PYR ENERGY CORP (PYRX)
Quarterly Report (SEC form 10QSB)
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company is an independent oil and gas exploration company whose strategic focus is the application of advanced seismic imaging and computer-aided exploration technologies in the systematic search for commercial hydrocarbon reserves, primarily in the onshore western United States. The Company attempts to leverage its technical experience and expertise with seismic to identify exploration and exploitation projects with significant potential economic return. The Company intends to participate in selected exploration projects as a non-operating, working interest owner, sharing both risk and rewards with its partners. The Company has and will continue to pursue exploration opportunities in regions where the Company believes significant opportunity for discovery of oil and gas exists. By reducing drilling risk through seismic technology, the Company seeks to improve the expected return on investment in its oil and gas exploration projects.
During the quarter ended November 30, 1998, the Company completed the sale of convertible promissory notes (the "Notes") in the total amount of $2,500,000 in a private placement transaction pursuant to exemptions from federal and state registration requirements. On April 16, 1999, the Shareholders of the Company approved a proposal to create a Preferred Class of stock and, pursuant to the terms of the Notes, the Notes then automatically converted into shares of Series A Preferred Stock (the "Serie A Preferred") at the rate of one share for each $100 principal amount of Notes. The Series A Preferred is convertible into Common Stock at the rate of one share of Common Stock for each $.60 of the $100 per share purchase amount of the Series A Preferred. The Series A Preferred accrues an annual dividend of 10 percent that is payable semi-annually on July 1 and January 1 of each year. The Company has the right to require conversion of the preferred shares in the following circumstances:
o The Company has the right to require conversion of one-third of the outstanding Series A Preferred at any time after October 26, 1999, provided that the market value of the Company's Common Stock is at least $2.40 per share, based on a 45 day weighted average trading price.
o The Company has the right to require conversion of an additional one-third of the initially issued Series A Preferred at any time after October 26, 2000, provided that the market value of the Company's Common Stock is at least $3.60 per share, based on a 45 day weighted average trading price.
o The Company has the right to require conversion of the final one-third of the initially issued Series A Preferred at any time after October 26, 2000, provided that the market value of the Company's Common Stock is at least $4.80 per share, based on a 45 day weighted average trading price.
o The Company has the right to require conversion of all of the outstanding Series A Preferred at any time after October 26, 2000 if the Company has accumulated retained earnings equal to or greater than $3,750,000.
During the Quarter ended May 31, 1999, the Company received $7,000,000 (less commissions, fees and related expenses of approximately $92,000) of private placement funding through the sale of 4,375,000 shares of the Company's Common Stock and 437,500 5-year warrants to purchase an additional share of the Company's Common Stock at a price of $2.50. The warrants are immediately exercisable, and all warrants expire on May 14, 2004. The Company may, upon 30-days notice, repurchase the warrants for $.01 per warrant at any time after the weighted average trading price of the Company's Common Stock has been at least $6.00 for a 45 day period.
During the nine months ended May 31, 1999 ("1999") and May 31, 1998 ("1998"), the Company incurred approximately $2,651,000 and $2,054,000 respectively, for acquisition of acreage, direct geological and geophysical costs, drilling costs and other related direct costs with respect to its identified exploration and exploitation projects. The Company has had no revenues from oil and gas production.
The Company currently anticipates that it will participate in the drilling of two to four additional exploratory wells during the next twelve months, although the number of wells may increase as additional projects are added to the Company's portfolio. There can be no assurance that any such wells will be drilled and if drilled that any of these wells will be successful.
The following provides a summary and status of the Company's exploration areas and significant projects. While actively pursuing specific exploration activities in each of the following areas, the Company is continually reviewing additional opportunities in these core areas and in other areas that meet certain exploration and exploitation criteria. There is no assurance that drilling opportunities will continue to be identified in the current project portfolio or will be successful if drilled. The Company's primary focus area is the San Joaquin Basin of California.
The San Joaquin Basin of California has proven to be one of the most productive hydrocarbon producing basins in the continental United States. To date, the approximately 14,000 square mile basin has produced in excess of 12.7 billion barrels of oil equivalent, and contains 25 fields classified as giant, with cumulative production of more than 100 million barrels of oil equivalent ("MMBoe"). In calculating barrels of oil equivalent, the Company uses the ratio of six thousand cubic feet ("Mcf") of gas for one barrel of oil.
The San Joaquin Basin contains six of the 25 largest oil fields in the U.S. All six of these fields were discovered between 1890 and 1911, a full decade prior to the discovery of the first giant Texas oil field. The basin accounts for 34 percent of California's actively producing fields, yet produces more than 75 percent of the state's total oil and gas production. Most of the production within the basin is located along the western and southern end of Kern County. San Joaquin Basin production totals for 1997 reported by the California Department of Oil and Gas for all producers in the aggregate indicate total production of 246.9 MMBoe. Of this figure, Kern County accounts for over 90 percent of the oil production from the San Joaquin Basin.
Exploration Opportunity. For the 100 plus years of its productive life, the San Joaquin Basin has been dominated by major oil companies and large fee acreage holdings. As a result of these conditions, the basin has generally been under-explored by independent exploration and production companies, groups that usually bring advanced technologies to their exploration efforts. The large fields in the basin were all discovered on surface anticlines and produce mostly heavy oil from depths of less than 5,000 feet. As a consequence, basin operators have employed only those advanced engineering technologies related to enhanced production practices including steam floods and, most recently, horizontal drilling.
With limited exploration in the San Joaquin Basin since the "boom" days of the early 1980s, the Company believes that multiple exploration opportunities are available. Deep basin targets, both structural and stratigraphic in nature, remain largely untested. In addition, retrenchment of the majors in the basin has caused many of them to rethink their policies regarding their large fee acreage positions. For the first time in history, many of these companies are opening up these fee acreage positions to outside exploration by aggressive independent companies.
East Lost Hills. The East Lost Hills prospect is a deep, large untested structure in the footwall of the Lost Hills thrust that lies directly east of and structurally below the existing Lost Hills field. The Lost Hills thrust has produced in excess of 350 MMBoe from shallow pay zones in a large thrusted anticlinal feature.
In early 1998, the Company and Denver based Armstrong Resources, LLC entered into an exploration agreement with a number of established Canadian partners concerning approximately 30,000 gross acres over this prospect. PYR received cash consideration for its share of acreage in this play and a carried 6.475% working interest through the tanks in the initial exploration well. PYR owns an additional 4.1% working interest for a total working interest of 10.575% in the nine township area of mutual interest.
On May 15, 1998, the Bellevue Resources et al. #1-17 East Lost Hills well, located in SE1/4. Sec 17, T26S, R21E, Kern County, California, commenced drilling. The well was designed to test prospective Miocene sandstone reservoirs in the Temblor Formation. During September 1998, the well was sidetracked in an attempt to gain better structural position and delineate potential uphole pay. On November 23, 1998, the well was drilling at 17,600 feet toward a total depth of 19,000 feet when it blew out and ignited. No personal injuries resulted, and an expert well control team was engaged to contain the fire. Surface containment facilities were installed and all liquid and gas production from that well were contained and were transported to processing and disposal facilities. A snubbing unit was deployed to attempt a surface control kill of the Bellevue #1-17, but, after eight kill attempts, was not successful. A relief well, the Bellevue #1-17R, began drilling on December 18, 1998. It was initially expected to intersect the wellbore of the Bellevue #1-17 at a depth of about 13,500 feet. However, as drilling continued and the characteristics of the blowout were examined, it was determined to attempt to intersect the wellbore below 16,000 feet. The relief well was drilled to 16,668 feet, where it intersected the original well bore. On May 29, 1999, the original well bore was killed by pumping heavy mud and cement into the well bore. The original well bore has been plugged back and abandoned and the relief well is currently being used to sidetrack a replacement well into the targeted Temblor Zone. It is anticipated that the drilling of the replacement well will be completed by the end of August 1999.
Although the Company believes that substantially all the loss from the blowout of the Bellevue #1-17 well is covered by insurance, the insurance company has not determined its position on certain claims related to the blowout, and the operator continues to work with the insurance company in order to clarify the claims. If the insurance company denies these claims successfully, the Company's share of these costs could be as much as $400,000.
Deep Temblor Exploration Program. In April 1999, the Company purchased a working interest in three additional deep exploration projects in the San Joaquin Basin of California. These three projects are in addition to the exploration program initiated by the recent deep drilling at East Lost Hills, and all three lay outside the East Lost Hills joint venture area. Pursuant to the agreement, the Company paid $656,000 cash and issued 218,866 shares of common stock in exchange for working interests, ranging from 3.00% to 3.75%, in each of the three exploration prospect areas. The Company's interest will be carried "through the tanks" in the initial test well in each of the three separate exploration prospects.
The first exploration well in the program began drilling on June 15, 1999 and is operated by Berkley Petroleum Corporation ("Berkley") of Calgary. The three exploration prospects in this program, targeting the Temblor Formation at depths ranging from 15,000 to 18,000 feet, are expected to be drilled in sequence with the same rig. Berkley will operate the other exploration projects in the Deep Temblor Exploration Program as well as assume operations at East Lost Hills, effective July 1, 1999.
Including the above four projects, the Company has a total of nine separate projects with interests covering approximately 93,500 gross and 42,500 net acres in the San Joaquin Basin of California. In addition, the Company has an interest in a number of additional exploration projects in the Rocky Mountains, covering approximately 58,000 gross and 51,000 net acres, that are currently at various stages of development.
At May 31, 1999, the Company had a working capital amount of $6,501,000. The Company had no outstanding long-term debt at May 31, 1999 other than a capital lease obligation and has not entered into any commodity swap arrangements or hedging transactions. Although it has no current plans to do so, it may enter into commodity swap and/or hedging transactions in the future in conjunction with oil and gas production. Nevertheless, there can be no assurance that the Company will ever have oil and gas production.
It is anticipated that the future development of the Company's business will require additional capital expenditures. Depending upon the ultimate results at East Lost Hills and the results of the Company's other exploration projects, the Company may require as much as $4,000,000 to $6,000,000 for capital expenditures during the next 12 months. In conjunction with funding these capital requirements, the Company has received $7,000,000 from a private placement funding completed during the quarter ended May 31, 1999. The Company intends to limit capital expenditures by forming industry alliances and exchanging an appropriate portion of its interest in the various exploration projects for cash and/or a carried interest in these projects. The Company anticipates that it may need to raise additional funds to cover added capital expenditures.
Results of Operations
The quarter ended May 31, 1999 ("1999") compared with the quarter ended May 31, 1998 ("1998").
Operations during the quarter ended May 31, 1999 resulted in a net loss of ($237,891) compared to a net loss of ($164,392) for the quarter ended May 31, 1998. The difference is attributable to an increase in interest expense in 1999 associated with the Company's convertible debentures and with a slight increase in general and administrative expenses.
Oil and Gas Revenues and Expenses. The Company has not owned any producing or proved oil and gas properties. Accordingly, no oil and gas revenues or expenses have been recorded by the Company.
Depreciation, Depletion and Amortization. The Company recorded no depletion expense from oil and gas properties for the quarters ended May 31, 1999 or 1998. The Company has not owned any proved reserves and had no oil or gas production. The Company recorded $6,628 and $6,223 in depreciation expense associated with capitalized office furniture and equipment during the quarters ended May 31, 1999 and 1998, respectively.
General and Administrative Expense. The Company incurred $216,359 and $163,343 in general and administrative expenses during the quarters ended May 31, 1999 and 1998, respectively. The difference is attributable to increases in shareholder relations expenses and Directors and Officers insurance.
Interest Expense. The Company recorded $46,115 in interest expense for the quarter ended May 31, 1999 primarily associated with the Company's convertible debentures. The Company had nominal interest expense for the quarter ended May 31, 1998.
The nine months ended May 31, 1999 ("1999") compared with the nine months ended May 31, 1998 ("1998").
Operations during the nine months ended May 31, 1999 resulted in a net loss of ($659,192) compared to a net income of $50,843 for the nine months ended May 31, 1998. The difference is attributed to a gain from the sale of oil and gas properties reported during the nine months ended May 31, 1998 of $556,000 and to an increase in interest expense in 1999 associated with the Company's convertible debentures.
Oil and Gas Revenues and Expenses. The Company has not owned any producing or proved oil and gas properties. Accordingly, no oil and gas revenues or expenses have been recorded by the Company.
Depreciation, Depletion and Amortization. The Company recorded no depletion expense from oil and gas properties for the nine months ended May 31, 1999 or 1998. The Company has not owned any proved reserves nor had any oil or gas production. The Company recorded $19,421 and $15,983 in depreciation expense associated with capitalized office furniture and equipment during the nine months ended May 31, 1999 and 1998, respectively.
General and Administrative Expense. The Company incurred $528,433 and $524,633 in general and administrative expenses during the nine months ended May 31, 1999 and 1998, respectively.
Interest Expense. The Company recorded $158,151 in interest expense for the nine months ended May 31, 1999 primarily associated with the Company's convertible debentures. The Company had nominal interest expense for the nine months ended May 31, 1998.
Consulting Fee Revenue. The Company generated $10,000 from consulting fees during the nine months ended May 31, 1998. These revenues have ceased and are not expected to occur in the future.
Year 2000 Compliance
Year 2000 compliance is the ability of computer hardware and software to respond to the problems posed by the fact that computer programs traditionally have used two digits rather than four digits to define an applicable year. As a consequence, any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing interruption of operations, including temporary inability to perform 3-D seismic analysis and to perform accounting functions and delays in the receipt of payments from purchasers of oil and gas production, if any. The Company continues to review the Company's computers and software as well as other equipment that utilizes imbedded computer chips, such as facsimile machines and telephone systems. The Company believes that its review will be completed prior to its fiscal year ending August 31, 1999. The Company has confirmed with the maker of its accounting software that it is Year 2000 compliant.
Until the Company's Year 2000 review has been completed, the Company has no estimate of the cost to correct any potential deficiency in Year 2000 compliance for its computers and equipment. Upon the completion of the Company's Year 2000 review, the Company intends to develop a contingency plan to address potential Year 2000 problems
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
During the quarter ended May 31, 1999, the Registrant filed two reports on Form 8-K:
A Form 8-K was filed on April 7, 1999 reporting a press release dated April 5, 1999, A Form 8-K was filed on April 30, 1999 reporting a press release dated April 30, 1999,
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