PARALLEL PETROLEUM CORPORATION
BALANCE SHEETS
(Continued)
(unaudited)
(audited) (unaudited) Proforma
December 31, March 31, March 31,
2001* 2002 2002 (1)
------------- -------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 2,400,000 $ 3,300,000 $ 3,300,000
Accounts payable and accrued liabilities:
Trade 3,446,370 2,728,007 4,209,522
------------- -------------- -------------
5,846,370 6,028,007 7,509,522
------------- -------------- -------------
Long-term debt, excluding current maturities (Note 2) 9,600,000 9,265,589 9,265,589
Deferred taxes payable - - 3,688,673
Stockholders' equity:
Series A preferred stock -- par value $.10 per share (aggregate liquidation
preference of $26) authorized 50,000 shares - - -
Preferred stock -- $.60 cumulative convertible preferred stock -- par value
of $.10 per share (aggregate liquidation preference of $10) authorized
10,000,000 shares, issued and outstanding 974,500 in 2001 and 2002 97,450 97,450 97,450
Common stock -- par value $.01 per share, authorized 60,000,000 shares,
issued and outstanding 20,663,861 in 2001 and 2002 206,639 206,639 206,639
Additional paid-in capital 34,087,498 33,941,323 33,941,323
Retained earnings (deficit) (8,078,054) (8,846,805) 10,291,181
------------- -------------- -------------
Total stockholders' equity 26,313,533 25,398,607 44,536,593
Commitments and contingencies (Note 9)
------------- -------------- -------------
$ 41,759,903 $ 40,692,203 $ 65,000,377
============= ============== =============
*The balance sheet as of December 31, 2001 has been derived from Parallel’s
audited financial statements. See accompanying notes to Financial Statements.
__________
(1) Assumes the sale of the oil and gas assets of First Permian, L.P. occurred
as of March 31, 2002. The sale closed on April 8, 2002 and Parallel’s
distribution from First Permian, L.P. was $5.5 million in cash and $25.6 million
of Energen Corporation’s common stock (933,589 shares at $27.40 per share,
the market value of Energen’s common stock on the date of closing). The
proforma balance sheet reflects the utilization of the Company’s $6.6
million net deferred tax asset, recognition of deferred taxes payable of $3.7
million, a $1.4 million accounts payable related to incentive award payments and
an increase of $19.1 million in retained earnings.
2
PARALLEL PETROLEUM CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
-------------------------
2001 2002
------------ ------------
Oil and gas revenues $ 7,288,202 $ 1,971,191
------------ ------------
Cost and expenses:
Lease operating expense 1,119,065 549,376
General and administrative 298,208 349,764
Depreciation, depletion and amortization 1,677,820 1,354,630
------------ ------------
3,095,093 2,253,770
------------ ------------
Operating income (loss) 4,193,109 (282,579)
------------ ------------
Other income (expense), net:
Equity in loss of First Permian, LLC - (316,293)
Change in fair value of derivatives - (339,858)
Interest income 19,049 10,378
Other income 25,207 5,997
Interest expense (226,857) (153,057)
Other expense (55,254) (172,066)
------------ ------------
Total other expense, net (237,855) (964,899)
------------ ------------
Income (loss) before income taxes 3,955,254 (1,247,478)
Income tax benefit, net (680,668) (478,727)
------------ ------------
Net income (loss) $ 4,635,922 $ (768,751)
Cumulative preferred stock dividend (146,175) (146,175)
------------ ------------
Net income (loss) available to common
stockholder $ 4,489,747 $ (914,926)
============ ============
Net income (loss) per common share:
Basic $ 0.22 $ (0.04)
============ ============
Diluted $ 0.20 $ (0.04)
============ ============
Weighted average common share outstanding
Basic 20,419,158 20,663,861
============ ============
Diluted 23,692,582 20,663,861
============ ============
*The balance sheet as of December 31, 2001 has been derived from Parallel’s
audited financial statements. See accompanying notes to Financial Statements.
3
PARALLEL PETROLEUM CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
---------------------------------
2001 2002
--------------- -----------------
Cash flows from operating activities:
Net income (loss) $ 4,635,922 $ (768,751)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and depletion 1,677,820 1,354,630
Equity in loss from investments in First Permian, LLC - 316,293
Change in fair value of derivative instruments - 339,859
Deferred income taxes (718,168) (478,727)
Other, net (33,526) (11,865)
Changes in assets and liabilties:
Decrease in accounts receivables 346,381 161,584
Decrease (increase) in prepaid expenses and other (15,036) 95,571
Decrease in accounts payable and accrued liabilities (357,201) (864,538)
Purchase of derivative instruments - (391,105)
--------------- -----------------
Net cash provided by (used in) operating activities 5,536,192 (247,049)
--------------- -----------------
Cash flows from investing activities:
Additions to property and equipment (2,267,716) (2,785,855)
Proceeds from disposition of property and equipment - 365,380
--------------- -----------------
Net cash used in investing activities (2,267,716) (2,420,475)
--------------- -----------------
Cash flows from financing activities:
Borrowings from bank line of credit - 565,589
Payments on bank line of credit (427,531) -
Proceeds from exercise of options and warrants 99,910 -
--------------- -----------------
Net cash provided by (used in) financing activities (327,621) 565,589
--------------- -----------------
Net increase (decrease) in cash and cash equivalents 2,940,855 (2,101,935)
Beginning cash and cash equivalents 2,000,826 3,351,044
--------------- -----------------
Ending cash and cash equivalents $ 4,941,681 $ 1,249,109
=============== =================
Non-cash financing activities:
Accrued preferred stock dividend $ 146,175 $ 146,175
=============== =================
The accompany notes are an integral part of these financials.
4
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, 2001, 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 2001 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.
Reclassifications
Certain reclassifications related to accrued preferred stock dividends have
been made to the 2001 amounts to conform to the 2002 presentation.
NOTE 2. LONG TERM DEBT
Long-term debt consists of the following at March 31, 2002:
Revolving Facility note payable to bank, at bank's base
lending rate (5.0% at March 31, 2002) $12,565,589
Less: current maturities 3,300,000
-----------
$ 9,265,589
===========
Schedules maturities of long-term debt at March 31, 2002 are
as follows:
March 31, 2003 $ 3,300,000
March 31, 2004 3,600,000
March 31, 2005 3,600,000
January 25, 2006 2,065,589
-----------
$12,565,589
===========
Revolving Credit Facility. On January 25, 2002, Parallel entered into a
loan agreement with First American Bank ("New Revolving Facility") to refinance
the outstanding indebtedness with our former lender. Pursuant to the New
Revolving Facility, Parallel may borrow the lesser of $30,000,000 or the
"borrowing base" then in effect. The borrowing base at January 25, 2002 was
$13,000,000. The
5
borrowing base is reduced by a monthly commitment reduction of $300,000
beginning May 1, 2002. At the closing of the loan transaction, the outstanding
balance was $12,065,589, bearing interest at 5.00%. The total outstanding
principal amount of our bank indebtedness was $12,000,000 at December 31, 2001
and $12,565,589 at March 31, 2002. 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, 2002. The bank is currently reviewing
our borrowing base. The bank may require a redetermination of the borrowing base
and monthly commitment reduction at any time in its sole discretion.
Indebtedness under the New Revolving Facility matures January 25, 2006.
Substantially all of our producing properties are pledged to the bank as
collateral for the payment and performance of our liabilities and obligations
under the loan agreement.
The unpaid principal balance for the New Revolving Facility bears interest
at the election of Parallel at a rate equal to (i) the bank's base lending rate,
or (ii) the applicable Adjusted Eurodollar Rate, as defined in the New Revolving
Facility, plus a margin of 2.75% during the related Eurodollar Interest Period,
as defined in the New Revolving Facility. However, the interest rate may never
be less than 5.00%. Interest is due and payable on the day which the related
Eurodollar Interest Period ends.
In addition to customary affirmative covenants, the loan agreement contains
various restrictive covenants and compliance requirements, including:
o Maintaining certain financial requirements;
o Limitations on additional indebtedness;
o Prohibiting the payment of dividends on our common stock;
o Limitations on the disposition of assets;
o Prohibiting liens (other than in favor of the bank) to exist on
any of our properties; and
o Limitations on investments, mergers, forming subsidiaries, affiliate
transactions, changes in accounting methods, rental and lease
payments and derivative transactions.
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 Convertible
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 Convertible 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
Income tax benefit in the amount of $478,727 was recorded in the Statements
of Operations which resulted in a net deferred tax asset of $6.6 million at
March 31, 2002. The sale of the oil and gas assets of First Permian, L.P. was
closed on April 8, 2002 and resulted in a pre-tax gain of approximately $30
million; therefore, no valuation allowance has been established since we believe
all the available net operating losses, statutory depletion and AMT
carryforwards will be utilized to reduce the tax liability associated with the
First Permian, L.P. gain.
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
6
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 March 31, 2002 our net book value of oil and gas properties, 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 at that time.
NOTE 6. INVESTMENT IN FIRST PERMIAN, LLC
For the three months ended March 31, 2002, First Permian had net loss of
$1,031,110. Our share of the net loss for the three months ended March 31, 2002,
was $316,293. At December 31, 2001, we had recorded cumulative earnings of
$840,529 in our investment in First Permian, LLC because we had been released
from our $10,000,000 guaranty as of October 25, 2000 and had resumed the equity
method of accounting for our share of net income associated with our 30.675%
interest in First Permian, LLC. Using the equity method of accounting, our
investment is increased or decreased by our proportionate share of First
Permian's net income or loss.
On March 7, 2002, First Permian entered into an Agreement of Sale and
Purchase with Energen Resources Corporation, a wholly owned subsidiary of
Energen Corporation (Energen), to sell all of First Permian's oil and gas
properties for $120 million in cash and 3,043,479 shares in Energen stock
approximating $70 million in value. Energen is a publicly traded company listed
on the NYSE. The transaction closed on April 8, 2002. As a 30.675% interest
owner in First Permian, Parallel received its prorata share of the net proceeds,
$5.5 million in cash and 933,589 shares of Energen stock. At April 8, 2002, the
market value of Energen's stock was $27.40 per share.
Commodity Hedges. First Permian uses various swap contracts and other
financial instruments to hedge the effect of prices changes on future oil
production.
The following table sets forth First Permian's outstanding oil hedge
contracts at March 31, 2002:
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
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 March 31, 2002, 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 a revolving
line of credit through July 1, 2002.
NOTE 7. DERIVATIVE INSTRUMENTS
In January and February, 2002, we purchased put floors with a counterparty
to sell notional volumes of 210,000 Mcf of gas per month for the seven-month
period April, 2002 through October, 2002, at a floor price of $2.40 per Mcf
based on NYMEX pricing. The cost of implementing these hedges was $311,930 and
$79,179, respectively, or approximately $56,000 per month for the seven-month
period. These derivatives are not held for trading purposes.
7
The fair value of the put floors as of March 31, 2002 was $51,426;
therefore, a $339,858 decrease in fair value was recognized as of March 31, 2002
in the Statements of Operations.
NOTE 8. 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
March 31,
----------------------------------------
2001 2002
-------------------- -------------------
Basic EPS Computation:
Numerator-
Net income $ 4,635,922 $ (768,751)
Preferred stock dividend (146,175) (146,175)
-------------------- -------------------
Net income available to common
stockholders $ 4,489,747 $ (914,926)
==================== ===================
Denominator-
Weighted average common shares
outstanding 20,419,158 20,663,861
==================== ===================
Basic earnings per share $ 0.22 $ (0.04)
==================== ===================
Diluted EPS Computation:
Numerator-
Net income $ 4,635,922 $ (768,751)
Preferred stock dividend - (146,175)
-------------------- -------------------
Net income available to common
stockholders $ 4,635,922 $ (914,926)
==================== ===================
Denominator-
Weighted average common shares
outstanding 20,419,158 20,663,861
Employee stock options 489,180 -
Preferred stock 2,784,244 -
-------------------- -------------------
23,692,582 20,663,861
==================== ===================
Diluted earnings per share $ 0.20 $ (0.04)
==================== ===================
8
Convertible preferred stock equivalent shares for the three-month period
ended March 31, 2002 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 anti-dilutive.
NOTE 9: RECENTLY ANNOUNCED ACCOUNTING PRONOUNCEMENTS
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 March 31, 2002 be accounted for under the
purchase method and Statement 142 requires that goodwill no longer be amortized
to earnings, but instead be reviewed for impairment. As of March 31, 2002 there
was no impact on Parallel'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 September 15, 2002, with earlier application
encouraged. Parallel is currently assessing the impact on its financial
statements.
On October 3, 2001, the FASB issued Statement No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". This pronouncement supersedes FAS
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" and eliminates the requirement of Statement 121 to
allocate goodwill to long-lived assets to be tested for impairment Statement 144
also describes a probability-weighted cash flow estimation approach to deal with
situations in which alternative courses of action to recover the carrying amount
of long-lived assets are under consideration or a range is estimated for the
amount of possible future cash flows. The statement also establishes a
"primary-asset" approach to determine the cash flow estimation period for a
group of assets and liabilities that represents the unit of accounting for a
long-lived asset to be held and used. The provisions of this statement were
adopted with no impact on the financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years.
NOTE 10. LEGAL PROCEEDINGS
At March 31, 2002, 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 strategy has been 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. To achieve these objectives, we have:
o used advanced technologies to conduct exploratory and development
activities;
o acquired producing properties we believe add incremental value to
our asset base;
o attempted to keep debt levels low;
9
o concentrated activities in core areas to achieve economies of scale;
and
o emphasized 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.
As a result of the sale of First Permian properties, we now have available
additional capital resources for pursuing our business strategy. By utilizing
these additional capital resources, we believe we can more effectively pursue
our goal of increasing Parallel's per share net asset value.
Investment in First Permian. In September 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 acquired by First Permian
in the merger 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. The purchase was financed
primarily with senior secured bank borrowings in the amount of $74 million,
proceeds of subordinated notes in the principal amount of $16 million and the
remainder with proceeds from a simultaneous sale of minerals.
First Permian is owned by Parallel and other privately held oil and gas
companies and individuals. As of March 31, 2002, 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, under this accounting method, our
investment is increased or decreased by our proportionate share of First
Permian's net income or loss. See Note 6 to our financial statements for more
discussion about the continuance of the equity method of accounting for our
investment.
On March 7, 2002, First Permian entered into an Agreement of Sale and
Purchase with an affiliate of Energen Corporation (Energen), to sell all of its
oil and gas properties for $120 million in cash and 3,043,479 shares in Energen
stock approximating $70 million in value. Energen is a publicly traded company
listed on the NYSE. The transaction closed on April 8, 2002. As a 30.675%
interest owner in First Permian, Parallel received its prorata share of the net
proceeds, approximately $5.5 million in cash and 933,589 shares of Energen
stock. At April 8, 2002, the market value of Energen's stock was $27.40 per
share.
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. The world price for oil has overall influence on the prices
we receive for our oil production. The 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.
10
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:
o cash flow from operations,
o sales of our equity securities, and
o bank borrowings.
For the three months ended March 31, 2002, the sales price we received for
our crude oil production averaged $21.20 per barrel compared with $19.86 per
barrel for the three months ended December 31, 2001 and $27.81 per barrel for
the three months ended March 31, 2001. The average sales price we received for
natural gas for the three months ended March 31, 2002, was $2.25 per mcf
compared with $2.37 per mcf for the three months ended December 31, 2001 and
$6.25 per mcf for the three months ended March 31, 2001. For the three months
ended September 30, 2001, the average sales price we received for our crude oil
was $23.91 and for our natural gas was $4.02 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 the 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.
11
RESULTS OF OPERATIONS
Our business activities are characterized by frequent, and sometimes
significant, changes in our:
o sources of production;
o product mix (oil vs. gas volumes); and
o 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.
Three Months Ended Three Months Ended
----------------------------------------- -----------------------------
9-30-01 12-31-01 3-31-02 3-31-01 3-31-02
------------ -------------- ------------- -------------- --------------
Production and prices:
Oil (Bbls) 36,211 28,021 30,161 34,914 30,161
Natural gas (Mcf) 732,604 589,263 590,650 1,009,532 590,650
Equivalent barrels of oil (EBO) 158,312 126,232 128,603 203,169 128,603
Oil price (per Bbl) $ 23.91 $ 19.86 $ 21.20 $ 27.81 $ 21.20
Gas price (per Mcf) $ 4.02 $ 2.37 $ 2.25 $ 6.25 $ 2.25
Price per EBO $ 24.08 $ 15.44 $ 15.33 $ 35.87 $ 15.33
Results of operations per EBO:
Oil and gas revenues $ 24.08 $ 15.44 $ 15.33 $ 35.87 $ 15.33
Costs and expenses:
Lease operating expense 5.41 7.11 4.27 5.51 4.27
General and administrative 2.30 3.02 2.72 1.47 2.72
Depreciation and depletion 9.65 11.85 10.53 8.26 10.53
Impairment of oil and gas properties 13.75 116.00 - - -
------------ -------------- ------------- -------------- --------------
Total costs and expense 31.11 137.98 17.52 15.24 17.52
------------ -------------- ------------- -------------- --------------
Operating income (loss) (7.03) (122.54) (2.19) 20.63 (2.19)
------------ -------------- ------------- -------------- --------------
Interest expense, net (0.85) (1.05) (1.11) (1.02) (1.11)
Other income, net 0.12 (2.95) (1.29) (0.15) (1.29)
------------ -------------- ------------- -------------- --------------
(0.73) (4.00) (2.40) (1.17) (2.40)
Equity in earnings (loss) of First Permian, 2.79 3.16 (2.46) - (2.46)
------------ -------------- ------------- -------------- --------------
2.06 (0.84) (4.86) (1.17) (4.86)
------------ -------------- ------------- -------------- --------------
Pretax income per EBO (4.97) (123.38) (7.05) 19.46 (7.05)
Income tax expense (benefit) (1.86) (43.63) (3.72) (3.35) (3.72)
------------ -------------- ------------- -------------- --------------
Net income per EBO $ (3.11) $ (79.75) $ (3.33) $ 22.81 $ (3.33)
============ ============== ============= ============== ==============
Net operating cash flow before
working capital adjustments $ 15.64 $ 1.31 $ 3.48 $ 27.72 $ 3.48
============ ============== ============= ============== ==============
12
The following table shows for the periods indicated the percentage of total
revenues represented by each item reflected on our statements of operations.
Three Months Ended Three Months Ended
---------------------------------------- --------------------------
9-30-01 12-31-01 3-31-02 3-31-01 3-31-02
------------ -------------- ------------ ------------- ------------
Oil and gas revenues 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Lease operating expense 22.5 46.1 27.9 15.4 27.9
General and administrative 9.5 19.5 17.7 4.1 17.7
Depreciation and depletion 50.6 76.7 68.7 23.0 68.7
Impairment of oil and gas properties 46.5 751.4 - -
------------ -------------- ------------ ------------- ------------
Total costs and expenses 129.1 893.7 114.3 42.5 114.3
------------ -------------- ------------ ------------- ------------
Operating income (29.1) (793.7) (14.3) 57.5 (14.3)
------------ -------------- ------------ ------------- ------------
Interest expense, net (3.5) (6.8) (7.2) (2.9) (7.2)
Other income, net 0.5 (19.1) (8.4) (0.4) (8.4)
------------ -------------- ------------ ------------- ------------
(3.0) (25.9) (15.6) (3.3) (15.6)
------------ -------------- ------------ ------------- ------------
Equity in earnings (loss) of First Permian, LLC 11.6 20.4 (16.0) - (16.0)
Change in FMV of Put Option - - (17.2) - (17.2)
------------ -------------- ------------ ------------- ------------
11.6 20.4 (33.2) - (33.2)
------------ -------------- ------------ ------------- ------------
Pretax income (20.5) (799.2) (63.1) 54.2 (63.1)
Income tax expense (benefit) (7.7) (282.6) (24.3) (9.4) (24.3)
------------ -------------- ------------ ------------- ------------
Net income (12.8) (516.6) (38.8) 63.6 (38.8)
============ ============== ============ ============= ============
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2002:
Oil and Gas Revenues. Oil and gas revenues decreased, $5,317,011 or 73%, to
$1,971,191 for the three months ended March 31, 2002, from $7,288,202 for the
same period of 2001. The decrease was primarily the result of a 37% decrease in
oil and gas production and a 57% decrease in the average sales price per EBO. We
received $15.33 per EBO in the three months ended March 31, 2002 compared with
$35.87 per EBO for the same period of 2001.
Production Costs. Production costs decreased $569,689 or 51%, to $549,376
during the three months ended March 31, 2002, compared with $1,119,065 for the
same period of 2001. The decrease was primarily attributable to lower lease
operating costs. Average production costs per EBO decreased 23% to $4.27 for the
three months ended March 31, 2002 compared with $5.51 for the same period in
2001.
General and Administrative Expenses. General and administrative expenses
increased by $51,556, or 17%, to $349,764 for the three months ended March 31,
2002 from $298,208 for the same period of 2001. The increase was primarily due
to higher legal and public reporting costs and franchise taxes. General and
administrative expenses were $2.72 per EBO for the three months ended March 31,
2002, compared to $1.47 per EBO for the same period of 2001.
13
Depreciation, Depletion and Amortization Expense. Depreciation, depletion
and amortization expense ("DD&A") decreased by $323,190, or 19%, to
$1,354,630 for the three months ended March 31, 2002 compared with $1,677,820
for the same period of 2001 primarily because of a 37% decrease in production
volumes. As a percentage of revenues, DD&A increased to 69% compared to 23%
last year, a result of a decrease in the average sales price per EBO we received
in the first quarter of 2002. The DD&A rate per EBO increased to $10.53 for
the first quarter of 2002 compared with $8.26 per EBO for the first quarter of
2001. 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 2001.
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& rate accordingly.
We believe periodic reviews and adjustments, if necessary, will result in a more
accurate reflection of the DD&A rate during the year and minimize possible
year-end adjustments.
Equity in Earnings (Loss) of First Permian, LLC. At December 31, 2001, we
had recorded cumulative earnings of $840,529 in our investment in First Permian,
LLC because we had been released from the $10,000,000 guaranty as of October 25,
2000 and had resumed the equity method of accounting for our share of net income
associated with our 30.675% interest in First Permian, LLC. For the three months
ended March 31, 2002, First Permian had net loss of $1,031,110. Our share of the
net loss for the three months ended March 31, 2002, was $316,293.
Net Interest Expense. Interest expense decreased $65,129, or 31%, to
$142,679 for the three months ended March 31, 2002 compared with $207,808 for
the same period of 2001 due a decrease in the bank's prime rate.
Income Tax Benefit. Our effective tax rate for the three months ended March
31, 2002 is 38%. For further discussion see Note 4.
Net Income (Loss) and Cash Flow from Operations. Our net loss, before
preferred stock dividends, was $768,751 for the three months ended March 31,
2002 compared with a net income of $4,635,922 for the three months ended March
31, 2001. The decrease in net income and operating cash flow resulted primarily
from a 73% decrease in oil and gas revenues, because of a 57% decrease in the
average sales price we received per EBO, and a 37% decrease in production
volumes.
Cash flow from operations for three months ended March 31, 2002 decreased
approximately $5,783,241 to a deficit of $247,049 compared with $5,536,192 for
the three months ended March 31, 2001. The decrease was primarily associated
with the $5,404,673 decrease in net income and an $864,538 decrease in accounts
payable and accrued liabilities.
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 prices we
receive for oil and natural gas we produce.
Working capital decreased $2,489,481 as of March 31, 2002 compared with
December 31, 2001. Current liabilities exceeded current assets by $3,076,322 at
March 31, 2002 compared with $586,841 at December 31, 2001. Working capital
decreased primarily due to a decrease in current assets of $2,307,844 and an
increase of $181,637 in current liabilities.
We incurred net property costs of $2,420,475 for the three months ended
March 31, 2002, 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.
14
Based on our projected oil and gas revenues and related expenses, available
bank borrowings, and the cash and marketable securities we received from the
sale of First Permian's properties, we believe that we will have sufficient
capital resources 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. As described under Item 3,
in January 2002 we implemented a hedging strategy of purchasing put floors
covering a portion of our natural gas production.
Our capital expenditure budgets are highly dependent on future oil and gas
prices and will be consistent with internally generated cash flows.
During fiscal year 2001 the average sales price we received for our oil was
approximately $24.80 per barrel while the average sales prices we received for
natural gas was approximately $4.41 per thousand cubic feet ("Mcf"). For the
three months ended March 31, 2002, the average price we received for our oil
production was approximately $21.20 per Bbl, while the average price received at
that same date for our natural gas production was approximately $2.25 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 Parallel'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 our
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 Parallel with the Securities and Exchange
Commission.
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our only financial instrument sensitive to changes in interest rates is our
bank debt. Our annual interest costs in 2002 could 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 March, 2002.
March March March January Fair
2003 2004 2005 2006 Total Value
------------ ------------ ------------ ------------- ------------ -------------
(In 000's, except interest rates)
Variable rate debt:
Revolving facility (secured) $ 3,300 $ 3,600 $ 3,600 $ 2,066 $ 12,566 $ 12,566
Average interest rate 5.00% 5.00% 5.00% 5.00%
At February 1, 2002, we had bank loans in the amount of $12,565,589
outstanding at an average interest rate of 5.00%. Borrowings under our new
credit facility bear interest, at our election, at (i) the bank's base rate or
(ii) the Eurodollar rate, plus 2.75%, but in no event less than 5.00%. As a
result, our annual interest costs in 2002 could fluctuate based on short-term
interest rates. Assuming no change in the amount outstanding during 2002, the
impact on interest expense of a one-half of one percent change in the average
interest rate above the 5.00% floor would be approximately $62,828. As the
interest rate is variable and is reflective of current market conditions, the
carrying value approximates the fair value.
Our major market risk exposure is in the pricing applicable to our oil and
natural gas production. Market risk refers to the risk of loss from adverse
changes in oil and natural gas prices. 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 $16.81 per barrel
to a monthly high of $33.95 per barrel during 2001. Natural gas prices we
received during 2001 ranged from a monthly low of $1.08 per Mcf to a monthly
high of $11.81 per Mcf. During the first quarter 2002 oil prices ranged from a
monthly low of $16.04 to a monthly high of $26.74. Natural gas prices we
received during 2002 ranged from a monthly low of $1.05 per Mcf to a monthly
high of $3.80 per Mcf. A significant decline in the prices of natural gas or oil
could have a material adverse effect on our financial condition and results of
operations.
Historically, we have not entered into hedging arrangements and have not
had any delivery commitments. While hedging arrangements reduce exposure to
losses as a result of unfavorable price changes, they may also limit the ability
to benefit from favorable market price changes. However, in January, 2002, our
Board determined that Parallel should hedge natural gas prices for one-half of
its natural gas production. After reviewing alternative strategies, we purchased
put options on gas prices to create a sales price floor for part of our gas
production. We believe put floors provide us with the advantage of no margin
requirements, participating in the upside of potential increases in natural gas
prices and establishing a minimum selling price at a fixed cost. However, put
floors can also be expensive if markets do not change, and in most cases the
protection of a floor will not be immediately realized at current levels. In
January and February, 2002, we purchased put floors with a counterparty to sell
notional volumes of 210,000 Mcf of gas per month for the seven-month period
April, 2002 through October, 2002, at a floor price of $2.40 per Mcf based on
NYMEX pricing. The cost of implementing these hedges was $311,930 and $79,179,
respectively, or approximately $56,000 per month for the seven-month period.
These derivatives are not held for trading purposes.
The fair value of the put floors as of March 31, 2002 was $51,426;
therefore, a $339,858 decrease in fair value was recognized as of March 31, 2002
in the Statements of Operations.
16
The following table illustrations our gas hedge, which we entered into in
the first quarter of 2002.
Average
Cost of
Mcf Per Floor per
Period Day Total Mcf Commodity Mcf
--------------------- ------------- --------------- -------------- -------------
April 2002 7,000 210,000 natural gas $ 0.2893
May 2002 7,000 210,000 natural gas $ 0.2657
June 2002 7,000 210,000 natural gas $ 0.2486
July 2002 7,000 210,000 natural gas $ 0.2414
August 2002 7,000 210,000 natural gas $ 0.2479
September 2002 7,000 210,000 natural gas $ 0.2679
October 2002 7,000 210,000 natural gas $ 0.2751
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
At March 31, 2002, 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 6. EXHIBIT 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.)
3.2 Bylaws of Registrant (Incorporated by reference to Exhibit 3 to the
Registrant's Form 8-K, dated October 9, 2000, as filed with the
Securities and Exchange Commission on October 10, 2000.)
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.)
17
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
10.10):
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 (Incorporated by
reference to Exhibit 10.8 of Form 10-Q of the Registrant for the
fiscal quarter ended June 30, 2001.)
10.9 Form of Incentive Award Agreements, dated December 12, 2001, between
the Registrant and Thomas R. Cambridge, Larry C. Oldham, Eric A.
Bayley and John S. Rutherford granting 2,394 Unit Equivalent Rights to
Mr. Cambridge; 9,564 Unit Equivalent Rights to Mr. Oldham; 2,869 Unit
Equivalent Rights to Mr. Bayley; and 7,173 Unit Equivalent Rights to
Mr. Rutherford. (Incorporated by reference to Exhibit 10.8 of the
Registrant's Form 10-K Report for the fiscal year ended December 31,
2001).
10.10 Form of Change of Control Agreements, dated June 1, 2001, between the
Registrant and Thomas R. Cambridge, Larry C. Oldham, Eric A. Bayley
and John S. Rutherford. (Incorporated by reference to Exhibit 10.9 of
the Registrant's Form 10-K Report for the fiscal year ended December
31, 2001).
18
10.11 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).
10.12 Restated Loan Agreement dated December 18, 2000, 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, 2000.)
10.13 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 of the Registrant for the fiscal year ended December 31,
1998.)
10.14 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.)
10.15 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.)
10.16 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.)
10.17 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.)
10.18 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.)
10.19 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.)
10.20 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.)
10.21 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.)
10.22 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.)
10.23 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.)
19
10.24 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.)
10.25 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.)
10.26 Loan Agreement, dated January 25, 2002, between the Registrant and
First American Bank, SSB (Incorporated by reference to Exhibit 10.25
of Form 10-K for the fiscal year ended December 31, 2001.)
(b) Reports on Form 8-K
On March 22, 2002, one report on Form 8-K, dated March 21, 2002, was
filed which reported First Permian, LLC having entered into an
agreement with Energen Corporation to sell all of First Permian's oil
and gas properties to Energen Corporation for $120 million in cash and
approximately $70 million in common stock of Energen Corporation. As
of the date of this Form 10-Q Report, financial statements had not
been filed with the Form 8-K Report, but will be filed as an amendment
to the Form 8-K not later than May 21, 2002.
20
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
BY: /s/ Thomas R. Cambridge
Date: May 15, 2002 -------------------------------------------
Thomas R. Cambridge
Chairman of the Board of Directors
and Chief Executive Officer
Date: May 15, 2002 BY: /s/ Larry C. Oldham
-------------------------------------------
Larry C. Oldham,
President and Principal Financial Officer
21