Thomas, II dated July 30, 1999
(incorporated herein by reference to Exhibit 10.2 to Form 8-K dated
August 9, 1999).
10.9 First Amendment to Employment Agreement dated September 1, 1998 between
PetroQuest Energy, Inc. and Ralph J. Daigle dated July 30, 1999
(incorporated herein by reference to Exhibit 10.3 to Form 8-K dated
August 9, 1999).
10.10 First amendment to Employment Agreement dated September 1, 1998 between
PetroQuest Energy, Inc. and Robert R. Brooksher dated July 30, 1999
(incorporated herein by reference to Exhibit 10.4 to Form 8-K dated
August 9, 1999)
10.11 Employment Agreement dated May 8, 2000 between PetroQuest Energy, Inc.
and Michael O. Aldridge (incorporated by reference to Exhibit 10.1 to
the Form 10-Q filed August 14, 2000).
*10.12 Employment Agreement dated December 15, 2000 between PetroQuest Energy,
Inc. and Arthur M. Mixon, III.
10.13 Credit Agreement dated as of December 21, 2000, by and among PetroQuest
Energy One, L.L.C., a Louisiana limited liability company, PetroQuest
Energy, Inc., a Louisiana corporation, PetroQuest Energy, Inc., a
Delaware corporation, and Hibernia National Bank, a national banking
association (incorporated by reference to Exhibit 10.1 to the Form
8-K/A-1 filed January 8, 2001).
*10.14 First Amendment to Credit Agreement dated and effective as of December
31, 2000, by and among PetroQuest Energy, L.L.C., a Louisiana limited
liability company, PetroQuest Energy, Inc., a Delaware corporation, and
Hibernia National Bank, a national banking association
10.15 Credit Agreement made as of December 21, 2000, by and among PetroQuest
Energy, Inc., a Louisiana corporation, PetroQuest Energy One, L.L.C., a
Louisiana limited liability company, PetroQuest Energy, Inc., a
Delaware corporation, and EnCap Energy Capital Fund III, L.P.
(incorporated by reference to Exhibit 10.2 to the Form 8-K/A-1 filed
January 8, 2001).
*10.16 First Amendment to Credit Agreement dated and effective as of
December 31, 2000, by and among PetroQuest Energy, L.L.C., a Louisiana
limited liability company, PetroQuest Energy, Inc., a Delaware
corporation, and EnCap Energy Capital Fund III, L.P.
10.17 Revolving Note dated December 21, 2000 in the principal amount of
$50,000,000.00 payable to Hibernia National Bank (incorporated by
reference to Exhibit 10.2 to the Form 8-K/A-1 filed January 8, 2001).
10.18 Promissory Note dated December 21, 2000 in the principal amount of
$10,000,000 payable to EnCap Energy Capital Fund III, L.P.
(incorporated by reference to Exhibit 10.3 to the Form 8-K/A-1 filed
January 8, 2001).
10.19 Continuing Guaranty made as of December 21, 2000, by PetroQuest Energy,
Inc., a Delaware corporation, in favor of Hibernia National Bank
(incorporated by reference to Exhibit 10.4 to the Form 8-K/A-1 filed
January 8, 2001).
10.20 Guaranty made as of December 21, 2000, by PetroQuest Energy, Inc., a
Delaware corporation, in favor of EnCap Energy Capital Fund III, L.P.
(incorporated by reference to Exhibit 10.5 to the Form 8-K/A-1 filed
January 8, 2001).
10.21 Subordination Agreement effective as of December 21, 2000, by and among
Hibernia National Bank, EnCap Energy Capital Fund III, L.P., PetroQuest
Energy, Inc., a Louisiana corporation, PetroQuest
46
Energy One, L.L.C., a Louisiana limited liability company, and
PetroQuest Energy, Inc., a Delaware corporation (incorporated by
reference to Exhibit 10.6 to the Form 8-K/A-1 filed January 8, 2001).
10.22 Termination Agreement dated December 16, 1998, between PetroQuest
Energy, Inc. and Charles T. Goodson (incorporated herein by reference
to Exhibit 10.7 to the Form 10-K filed March 31, 1999).
10.23 Termination Agreement dated December 16, 1998, between PetroQuest
Energy, Inc. and Alfred J. Thomas, II (incorporated herein by
reference to Exhibit 10.8 to the Form 10-K filed March 31, 1999).
10.24 Termination Agreement dated December 16, 1998, between PetroQuest
Energy, Inc. and Ralph J. Daigle (incorporated herein by reference to
Exhibit 10.9 to the Form 10-K filed March 31, 1999).
10.25 Termination Agreement dated December 16, 1998, between PetroQuest
Energy, Inc. and Robert R. Brooksher (incorporated herein by reference
to Exhibit 10.10 to the Form 10-K filed March 31, 1999).
10.26 First Amendment to Termination Agreement dated December 16, 1998,
between PetroQuest Energy, Inc. and Charles T. Goodson dated July 30,
1999 (incorporated herein by reference to Exhibit 10.5 to Form 8-K
dated August 9, 1999).
10.27 First Amendment to Termination Agreement dated December 16, 1998,
between PetroQuest Energy, Inc. and Alfred J. Thomas, II dated July
30, 1999 (incorporated herein by reference to Exhibit 10.6 to Form 8-K
dated August 9, 1999).
10.28 First Amendment to Termination Agreement dated December 16, 1998,
between PetroQuest Energy, Inc. and Ralph J. Daigle dated July 30,
1999 (incorporated herein by reference to Exhibit 10.7 to Form 8-K
dated August 9, 1999).
10.29 First Amendment to Termination Agreement dated December 16, 1998,
between PetroQuest Energy, Inc. and Robert R. Brooksher dated July 30,
1999 (incorporated herein by reference to Exhibit 10.8 to Form 8-K
dated August 9, 1999).
10.30 Termination Agreement dated May 8, 2000 between PetroQuest Energy,
Inc. and Michael O. Aldridge (incorporated by reference to Exhibit
10.2 to the Form 10-Q filed August 14, 2000).
*10.31 Termination Agreement dated December 15, 2000 between PetroQuest
Energy, Inc. and Arthur M. Mixon.
10.32 Indemnification Agreement dated December 16, 1998, between PetroQuest
Energy, Inc. and Charles T. Goodson (incorporated herein by reference
to Exhibit 10.11 to the Form 10-K filed March 31, 1999).
10.33 Indemnification Agreement dated December 16, 1998, between PetroQuest
Energy, Inc. and Alfred J. Thomas, II (incorporated herein by
reference to Exhibit 10.12 to the Form 10-K filed March 31, 1999).
10.34 Indemnification Agreement dated December 16, 1998, between PetroQuest
Energy, Inc. and Ralph J. Daigle (incorporated herein by reference to
Exhibit 10.13 to the Form 10-K filed March 31, 1999).
10.35 Indemnification Agreement dated December 16, 1998, between PetroQuest
Energy, Inc. and Robert R. Brooksher (incorporated herein by reference
to Exhibit 10.14 to the Form 10-K filed March 31, 1999).
10.36 Indemnification Agreement dated December 16, 1998, between PetroQuest
Energy, Inc. and Daniel G. Fournerat (incorporated herein by reference
to Exhibit 10.15 to the Form 10-K filed March 31, 1999).
10.37 Indemnification Agreement dated April 3, 2000, between PetroQuest
Energy, Inc. and E. Wayne Nordberg (incorporated by reference to
Exhibit 10.1 to the Form 8-K filed April 20, 2000).
10.38 Indemnification Agreement dated April 3, 2000, between PetroQuest
Energy, Inc. and Jay B. Langner (incorporated by reference to Exhibit
10.2 to the Form 8-K filed April 20, 2000).
10.39 Indemnification Agreement dated April 3, 2000, between PetroQuest
Energy, Inc. and Francisco A. Garcia (incorporated by reference to
Exhibit 10.3 to the Form 8-K filed April 20, 2000).
10.40 Indemnification Agreement dated April 3, 2000, between PetroQuest
Energy, Inc. and William W. Rucks, IV (incorporated by reference to
Exhibit 10.4 to the Form 8-K filed April 20, 2000).
10.41 Indemnification Agreement dated August 11, 2000 between PetroQuest
Energy, Inc. and Michael O. Aldridge (incorporated by reference to
Exhibit 10.3 to the Form 10-Q filed August 14, 2000).
*10.42 Indemnification Agreement entered into March 26, 2001 and effective
January 1, 2001 between PetroQuest Energy, Inc. and Arthur M. Mixon,
III.
*21.1 Subsidiaries of the Company
*23.1 Consent of Independent Public Accountants
- --------------------
* Filed herewith