Mercantile Petroleum announces discontinuance of debt repayment, third
quarter results and a company update
GRAND CAYMAN, Cayman Islands, Nov. 30 /CNW/ - Mercantile International
Petroleum Inc. (''Mercantile'') announced today that it is suspending
repayment of its debt obligations and has commenced discussions with its
creditors concerning a restructuring of Mercantile's debt and equity capital.
Mercantile also announced its results from operations for the third quarter of
1998 along with an update on proceeds from its insurance claim for El Nino
damages in Peru, the approval of a gas royalty rate in Peru and the
preliminary results from a gas well testing program which is being carried out
on its Block III property in Talara, Peru.
Suspension of Debt repayments
Mercantile announced that it is suspending payment on certain of its debt
obligations. As a result, Mercantile has not paid US$1 million that was due on
October 30, 1998 to the vendors of Rio Bravo S.A. and Mercantile will not be
paying the US$2.3 million semi-annual interest payment due on December 2, 1998
to holders of its US$40 million, 11.5% debentures. Management of the Company
has begun discussions with the holders of debentures for the purpose of
gaining support for a capital restructuring plan. The terms of the
restructuring plan have not been determined and will ultimately be a function
of the level of success that Mercantile experiences in developing a market in
Peru for its gas reserves. To date, holders of over 50% of the debentures have
informally provided their support to management in its restructuring efforts.
The vendors of Rio Bravo S.A. have advised Mercantile that they will seek
arbitration in respect of the US$1 million that was due on October 30, 1998.
Mercantile is conducting engineering and marketing studies for the
purpose of building a gas-fired power plant in Peru, which will be fueled by
gas from Block III in Talara. At the present time, there is no market for
Mercantile's gas in Peru, however, the Company believes that it possesses gas
reserves sufficient to support the development of a power plant. Mercantile's
potential partners in this venture are currently awaiting completion of a gas
test program on 12 of its wells in Block III. As discussed below, tests have
been conducted on five of these wells and the balance of the testing is
expected to be completed by mid January 1999. On successful completion of the
test program, Mercantile will work with its potential partners to finalize
proposals for the development of the power facility. Once agreements have been
reached for the development of the power plant, Mercantile will seek agreement
with its creditors on a restructuring of its capital structure so that its
debt levels can be supported by expected cash flow.
Insurance Proceeds
Mercantile announced that it has received an additional payment of
US$500,000.00 as a further advance against its claims for insurance coverage
on its Peru properties resulting from damages incurred in the recent El Nino
phenomenon. To date, the Company has received a total of US$850,000.00 in
advances including this current payment, against claims which total in excess
of US$3 million. The Company expects that a final review and report will be
completed by year end and that its insurer will provide a payment representing
the balance of any amounts determined by the insurer to be owing to Mercantile
shortly thereafter. Mercantile has not had any indication from its insurer
regarding the expected amount of the final payment.
Gas Royalty
Mercantile announced that it has received official notification from
Perupetro, the government agency in Peru that regulates oil and gas
exploration and production, that it has approved a gas royalty rate for
Mercantile on gas from its Block III property. The gas royalty rate is price
related and at prices up to US$1.00 per mcf of gas, the royalty rate will be
15% while at prices of $1.00 to $1.50/mcf the royalty rate increases from 15%
to 19%, and the royalty rate increases at the same rate for higher gas prices.
For example, at a gas price of $1.35 mcf (certain producers in Peru have
achieved gas prices in this range), the royalty rate payable to the government
of Peru will be 18%. Mercantile believes this gas royalty rate is reasonable
given the limited market for gas and the competitive nature of the power
generation business in Peru.
Gas Testing
Mercantile announced initial results from its Block III, Talara, Peru
natural gas testing program. The Company has successfully re-completed and
conducted gas production tests on five of the twelve wells planned for the
1998 testing program. The purpose of the program is to confirm engineering
reserve estimates and production rates required for the proposed power
generation facility. The twelve wells have been selected to provide a
representation of reserves and delivery rates from approximately 85 existing
wells in different areas of the field. The program includes oil wells with gas
bearing zones and wells that tested gas when initially drilled but were
shut-in due to lack of a gas market.
Wells 13024 and 4310, tested in separate gas prone areas of the field,
produced at rates of 5.4 mmcf/d and 2.5 mmcf/d respectively, during extended
tests through 3/8'' chokes, with stabilized flow pressure for well 13024 being
2180 psi. Well 13024 has the potential for offset development drilling. The
test conducted on well 4310 evaluated the top 20 feet of a total gas pay of
about 100 feet. Calculated open flow (AOF) for well 13024 is 18 mmcf/d and for
well 4310 is 3.8 mmcf/d.
Wells 8017, 4440 and 5553, which are re-completion candidates within the
Puertocheulo field, produced at rates of 570 mcf/d, 350 mcf/d and 220 mcf/d
respectively, during extended tests. In addition to the gas volumes tested,
the five wells produced combined oil and condensate volumes in excess of 100
bbls/d. Recompletion costs for these wells are expected to average about
US$50,000.00 each, making the wells economic to develop provided that there is
a market to sell the gas.
Given the test results to date, management believes that sufficient low
cost reserves and gas production volumes can be developed to support the
initial 100 MW power development project.
Third Quarter Results
For the first nine months of 1998, oil and gas revenues (net of
royalties), were U.S. $5,145,604 compared to U.S. $4,595,286 for the same
period last year. Net Earnings (Loss) for the nine months ended September 30,
1998, was U.S. $(10,254,877) compared to U.S. $(6,313,914) for the same period
in 1997 while cash flow from operations was U.S. $(5,353,767) compared to U.S.
$(3,830,142) for the first nine months of 1997. These results reflect a
combination of the impact of poor results from work-over and drilling
operations, El Nino rains in reducing production levels, continued low world
oil prices and the continued excessively high royalty rate regime in Peru.
For the first nine months of 1998, operating expenses increased by U.S.
$4,102,510 or 36% compared to the same period last year. Of that increase,
U.S. $1,199,831 or 29% is attributable to interest and bank charges while U.S.
$2,245,730 or 55% is attributable to non-cash depletion and depreciation
charges with the two categories combined representing 84% of the total
increase in operating expenses.
General and administrative expenses increased U.S. $1,509,821 or 29%
compared to the same period last year. Of that increase, U.S. $511,875 is
attributable to Corporate, however, 100% of this amount is the result of a
reversal of a 1997 book entry which double posted the allocation of travel
costs to subsidiaries, and thus, resulted in an overstatement of subsidiary
costs and and understatement of Corporate costs in 1997. Aside from this
correcting entry, Corporate G & A costs were relatively unchanged for the
period. Other increases to G & A are partially attributable to Peru where the
Company experienced increases in salaries and expenses related to new
technical staff and a new general manager and partially attributable to
Colombia where the Company experienced some increases in salaries and
consultants fees. As well, the statements reflected only seven months of
Colombia, due to the acquisition of AIPC on February 25, 1997, compared to
nine months for 1998. The balance of the increases to G & A are attributable
to Burma where the Company experienced increases in salaries, office rent and
expenses related to the start-up of activity in that country.
In spite of declining oil prices, the Company managed to achieve a 12%
increase in revenues while keeping field operating expenses lower compared to
the same period last year. These lower expenses am beginning to reflect the
continued changes management made in operations over the past year including
reductions in personnel, closing and/or consolidation of offices, outsourcing
of specified field services and reductions in maintenance and communication
costs.
Mercantile is an ''oil and gas exploitation company'' with interest in
Peru, Colombia and Myanmar. Mercantile's shares are listed on The Toronto
Stock Exchange and trade in US dollars under the symbol MPT.U while its
debentures are listed on the Winnipeg Stock Exchange.
MERCANTILE INTERNATIONAL PETROLEUM INC.
Consolidated Balance Sheets
(Expressed in United States dollars)
(unaudited)
September 30
--------------------------
1998 1997
--------------------------
ASSETS (RESTATED)
Current assets
Cash 2,785,238 16,076,105
Cash held in escrow - 8,208,320
Trade accounts receivable 1,114,121 672,114
Sundry receivables 1,137,250 1,188,031
Prepaid expenses 450,214 765,410
Inventory 69,744 97,038
---------------------------
5,556,567 27,007,018
---------------------------
Capital assets, net 54,097,690 48,329,917
Other assets
Fixed assets 412,731 877,136
Deferred charges 3,413,473 4,117,014
Long term receivable 3,039,904 2,874,815
Residual interest account 1,281,829 1,149,998
---------------------------
67,802,194 84,355,898
---------------------------
LIABILITIES
Current liabilities
Accounts payable
Trade accounts payable 2,981,617 6,090,339
Royalties 45,604 -
Interest 1,582,290 1,827,397
Note payable 75,000 1,000,000
Debentures - current portion 1,500,000 1,500,000
Purchase consideration payable 1,385,167 -
Other payables and accruals 414,381 -
---------------------------
7,984,059 10,417,736
Non current liabilities
Special Warrants - 26,450,000
Debentures - medium term portion 40,000,000 15,050,000
Site restoration provision 198,366 209,000
---------------------------
40,198,366 41,709,000
SHAREHOLDERS' EQUITY
Share capital 45,190,867 45,072,367
Retained deficit (25,571,098) (12,843,205)
---------------------------
19,619,769 32,229,162
---------------------------
67,802,194 84,355,898
---------------------------
MERCANTILE INTERNATIONAL PETROLEUM INC.
Consolidated Statements of Operations and Deficit
(Expressed in United states dollars)
(unaudited)
Nine Months Nine Months
Ended Ended
30 Sept., 30 Sept.,
1998 1997
--------------------------
(RESTATED)
REVENUE
Oil and gas, net of royalties 5,145,604 4,595,286
Interest and other income 586,090 544,578
--------------------------
5,731,694 5,139,864
--------------------------
EXPENSES
Oil and gas operating expenses 2,087,403 2,125,463
General and administrative
Corporate 2,039,686 1,527,821
Peru 1,883,392 1,471,112
Colombia 773,692 331,501
Burma 178,385 34,910
Severance costs 68,429 989,071
Interest and bank charges 3,591,988 2,392,157
Depletion and depreciation 4,534,502 2,288,772
Amortization of deferred charges 366,608 260,768
--------------------------
Total expenses before project costs 15,524,085 11,421,575
--------------------------
PROJECT COSTS
Burma and others - reconnaissance programs - 17,203
Investor reconnaissance - 15,000
Other 462,486 -
--------------------------
Total project costs 462,486 32,203
--------------------------
Total expenses 15,986,571 11,453,778
--------------------------
Net loss for the period (10,254,877) (6,313,914)
Deficit - beginning of the period (15,316,221) (6,529,291)
--------------------------
Deficit - end of the period (25,571,098) (12,843,205)
--------------------------
--------------------------
Basic loss per share (0.24) (0.15)
--------------------------
--------------------------
MERCANTILE INTERNATIONAL PETROLEUM INC.
Consolidated Statements of Cash Flows
(Expressed in United States dollars)
(unaudited)
Nine Months Nine Months
Ended Ended
30 Sept., 30 Sept.,
1998 1997
--------------------------
(RESTATED)
Cash flows from operating activities:
Net loss (10,254,877) (6,313,914)
Adjustments for non-cash items:
Depletion and depreciation 4,534,502 2,288,772
Amortization of deferred charges -
financing 366,608 195,000
--------------------------
Operating loss before working capital changes (5,353,767) (3,830,142)
Decrease (increase) in trade and sundry accounts 355,398 (355,782)
receivable
Decrease (increase) in prepaid expenses 124,016 (622,454)
Decrease (increase) in inventory 12,318 (6,630)
Decrease in purchase consideration (692,583) -
(Decrease) increase in accounts payable (497,282) 3,354,940
Decrease in long term receivable 222,456 4,261
--------------------------
Net cash used in operating activities (5,829,444) (1,455,807)
--------------------------
Cash flows from investing activities:
Investment in acquired companies,
less cash acquired - (12,565,146)
Capital expenditures for capital assets (2,821,794) (13,079,414)
Purchase of fixed assets 70,396 (639,346)
Deferred charges (152,260) (1,712,014)
Increase in residual interest account (92,373) (173,135)
--------------------------
Net cash used in investing activities (2,996,031) (28,169,055)
--------------------------
Cash flows from financing activities
(Decrease) increase in note payable (525,000) 1,000,000
Increase in special warrants - 40,000,000
Decrease (increase) in debentures (1,500,000) 3,000,000
Deferred charges 85,062 (2,600,000)
Shares issued on acquisitions 59,250 8,768,750
--------------------------
Net cash from financing activities (1,880,688) 50,168,750
--------------------------
Net increase in cash and cash equivalents (10,706,163) 20,543,888
Cash and cash equivalents at beginning
of period 13,491,401 3,740,537
--------------------------
Cash and cash equivalents at end of period 2,785,238 24,284,425
--------------------------
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