5
PARALLEL PETROLEUM CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ -----------------------------
2000 2001 2000 2001
----------- ------------ ----------- ------------
Oil and gas revenues $ 3,196,614 $ 5,143,894 $ 5,971,205 $ 12,432,096
----------- ----------- ----------- ------------
Cost and expenses:
Lease operating expense 618,570 1,076,936 1,232,385 2,196,001
General and administrative 260,160 303,881 457,960 602,089
Depreciation, depletion and amortization 1,219,142 1,765,747 2,282,611 3,443,567
----------- ----------- ----------- ------------
2,097,872 3,146,564 3,972,956 6,241,657
----------- ----------- ----------- ------------
Operating income 1,098,742 1,997,330 1,998,249 6,190,439
----------- ----------- ----------- ------------
Other income (expense), net:
Equity in loss of First Permian, LLC (109,572) - (496,083) -
Interest income 12,490 63,739 31,245 82,788
Other income 41,976 25,207 48,437 50,413
Interest expense (348,842) (247,655) (691,747) (474,511)
Other expense (276) (77,357) (1,982) (132,610)
----------- ----------- ----------- ------------
Total other expense, net (404,224) (236,066) (1,110,130) (473,920)
----------- ----------- ----------- ------------
Income before income taxes 694,518 1,761,264 888,119 5,716,519
Income tax expense (benefit), net - 430,813 - (249,855)
----------- ----------- ----------- ------------
Net income $ 694,518 $ 1,330,451 $ 888,119 $ 5,966,374
=========== =========== =========== ============
Cumulative preferred stock dividend $ 146,175 $ 146,175 $ 316,713 $ 292,350
=========== =========== =========== ============
Net income available to common stockholders $ 548,343 $ 1,184,276 $ 571,406 $ 5,674,024
=========== =========== =========== ============
Net income per common share:
Basic $ 0.027 $ 0.058 $ 0.028 $ 0.278
=========== =========== =========== ============
Diluted $ 0.027 $ 0.056 $ 0.028 $ 0.251
=========== =========== =========== ============
Weighted average common share outstanding
Diluted 20,583,831 23,826,809 20,569,109 23,758,020
=========== =========== =========== ============
The accompany notes are an integral part of these financial statements.
6
PARALLEL PETROLEUM CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30
--------------------------
2000 2001
--------- -----------
Cash flows from operating activities:
Net income $ 888,119 $ 5,966,374
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 2,282,611 3,443,567
Equity in loss from investments in First Permian, LLC 496,083 -
Income taxes - (249,855)
Other, net (6,362) (82,392)
Changes in assets and liabilties:
Decrease (increase) in accounts receivables (648,109) 1,121,359
Increase in prepaid expenses and other (12,782) (259,291)
(Decrease) increase in accounts payable, accrued liabilities
and taxes payable (464,337) 583,512
----------- -----------
Net cash provided by operating activities 2,535,223 10,523,274
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (1,909,566) (5,933,076)
Proceeds from disposition of property and equipment 2,917,392 -
Distribution from First Permian, LLC 67,500 -
----------- -----------
Net cash provided by (used in) investing activities 1,075,326 (5,933,076)
----------- -----------
Cash flows from financing activities:
Payments on bank line of credit (1,665,889) (1,427,531)
Proceeds from exercise of options and warrants - 125,723
Payment of preferred stock dividend (316,713) (292,350)
----------- -----------
Net cash used in financing activities (1,982,602) (1,594,158)
----------- -----------
Net increase in cash and cash equivalents 1,627,947 2,996,040
Beginning cash and cash equivalents 1,276,417 2,000,826
----------- -----------
Ending cash and cash equivalents $ 2,904,364 $ 4,996,866
=========== ===========
Non-cash financing activities:
Accrued preferred stock dividend $ 24,363 $ 316,713
=========== ===========
Transfer of assets held for sale to oil and gas property $ 2,127,734 -
=========== ===========
The accompany notes are an integral part of these financials.
7
PARALLEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial information included herein, except the balance sheet as of
December 31, 2000, is unaudited. However, such information includes all
adjustments (consisting solely of normal recurring adjustments), which are, in
the opinion of management, necessary for a fair statement of the results of
operations for the interim periods. The results of operations for the interim
period are not necessarily indicative of the results to be expected for an
entire year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted in this Form 10-Q Report pursuant to certain
rules and regulations of the Securities and Exchange Commission. These financial
statements should be read with the financial statements and notes included in
Parallel's 2000 Form 10-K.
We account for our 30.675% interest in First Permian using the equity
method of accounting. Under the equity method of accounting, we record our
investment in First Permian at cost on the balance sheet. This is increased or
reduced by our proportionate share of First Permian=s income or loss, which is
presented as one amount in the statements of operations.
NOTE 2. LONG TERM DEBT
Long-term debt consists of the following at June 30, 2001:
Revolving Facility note payable to bank, at bank's base
lending rate (6.75% at June 30, 2001)
$11,000,000
Less: current maturities 1,314,000
-----------
$ 9,686,000
===========
Scheduled maturities of long-term debt at June 30, 2001
are as follows:
June 30, 2002 $ 1,314,000
June 30, 2003 3,876,000
October 1, 2003 5,810,000
-----------
$11,000,000
===========
Revolving Credit Facility. On December 18, 2000, we entered into a loan
agreement with Bank United ("Revolving Facility@) to refinance the outstanding
indebtedness with our former lender. Pursuant to the loan agreement, we may
borrow up to the lesser of $30,000,000 or the Aborrowing base@ then in effect.
The borrowing base at December 31, 2000 was $15,500,000 and at June 30, 2001,
our borrowing base was $13,562,000. The borrowing base is reduced by a monthly
commitment reduction of $323,000 beginning January 1, 2001. The total
outstanding principal amount of our bank indebtedness was $12,427,531 at
December 31, 2000 and $11,000,000 at June 30, 2001.
8
The borrowing base and monthly commitment reduction are subject to
redetermination semi- annually, on or about May 1 and November 1 of each year,
beginning May 1, 2001. The bank is currently reviewing our borrowing base. The
lender may require a redetermination of the borrowing base and monthly automatic
borrowing base reduction at any time in its sole discretion. Indebtedness under
the Revolving Facility matures October 1, 2003. The loan is secured by
substantially all of our oil and gas properties. Commitment fees of .25% per
annum on the difference between the revolving commitment and the average daily
amount are due quarterly. The unpaid principal balance for the Revolving
Facility bears interest at our election at a rate equal to (i) the bank's base
lending rate, or (ii) the applicable adjusted eurodollar rate plus a margin of
2.75% during the related eurodollar interest period. Interest is due and payable
on the day which the related eurodollar interest period ends. The restated loan
agreement contains various restrictive covenants and compliance requirements,
which include (1) maintenance of certain financial ratios, (2) limiting the
incurrence of additional indebtedness, and (3) no payment of dividends for
common stock.
NOTE 3. PREFERRED STOCK
We have outstanding 974,500 shares of 6% Convertible Preferred Stock, $0.10
par value per share. Cumulative annual dividends of $0.60 per share are payable
semi-annually on June 15 and December 15 of each year. Each share of Preferred
Stock may be converted, at the option of the holder, into 2.8571 shares of
common stock at an initial conversion price of $3.50 per share, subject to
adjustment in certain events. The preferred stock has a liquidation preference
of $10 per share and has no voting rights, except as required by law. We may
redeem the preferred stock, in whole or part, for $10 per share plus accrued and
unpaid dividends.
NOTE 4. INCOME TAX BENEFIT
It is the opinion of management that it is more likely than not that we
will utilize all the available net operating loss carryforwards prior to their
ultimate expiration. As such, the valuation allowance of $2,062,954, established
as of December 31, 2000, was reversed in the first quarter. The income tax
benefit of $249,855 reflected in the statements of operations is a result of the
reversal of our $2,062,954 valuation allowance, net of $1,949,099 income tax
expense and $136,000 of excess statutory depletion. These are noncash
adjustments that do not affect operating cash flows.
NOTE 5. FULL COST CEILING TEST
We use the full cost method to account for our oil and gas producing
activities. Under the full cost method of accounting, the net book value of oil
and gas properties, less related deferred income taxes, may not exceed a
calculated "ceiling". The ceiling limitation is the discounted estimated
after-tax future net revenues from proved oil and gas properties. In calculating
future net revenues, current prices and costs are generally held constant
indefinitely. The net book value, less related deferred income taxes, is
compared to the ceiling on a quarterly and annual basis. Any excess of the net
book value, less related deferred income taxes, is generally written off as an
expense. Under rules and regulations of the SEC, the excess above the ceiling is
not written off if, subsequent to the end of the quarter or year but prior to
the release of the financial results, prices increased sufficiently such that an
excess above the ceiling would not have existed if the increased prices were
used in the calculations.
At December 31, 2000 and June 30, 2001, our net book value of oil and gas,
less related deferred income taxes, was below the calculated ceiling. As a
result, we were not required to record a reduction of our oil and gas properties
under the full cost method of accounting.
NOTE 6. INVESTMENT IN FIRST PERMIAN, LLC
At June 30, 2001, we did not record our share of losses associated with our
30.675% interest in First Permian, LLC. At December 31, 2000, we had recorded
cumulative losses of $366,765 in our investment liability in First Permian
because we had guaranteed $10,000,000 of the debt of First Permian, LLC. We were
released from this guaranty on October 25, 2000 and have discontinued the equity
method of accounting for our share of losses in First Permian from that date.
When First Permian begins to generate net income, we will resume application of
the equity method
9
of accounting only after our share in First Permian's net income equals or
exceeds the share of net losses not recognized during the period the equity
method was suspended. First Permian recorded net losses of $280,327 for the six
months ended June 30, 2001.
Commodity Hedges. First Permian uses various swap contracts and other
financial instruments to hedge the effect of prices changes on future oil
production. For the quarter ended June 30, 2001, First Permian's oil hedge
contracts qualified for hedge accounting.
The following table sets forth First Permian's outstanding oil hedge
contracts at June 30, 2001:
Type Volume/Month Term Price Commodity
Collar 40,000 barrels 7/01 - 12/02 $18.00-$28.75 WTI NYMEX
Collar 40,000 barrels 7/01 - 12/02 $19.00-$24.80 WTI NYMEX
At June 30, 2001, a crude oil swap for 91,000 barrels per month from
January 1, 2001 thru June 30, 2001 expired. The swap price was $17.70 per
barrel.
Interest Rate Swap Agreements. These instruments are used to reduce the
potential impact of increases in interest rates on floating-rate long term debt.
At June 30, 2001, First Permian was party to one interest rate swap agreement to
provide it with a fixed interest rate of 6.52% on $40,000,000 of its revolving
line of credit through July 1, 2002.
Pursuant to FAS 133, First Permian recorded a net transition adjustment
loss of $6,105,108 in accumulated other comprehensive income on January 1, 2001.
First Permian did not elect to apply hedge accounting in accordance with FAS 133
but elected to mark-to-market their liability each quarter. For the six months
ended June 30, 2001 First Permian incurred a $6,748,457 loss related to its
hedging activities of which $4,872,687 of the loss was for first quarter ending
March 31, 2001 and $1,875,770 of the loss was for the second quarter ending June
30, 2001. A liability of $3,417,966 was recorded as of June 30, 2001.
NOTE 7. NET INCOME PER COMMON SHARE
Basic income per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted income per share reflects the assumed conversion of all
potentially dilutive securities.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ---------------------------
2000 2001 2000 2001
----------- ----------- --------- ---------
Basic EPS Computation:
Numerator-
Net income $ 694,518 $ 1,330,451 $ 888,119 $ 5,966,374
Preferred stock dividend (146,175) (146,175) (316,713) (292,350)
----------- ----------- ----------- -----------
Net income available to common
stockholders $ 548,343 $ 1,184,276 $ 571,406 $ 5,674,024
=========== =========== =========== ===========
Denominator-
Weighted average common shares
outstanding 20,331,858 20,433,721 20,331,858 20,426,480
=========== =========== =========== ===========
Basic earnings per share $ 0.027 $ 0.058 $ 0.028 $ 0.278
=========== =========== =========== ===========
10
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ---------------------------
2000 2001 2000 2001
----------- ----------- --------- ---------
Diluted EPS Computation:
Numerator-
Net income $ 694,518 $ 1,330,451 $ 888,119 $ 5,966,374
Preferred stock dividend (146,175) - (316,713) -
----------- ----------- ----------- -----------
Net income available to common
stockholders $ 548,343 $ 1,330,451 $ 571,406 $ 5,966,374
========== =========== =========== ===========
Denominator-
Weighted average common shares
outstanding 20,331,858 20,433,721 20,331,858 20,426,480
Employee stock options 251,973 608,844 237,251 547,296
Preferred stock - 2,784,244 2,784,244
----------- ----------- ----------- -----------
20,583,831 23,826,809 20,569,109 23,758,020
=========== =========== =========== ===========
Diluted earnings per share $ 0.027 $ 0.056 $ 0.028 $ 0.251
=========== =========== =========== ===========
Convertible preferred stock equivalent shares for the three-month and six
month periods ended June 30, 2000 that could potentially dilute basic earnings
per share in the future were not included in the computation of diluted earnings
per share because to do so would have been antidilutive.
NOTE 8: RECENTLY ANNOUNCED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (AFAS No. 133@), which establishes standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. FAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. It establishes
conditions under which a derivative may be designated as a hedge and establishes
standards for reporting changes in the fair value of a derivative. We adopted
FAS No. 133, as amended by FAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FASB Statement No.
133, effective January 1, 2001. After assessing our contracts, we are not aware
of any freestanding or embedded derivative instruments that would need to be
accounted for in accordance with FAS No. 133 as of January 1, 2001 or during the
period ending June 30, 2001.
In July 2001 the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141 "Business Combinations" and
No. 142 "Goodwill and Other Intangible Assets." Statement 141 requires that all
business combinations initiated after June 30, 2001 be accounted for under the
purchased method and Statement 142 requires that goodwill no longer be amortized
to earnings, but instead be reviewed for impairment. As of June 30, 2001 there
is no impact to the Company's financial statements as we have not entered into
any business combination and have not acquired goodwill.
Also, the FASB had voted to issue Statement No. 143 "Accounting for Asset
Retirement Obligations" which establishes requirements for the accounting of
removal-type costs associated with asset retirements. The standard is effective
for fiscal years beginning after June 15, 2002, with earlier application
encouraged. The Company is currently assessing the impact on its financial
statements.
11
NOTE 9. LEGAL PROCEEDINGS
At June 30, 2001, we were involved in one lawsuit incidental to our
business. In the opinion of management, the ultimate outcome of this lawsuit
will not have a material adverse effect on Parallel's financial position or
results of operations. We are not aware of any other threatened litigation. We
have not been a party to any bankruptcy, receivership, reorganization,
adjustment or similar proceeding.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
our Financial Statements and the related notes.
OVERVIEW
Strategy
Our primary objectives are to build oil and gas reserves, production, cash
flow and earnings per share by exploring for new oil and gas reserves, acquiring
oil and gas properties and optimizing production from existing oil and gas
properties. Management seeks to achieve these objectives by:
. using advanced technologies to conduct exploratory and development
activities;
. acquiring producing properties we believe add incremental value
to our asset base;
. keeping debt levels low;
. concentrating activities in core areas to achieve economies of
scale; and
. emphasizing cost controls.
Following this strategy, we have discovered oil and gas reserves using 3-D
seismic technology in the Horseshoe Atoll Reef Trend of west Texas and in the
Yegua/Frio/Wilcox gas trend onshore the gulf coast of Texas. Additionally, we
have acquired oil and gas producing properties in the Permian Basin of west
Texas. Capital utilized to acquire these properties has been provided primarily
by secured bank financing, sales of our equity securities and cash flow from
operations.
Investment in First Permian. In June 1999, we joined with three privately
held oil and gas companies to acquire oil and gas properties from Fina Oil and
Chemical Company. The acquisition was effected through the formation of First
Permian, which entered into a cash merger with a wholly owned subsidiary of Fina
Oil and Chemical Company. The primary assets of the acquired subsidiary are oil
and gas reserves and associated assets in producing fields located in the
Permian Basin of west Texas. After giving effect to purchase price adjustments,
First Permian paid to Fina Oil and Chemical Company cash in the aggregate amount
of approximately $92.0 million.
First Permian is owned by Parallel and certain other privately held oil and
gas companies. As of June 30, 2001, Parallel owned a 30.675% common membership
interest in First Permian. We account for our interest in First Permian using
the equity method of accounting whereby our investment is increased or decreased
by our proportionate share of First Permian=s net income or loss. See Note 6 for
further discussion about the discontinuance of the equity method of accounting
for our investment.
The purchase was financed, in part, with the proceeds of a $110.0 million
revolving credit facility provided by Bank One, Texas, N.A. to First Permian.
The principal amount of the initial loan was $74.0 million. In addition, First
Permian also borrowed $8.0 million from Tejon Exploration Company and $8.0
million from Mansefeldt Investment Corporation to help finance the purchase.
Operating Performance. Our operating performance is influenced by several
factors, the most significant of which are the prices we receive for our oil and
gas and production volumes. The world price for oil has overall influence on the
prices we receive for our oil production. The
12
prices received for different grades of oil are based upon the world price for
oil, which is then adjusted based upon the particular grade. Typically, light
oil is sold at a premium, while heavy grades of crude are discounted. Gas prices
we receive are primarily influenced by seasonal demand, weather, hurricane
conditions in the Gulf of Mexico, availability of pipeline transportation to end
users and proximity of our wells to major transportation pipeline infrastructure
and, to a lesser extent, world oil prices. Additional factors influencing our
operating performance include production expenses, overhead requirements, and
cost of capital.
Our oil and gas exploration, development and acquisition activities require
substantial and continuing capital expenditures. Historically, the sources of
financing to fund our capital expenditures have included:
. cash flow from operations,
. sales of our equity securities, and
. bank borrowings.
For the three months ended June 30, 2001, the average sales price we
received for our crude oil production averaged $26.35 per barrel compared with
$27.81 per barrel for the three months ended March 31, 2001 and $32.38 per
barrel for the three months ended December 31, 2000. The average sales price we
received for natural gas during this same period was $3.93 per mcf compared with
$6.25 per mcf for the three months ended March 31, 2001 and $6.67 per mcf for
the three months ended December 31, 2000. For the three months ended June 30,
2000, the average sales price we received for our crude oil averaged $27.13 and
for our natural gas averaged $3.02 per mcf.
Our oil and gas producing activities are accounted for using the full cost
method of accounting. Under this method, we capitalize all costs incurred in
connection with the acquisition of oil and gas properties and the exploration
for and development of oil and gas reserves. See Note 5 to Financial Statements.
These costs include lease acquisition costs, geological and geophysical
expenditures, costs of drilling both productive and non-productive wells, and
overhead expenses directly related to land acquisition and exploration and
development activities. Proceeds from the disposition of oil and gas properties
are accounted for as a reduction in capitalized costs, with no gain or loss
recognized unless such disposition involves a material change in reserves, in
which case the gain or loss is recognized.
Depletion of the capitalized costs of oil and gas properties, including
estimated future development costs, is provided using the equivalent
unit-of-production method based upon estimates of proved oil and gas reserves
and production, which are converted to a common unit of measure based upon their
relative energy content. Unproved oil and gas properties are not amortized, but
are individually assessed for impairment. The cost of any impaired property is
transferred to the balance of oil and gas properties being depleted.
Our production and results of operations vary from quarter to quarter. We
expect 2001 production volumes to increase when compared to our production
volumes in the prior year as a result of increased drilling activities.
RESULTS OF OPERATIONS
Our business activities are characterized by frequent, and sometimes
significant, changes in our:
. sources of production;
. product mix (oil vs. gas volumes); and
. the prices we receive for our oil and gas production.
Year-to-year or other periodic comparisons of the results of our operations
can be difficult and may not accurately describe our condition. The following
table compares the results of operations on the basis of equivalent barrels of
oil ("EBO") for the period indicated. An EBO means one barrel of oil equivalent
using the ratio of six Mcf of gas to one barrel of oil.
13
Three Months Ended Three Months Ended
------------------------------------- ------------------------
12-31-00 3-31-01 6-30-01 6-30-00 6-30-01
---------- --------- --------- --------- ---------
Production and prices:
Oil (Bbls) 38,784 34,914 43,311 44,753 43,311
Natural gas (Mcf) 860,651 1,009,532 1,017,456 657,039 1,017,456
Equivalent barrels of oil (EBO) 182,226 203,169 212,887 154,260 212,887
Oil price (per Bbl) $ 32.38 $ 27.81 $ 26.35 $ 27.13 $ 26.35
Gas price (per Mcf) $ 6.67 $ 6.25 $ 3.93 $ 3.02 $ 3.93
Price per EBO $ 38.42 $ 35.87 $ 24.16 $ 20.72 $ 24.16
Results of operations per EBO:
Oil and gas revenues $ 38.42 $ 35.87 $ 24.16 $ 20.72 $ 24.16
Costs and expenses:
Lease operating expense 6.19 5.51 5.06 4.01 5.06
General and administrative 3.03 1.47 1.43 1.69 1.43
Depreciation and depletion 9.10 8.26 8.29 7.90 8.29
------- ------- ------- ------- -------
Total costs and expense 18.32 15.24 14.78 13.60 14.78
------- ------- ------- ------- -------
Operating income 20.10 20.63 9.38 7.12 9.38
------- ------- ------- ------- -------
Interest expense, net (1.50) (1.02) (0.86) (2.18) (0.86)
Other income, net 0.71 (0.15) (0.24) 0.27 (0.24)
------- ------- ------- ------- -------
(0.79) (1.17) (1.10) (1.91) (1.10)
Equity in loss of First Permian, LLC - - - (0.71) -
------- ------- ------- ------- -------
Pretax income per EBO 19.31 19.46 8.28 4.50 8.28
Income tax expense (benefit) 0.71 (3.35) 2.02 - 2.02
------- ------- ------- ------- -------
Net income per EBO $ 18.60 $ 22.81 $ 6.26 $ 4.50 $ 6.26
======= ======= ======= ======= =======
Net operating cash flow before
working capital adjustments $ 28.41 $ 27.72 $ 16.57 $ 13.11 $ 16.57
======= ======= ======= ======= =======
14
Six Months Ended
----------------------------------------
6-30-99 6-30-00 6-30-01
-------------- ----------- ------------
Production and prices:
Oil (Bbls) 90,527 84,037 78,224
Natural gas (Mcf) 1,447,449 1,227,543 2,026,988
Equivalent barrels of oil (EBO) 331,768 288,627 416,055
Oil price (per Bbl) $ 12.68 $ 26.93 $ 27.00
Gas price (per Mcf) $ 1.94 $ 3.01 $ 5.09
Price per EBO $ 11.92 $ 20.69 $ 29.88
Results of operations per EBO:
Oil and gas revenues $ 11.92 $ 20.69 $ 29.88
Costs and expenses:
Lease operating expense 3.21 4.27 5.28
General and administrative 1.28 1.59 1.45
Depreciation and depletion 5.61 7.91 8.27
------- ------- -------
Total costs and expense 10.10 13.77 15.00
------- ------- -------
Operating income 1.82 6.92 14.88
------- ------- -------
Interest expense, net (2.17) (2.29) (0.94)
Other income, net 0.03 0.16 (0.20)
------- ------- -------
(2.14) (2.13) (1.14)
Equity in loss of First Permian, LLC - (1.72) -
------- ------- -------
Pretax income per EBO (0.32) 3.07 13.74
Income tax expense (benefit) - - (.60)
------- ------- -------
Net income (loss) per EBO $ (0.32) $ 3.07 $ 14.34
======= ======= =======
The following table sets forth for the periods indicated the percentage of
total revenues represented by each item reflected on our statements of
operations.
Three Months Ended Six Months Ended
----------------------------------- ---------------------
12-31-00 3-31-01 6-30-01 6-30-00 6-30-01
-------- ------- ------- ------- -------
Oil and gas revenues 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Lease operating expense 16.1 15.4 20.9 20.6 17.7
General and administrative 7.9 4.1 5.9 7.7 4.8
Depreciation and depletion 23.7 23.0 34.3 38.2 27.7
------ ------ ------ ------ ------
Total costs and expenses 47.7 42.5 61.1 66.5 50.2
------ ------ ------ ------ ------
Operating income 52.3 57.5 38.9 33.5 49.8
------ ------ ------ ------ ------
Interest expense, net (3.9) (2.9) (3.6) (11.1) (3.1)
Other income, net 1.9 (0.4) (1.0) 0.8 (0.7)
------ ------ ------ ------ ------
(2.0) (3.3) (4.6) (10.3) (3.8)
Equity in loss of First Permian, LLC - - - (8.3) -
------ ------ ------ ------ ------
(2.0) (3.3) (4.6) (18.6) (3.8)
------ ------ ------ ------ ------
Pretax income 50.3 54.2 34.3 14.9 46.0
Income tax expense (benefit) 1.9 (9.4) 8.4 - (2.0)
------ ------ ------ ------ ------
Net income 48.4 63.6 25.9 14.9 48.0
====== ====== ====== ====== ======
15
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 2001:
Oil and Gas Revenues. Oil and gas revenues increased $1,947,280, or 61%, to
$5,143,894 for the three months ended June 30, 2001, from $3,196,614 for the
same period of 2000. The increase was primarily the result of a 38% increase in
oil and gas production and a 17% increase in the average sales price per EBO. We
received $24.16 per EBO in the three months ended June 30, 2001 compared with
$20.72 per EBO for the same period of 2000.
Production Costs. Production costs increased $458,366, or 74%, to
$1,076,936 during the three months ended June 30, 2001, compared with $618,570
for the same period of 2000. The increase was primarily attributable to higher
production taxes and ad valorem taxes, the result of a 38% increase in
production volumes and higher oil and gas prices, which in turn increased
revenues. Average production costs per EBO increased 26% to $5.06 for the three
months ended June 30, 2001 compared with $4.01 for the same period in 2000. The
increase was primarily the result of increased taxes associated with higher oil
and gas revenues and a 38% increase in oil and gas production.
General and Administrative Expenses. General and administrative expenses
increased by $43,721, or 17%, to $303,881 for the three months ended June 30,
2001 from $260,160 for the same period of 2000. The increase was primarily due
to higher legal and public reporting costs, franchise taxes and increased
staffing requirements. General and administrative expenses were $1.43 per EBO
for the three months ended June 30, 2001, compared to $1.69 per EBO for the same
period of 2000, primarily because of the 38% increase in production volumes.
Depreciation, Depletion and Amortization Expense. Depreciation, depletion
and amortization expense ("DD&A") increased by $546,605, or 45%, to
$1,765,747 for the three months ended June 30, 2001 compared with $1,219,142 for
the same period of 2000 primarily because of a 38% increase in production
volumes. As a percentage of revenues, DD&A decreased to 34% compared to 38%
last year, a result of an increase in the average sales price per EBO we
received in the second quarter of 2001. The DD&A rate per EBO increased to
$8.29 for the second quarter of 2001 compared with $7.90 per EBO for the second
quarter of 2000. The increase in the DD&A rate per EBO, when compared with
the same quarter a year ago, is attributable to an increase in net depletable
property basis and a decrease in reserves as of fiscal year-end 2000.
Historically, we have reviewed our estimates of proven reserve quantities
on an annual basis. However, due to the potential volatility of oil and gas
prices, we conduct internal reviews of our estimated proven reserves on a more
frequent basis and make necessary adjustments to our DD&A rate accordingly.
We believe periodic reviews and adjustments, if necessary, will result in a more
accurate reflection of its DD&A rate during the year and minimize possible
year-end adjustments.
Net Interest Expense. Interest expense decreased $152,436, or 45%, to
$183,916 for the three months ended June 30, 2001 compared with $336,352 for the
same period of 2000 due principally to decreased bank borrowings and a decrease
in the bank's prime rate.
Income Tax Benefit. Our effective tax rate for the three months ended June
30, 2001 is 24%. For further discussion see Note 4.
Net Income and Operating Cash Flow. We reported net income of $1,330,451
for the three months ended June 30, 2001 compared with net income of $694,518
for the three months ended June 30, 2000. Operating cash flow (defined as net
income before taxes, adding back equity in loss of First Permian and
depreciation, depletion and amortization) increased $1,503,779, or 74%, to
$3,527,011 for the three months ended June 30, 2001 compared with $2,023,232 for
the three months ended June 30, 2000. The increase in net income and operating
cash flow resulted from a 61% increase in oil and gas revenues, a 17% increase
in the average sales price we received per EBO, a 38% increase in production
volumes and a 45% decrease in net interest expense. These factors were partially
offset by a 74% increase in production costs and a 45% increase in DD&A
expenses.
16
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 2001:
Oil and Gas Revenues. Oil and gas revenues increased $6,460,891, or 108%,
to $12,432,096 for the six months ended June 30, 2001, from $5,971,205 for the
same period of 2000. The increase was primarily the result of a 44% increase in
the average sales price per EBO and a 44% increase in production. We received
$29.88 per EBO in the six months ended June 30, 2001 compared with $20.69 per
EBO for the same period of 2000.
Production Costs. Production costs increased $963,616 or 78%, to $2,196,001
during the first six months of 2001, compared with $1,232,385 for the same
period of 2000. Average production costs per EBO increased 24%, to $5.28, for
the first six months in 2001 compared to $4.27 for the same period in 2000,
primarily a result of increased production taxes associated with higher oil and
gas revenues and a 44% increase in oil and gas production.
General and Administrative Expenses. General and administrative expenses
increased by $144,129, or 31%, to $602,089 for the first six months of 2001,
from $457,960 for the same period of 2000. The increase was primarily due to an
increase in audit, legal, public reporting, reservoir engineering and payroll
related expenses. General and administrative expenses were $1.45 per EBO in the
first six months of 2001 compared to $1.59 per EBO in the first six months of
2000. The decrease per EBO is a result of higher production volumes in the first
six months of 2001 when compared with the same six-month period of the prior
year. Future general and administrative costs are expected to remain fairly
stable with no material increases expected in any particular category.
Depreciation, Depletion and Amortization Expense. Depreciation, depletion
and amortization expense ("DD&A") increased by $1,160,956, or 51%, to
$3,443,567 for the first six months of 2001 compared with $2,282,611 for the
same period of 2000. As a percentage of revenues, the DD&A decreased to 28%
when compared to 38% for the prior year six months, a result of an increase in
the average sales price per EBO we received in the first six months of 2001. The
DD&A rate per EBO increased to $8.27 for the first six months of 2001
compared with $7.91 per EBO for the first six months of 2000. The increase in
the DD&A rate per EBO is attributable to a decrease in proved reserves as of
fiscal year-end 2000.
Historically, we have reviewed our estimates of proven reserve quantities
on an annual basis. However, due to the recent volatility of oil and gas prices,
we conduct internal reviews of our estimated proven reserves on a more frequent
basis and make necessary adjustments to our DD&A rate accordingly. We
believe periodic reviews and adjustments, if necessary, will result in a more
accurate reflection of its DD&A rate during the year and minimize possible
year-end adjustments.
Equity in Earnings (Loss) of First Permian, LLC. Our share of the operating
results of First Permian resulted in a noncash charge of $496,083 for the six
months ended June 30, 2000, which reflects our pro rata share of First Permian's
loss for the six months ended June 30, 2000. First Permian recorded a loss for
the six-month period primarily as a result of a noncash charge of $960,825
associated with the restructuring of its debt during the second quarter ended
June 30, 2000, which was booked as a nonrecurring extraordinary item. Also
contributing to First Permian's loss were oil hedge payments totaling $6,125,064
for the six months ended June 30, 2000.
At December 31, 2000, we had recorded cumulative losses of $366,765 in our
investment liability in First Permian, LLC because we had guaranteed $10,000,000
of the debt of First Permian, LLC. We were released from this guaranty on
October 25, 2000 and have discontinued the equity method of accounting for our
share of losses in First Permian from that date. At June 30, 2001, we did not
record our share of losses associated with our 30.675% interest in First
Permian, LLC. For the six months ended June 30, 2001, First Permian, L.L.C.
incurred a net loss of $280,327, which
17
includes $6,748,457 loss primarily associated with its oil hedge.
Net Interest Expense. Net interest expense decreased $268,779, or 41%, to
$391,723 for the six months ended June 30, 2001 compared with $660,502 for the
same period of 2000; due principally to decreased bank borrowings.
Income Tax Expense. For the six months ended June 30, 2001 we recorded a
tax benefit of $249,855. For further discussion see Note 4.
Net Income and Operating Cash Flow. We reported net income of $5,966,374
for the six months ended June 30, 2001 compared to $888,119 for the six months
ended June 30, 2000. Operating cash flow (defined as net income before taxes,
adding back equity in loss of First Permian and depreciation, depletion and
amortization) increased $5,493,273, or 150%, to $9,160,086 for the six months
ended June 30, 2001 compared to $3,666,813 for the six months ended June 30,
2000. The increase in net income and operating cash flow resulted from a 108%
increase in oil and gas revenues due to a 44% increase in production volumes
sold, a 44% increase in the average sales price per EBO and a 41% decrease in
interest expense. These factors were partially offset by a 78% increase in
production costs, a 31% increase in general and administrative costs, and a 51%
increase in DD&A expense.
LIQUIDITY AND CAPITAL RESOURCES
Our capital resources consist primarily of cash flows from our oil and gas
properties and bank borrowings supported by our oil and gas reserves. Our level
of earnings and cash flows depends on many factors, including the price of oil
and natural gas.
Working capital increased $1,289,846 as of June 30, 2001 compared with
December 31, 2000. Current assets exceeded current liabilities by $4,050,683 at
June 30, 2001 compared with $2,760,837 at December 31, 2000. Working capital
increased primarily due to an increase in cash offset by the decrease in
accounts receivable. Current assets increased primarily as a result of an
increase in production volumes and higher oil and gas prices.
We incurred property costs of $5,933,076, for the six months ended June 30,
2001, primarily for our oil and gas property acquisition, development, and
enhancement activities. Such costs were financed by the utilization of cash
flows provided by operations.
Based on our projected oil and gas revenues and related expenses, we
believe that our internally generated cash flows will be sufficient to fund
normal operations, interest expense and principal reduction payments on bank
debt, if required, and preferred stock dividends. We continually review and
consider alternative methods of financing.
TRENDS AND PRICES
Changes in oil and gas prices significantly affect our revenues, cash flows
and borrowing capacity. Markets for oil and gas have historically been, and will
continue to be, volatile. Prices for oil and gas typically fluctuate in response
to relatively minor changes in supply and demand, market uncertainty, seasonal,
political and other factors beyond our control. We are unable to accurately
predict domestic or worldwide political events or the effects of other such
factors on the prices we receive for our oil and gas. Historically, we have not
entered into transactions to hedge against changes in oil and gas prices, but we
may elect to enter into hedging transactions in the future to protect against
fluctuations in oil and gas prices.
Our capital expenditure budget for 2001 is highly dependent on future oil
and gas prices and will be consistent with internally generated cash flows.
During fiscal year 2000 the average sales price we received for our oil was
approximately $28.88 per barrel while the average sales prices we received for
natural gas was approximately $4.38 per thousand cubic feet ("Mcf"). For the
three months ended June 30, 2001, the average price we
18
received for our oil production was approximately $26.35 per Bbl, while the
average price received at that same date for our natural gas production was
approximately $3.93 per Mcf.
FORWARD-LOOKING STATEMENTS
In addition to historical information contained herein, this Form 10-Q
Report contains forward-looking statements subject to various risks and
uncertainties that could cause the company's actual results to differ materially
from those in the forward-looking statements. Forward-looking statements can be
identified by the use of forward-looking terminology such as "may", "will",
"expect," "intend," "anticipate, "estimate," "continue," "present value,"
"future," "reserves" or other variations thereof or comparable terminology.
Factors that could cause or contribute to such differences could include, but
are not limited to, those relating to the results of exploratory drilling
activity, changes in oil and natural gas prices, operating risks, availability
of drilling equipment, outstanding indebtedness, changes in interest rates,
dependence on weather conditions, seasonality, expansion and other activities of
competitors, changes in federal or state environmental laws and the
administration of such laws, and the general condition of the economy and its
effect on the securities market. While we believe our forward-looking statements
are based upon reasonable assumptions, these are factors that are difficult to
predict and that are influenced by economic and other conditions beyond our
control. Investors are directed to consider such risks and other uncertainties
discussed in documents filed by the company with the Securities and Exchange
Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not trade in derivative financial instruments and do not have firmly
committed sales transactions. We have not entered into hedging arrangements and
do not have any delivery commitments. While hedging arrangements reduce exposure
to losses as a result of unfavorable price changes, they also limit our ability
to benefit from favorable market price changes.
Our major market risk exposure is in the pricing applicable to our oil and
natural gas production. Realized pricing is primarily driven by the prevailing
domestic price for crude oil and spot prices applicable to the region in which
we produce natural gas. Historically, prices received for oil and gas production
have been volatile and unpredictable. Pricing volatility is expected to
continue. Oil prices ranged from a monthly low of $17.56 per barrel to a monthly
high of $29.99 per barrel during second quarter 2001. The natural gas prices we
received during second quarter 2001 ranged from a monthly low of $2.54 per Mcf
to a monthly high of $12.03 per Mcf. A significant decline in the prices of oil
and natural gas could have a material adverse effect on our financial condition
and results of operations.
Our only financial instrument sensitive to changes in interest rates is
bank debt. Our annual interest costs in 2001 will fluctuate based on short-term
interest rates. As the interest rate is variable and reflects current market
conditions, the carrying value approximates the fair value. The table below
shows principal cash flows and related weighted average interest rates by
expected maturity dates. Weighted average interest rates were determined using
weighted average interest paid and accrued in June 2001.
June June October Fair
2002 2003 2003 Total Value
---- ---- ---- ----- -----
(In 000's, except interest rates)
Variable rate debt:
Revolving facility (secured) $1,314 $3,876 $5,810 $11,000 $11,000
Average interest rate 6.75% 6.75% 6.75%
19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
At June 30, 2001, we were involved in one lawsuit incidental to our
business. In the opinion of management, the ultimate outcome of this lawsuit
will not have a material adverse effect on Parallel's financial position or
results of operations. We are not aware of any other threatened litigation. We
have not been a party to any bankruptcy, receivership, reorganization,
adjustment or similar proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Parallel's annual meeting of stockholders was held on June 20, 2001. At the
meeting, the following persons were elected to serve as Directors of Parallel
for a term of one year expiring in 2002 and until their respective successors
are duly qualified and elected: (1) Thomas R. Cambridge, (2) Dewayne E.
Chitwood, (3) Ernest R. Duke, (4) Larry C. Oldham and (5) Martin B. Oring, (6)
Charles R. Pannill (7) Jeffrey G. Shrader. Set forth below is a tabulation of
votes with respect to each nominee for Director:
NAME VOTES CAST FOR VOTES WITHHELD
---- -------------- --------------
Thomas R. Cambridge 16,709,044 40,511
Dewayne E. Chitwood 16,706,574 42,981
Ernest R. Duke 16,700,294 49,291
Larry Oldham 16,619,294 130,261
Martin B. Oring 16,707,399 42,156
Charles R. Pannill 16,699,444 50,111
Jeffrey G. Shrader 16,705,249 44,306
In addition to electing Directors, the stockholders voted upon the approval
of the Parallel Petroleum Corporation 2001 Non-Employee Directors Stock Option
Plan. Set forth below is a tabulation of votes with respect to this proposal.
VOTES CAST FOR VOTES CAST AGAINST ABSTENTIONS
-------------- ------------------ -----------
15,909,957 594,008 245,450
In addition to electing Directors, the stockholders also voted upon and
ratified the appointment of KPMG LLP to serve as our independent public
accountants for 2001. Set forth below is a tabulation of votes with respect to
the proposal to ratify the appointment of Parallel's independent public
accountants:
VOTES CAST FOR VOTES CAST AGAINST ABSTENTIONS
-------------- ------------------ -----------
16,705,873 28,078 15,604
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
----------- -----------------------
3.1 Certificate of Incorporation of Registrant (incorporated by
reference to Exhibit 3.1 to Form 10-K of the Registrant for the
fiscal year ended December 31, 1998.)
4.1 Certificate of Designations, Preferences and Rights of Serial
Preferred Stock - 6% Convertible Preferred Stock (Incorporated by
reference to Exhibit 4.1 to Form 10-Q of the Registrant for the
fiscal quarter ended September 30, 1998.)
4.2 Certificate of Designation, Preferences and Rights of Series A
Preferred Stock. (Incorporated by reference to Exhibit 4.2 of
Form 10-K for the fiscal year ended December 31, 2000.)
4.3 Rights Agreement, dated as of October 5, 2000, between the
Registrant and Computershare Trust Company, Inc., as Rights
Agent. (Incorporated by reference to Exhibit 4.3 of Form 10-K for
the fiscal year ended December 31, 2000.)
Executive Compensation Plans and Arrangements (Exhibit No.'s 10.1
through 10.8):
10.1 1983 Incentive Stock Option Plan (Incorporated by reference to
Exhibit 10.2 to Form S-l of the Registrant (File No. 2-92397) as
filed with the Securities and Exchange Commission on July 26,
1984, as amended by Amendments No. 1 and 2 on October 5, 1984,
and October 25, 1984, respectively.)
10.2 1992 Stock Option Plan (Incorporated by reference to Exhibit 28.1
to Form S-8 of the Registrant (File No. 33-57348) as filed with
the Securities and Exchange Commission on January 25, 1993.)
10.3 Stock Option Agreement between the Registrant and Thomas R.
Cambridge dated December 11, 1991 (Incorporated by reference to
Exhibit 10.4 of Form 10-K of the Registrant for the fiscal year
ended December 31, 1992.)
10.4 Stock Option Agreement between the Registrant and Thomas R.
Cambridge dated October 18, 1993 (Incorporated by reference to
Exhibit 10.4(e) of Form 10-K of the Registrant for the fiscal
year ended December 31, 1993.)
10.5 Merrill Lynch, Pierce, Fenner & Smith Incorporated Prototype
Simplified Employee Pension Plan (Incorporated by reference to
Exhibit 10.6 of the Registrant's Form 10-K for the fiscal year
ended December 31, 1995.)
10.6 Non-Employee Directors Stock Option Plan (Incorporated by
reference to Exhibit 10.6 of the Registrant's Form 10-K Report
for the fiscal year ended December 31, 1997).
10.7 1998 Stock Option Plan (Incorporated by reference to Exhibit 10.7
of Form 10-K of the Registrant for the fiscal year ended December
31, 1998.)
*10.8 2001 Non-Employee Directors Stock Option Plan.
21
10.9 Restated Loan Agreement dated December 27, 1999, between the
Registrant and Bank One, Texas, N.A. (Incorporated by reference
to Exhibit 10.8 of Form 10-K of the Registrant for the fiscal
year ended December 31, 1999.)
10.10 Loan Agreement dated December 18, 2000 between the Registrant
and Bank United. (Incorporated by reference to Exhibit 10.9 of
Form 10-K for the fiscal year ended December 31, 2000.)
10.11 Letter agreement, dated March 24, 1999, between the Registrant
and Bank One, Texas, N.A. (Incorporated by reference to Exhibit
10.9 of Form 10-K for the fiscal year ended December 31, 1998.)
10.12 Certificate of Formation of First Permian, L.L.C. (Incorporated
by reference to Exhibit 10.1 of the Registrant's Form 8-K report
dated June 30, 1999.)
10.13 Limited Liability Company Agreement of First Permian, L.L.C.
(Incorporated by reference to Exhibit 10.2 of the Registrant's
Form 8-K report dated June 30, 1999.)
10.14 Merger Agreement dated June 25, 1999. (Incorporated by reference
to Exhibit 10.3 of the Registrant's Form 8-K report dated June
30, 1999.)
10.15 Agreement and Plan of Merger of First Permian, L.L.C. and Nash
Oil Company, L.L.C. (Incorporated by reference to Exhibit 10.4 of
the Registrant's Form 8-K report dated June 30, 1999.)
10.16 Certificate of Merger of First Permian, L.L.C. and Nash Oil
Company, L.L.C (Incorporated by reference to Exhibit 10.5 of the
Registrant's Form 8-K Report dated June 30, 1999.)
10.17 Amended and Restated Limited Liability Company Agreement of
First Permian, L.L.C. dated as of May 31, 2000. (Incorporated by
reference to Exhibit 10.16 of Form 10-K for the fiscal year ended
December 31, 2000.)
10.18 Credit Agreement dated June 30, 1999, by and among First
Permian, L.L.C., Parallel Petroleum Corporation, Baytech, Inc.,
and Bank One, Texas, N.A. (Incorporated by reference to Exhibit
10.6 of the Registrant's Form 8-K report dated June 30, 1999.)
10.19 Limited Guaranty, dated June 30, 1999, by and among First
Permian, L.L.C., Parallel Petroleum Corporation, and Bank One,
Texas, N.A. (Incorporated by reference to Exhibit 10.7 of the
Registrant's Form 8-K report dated June 30, 1999.)
10.20 Intercreditor Agreement, dated as of June 30, 1999, by and among
First Permian, L.L.C., Bank One, Texas, N.A., Tejon Exploration
Company, and Mansefeldt Investment Corporation (Incorporated by
reference to Exhibit 10.8 of the Registrant's Form 8-K report
dated June 30, 1999.)
10.21 Subordinated Promissory Note, dated June 30, 1999, in the
original principal amount of $8.0 million made by First Permian,
L.L.C. payable to the order of Tejon Exploration Company
(Incorporated by reference to Exhibit 10.9 of the Registrant's
Form 8-K report dated June 30, 1999.)
22
10.22 Subordinated Promissory Note, dated June 30, 1999, in the
original principal amount of $8.0 million made by First Permian,
L.L.C. payable to the order of Mansefeldt Investment Corporation
(Incorporated by reference to Exhibit 10.10 of the Registrant's
Form 8-K report dated June 30, 1999.)
10.23 Second Restated Credit Agreement, dated October 25, 2000, among
First Permian, L.L.C., Bank One, Texas, N.A., and Bank One
Capital Markets, Inc. (Incorporated by reference to Exhibit 10.22
of Form 10-K for the fiscal year ended December 31, 2000.)
_____________
*Filed herewith.
(2) Reports on Form 8-K
No reports were filed on form 8-K during the quarter ended June 30, 2001.
24
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PARALLEL PETROLEUM CORPORATION
Date: August 14, 2001 BY:/s/ Thomas R. Cambridge
------------------------------------
Thomas R. Cambridge
Chairman of the Board of Directors
and Chief Executive Officer
Date: August 14, 2001 BY: /s/ Larry C. Oldham
-------------------------------------
Larry C. Oldham,
President and Principal Financial
Officer