EARNINGS / PYR ENERGY CORP (Lost Hills Joint Venture Participant)
Stock Symbol (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 3-D 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 3-D 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.
The Notes will automatically convert into shares of Series A Preferred Stock (the "Series A Preferred") at the rate of one share for each $100 principal amount of Notes if the Series A Preferred is approved by stockholders prior to April 23, 1999. The Series A Preferred is convertible into Common Stock at the rate of one share of Common Stock for each $.60 of the purchase amount of the Series A Preferred. If the Series A Preferred is not issued by April 23, 1999 (which requires stockholder approval to authorize a class of preferred stock), the Note holders have the right to require that Notes and accrued interest be paid on demand or to convert the Notes into Common Stock at the rate of one share of Common Stock for each $.30 of principal amount of Notes rather than the conversion rate of one share of Common Stock for each $.60 of face amount of the Series A Preferred. The full principal amount of the Notes and accrued interest at the rate of 10 percent per year is due on October 26, 1999 if the Notes have not been converted into Series A Preferred or Common Stock prior to that time. The Company is required to make semi-annual interest payments on the Notes commencing on the date that is six months from the date of the Notes until the Notes are repaid. The Company has the right in its discretion to pay the interest portion of the Notes with Common Stock at a rate based on the weighted average trading price of the Common Stock for 45 days prior to the interest payment date.
During the quarters ended November 30, 1998 and 1997, the Company incurred approximately $244,000 and $139,000 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. However, there can be no assurance that any such wells will be drilled and if drilled that any of these wells will be successful.
The Company currently has four active projects in the Southern San Joaquin Basin of California:
East Lost Hills - The Company has identified and has undertaken technical analysis of a deep, large untested structure in the footwall of the Lost Hills thrust. This prospect lies directly east of and structurally below the existing Lost Hills field, which has produced in excess of 350 MMBoe from shallow pay zones in a large thrusted anticlinal feature.
In early 1998, the Company entered into an exploration agreement with a number of established Canadian oil and gas companies to participate in the drilling of an initial exploratory well to fully evaluate the feature. PYR received cash consideration for a portion of its share of the acreage in this play and a carried 6.475% working interest through the tanks. PYR owns an additional 4.1% working interest for a total working interest of 10.575%.
The Bellevue Resources et al #1-17 East Lost Hills well, located in SE1/4. Sec 17, T26S, R21E, Kern County, California, commenced drilling on May 15, 1998. The well is 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. Currently, the well is under control. Surface containment facilities consisting of separators and storage tanks have been installed and are collecting and separating hydrocarbons and water from the well. Natural gas is being flared while liquid hydrocarbons and water are being collected in the burn pits and in above ground storage tanks for trucking to processing and disposal facilities. A snubbing unit is being deployed to attempt a surface control kill of this well. A relief well, the Bellevue #1R commenced drilling on December 18, 1998 and it is expected that this relief well will intersect the wellbore of the Bellevue #1 sometime in late January of 1999, at which time the Bellevue #1 will be plugged. Should the operator be successful in using the snubbing unit to plug the Bellevue #1, the Bellevue #1R is expected to be drilled directly into the Temblor Formation as a replacement well. Although the Company believes that its insurance coverage is adequate to cover expenses associated with the blowout, there is no assurance that all of the costs will be covered. The Company and the other working interest owners jointly control approximately 23,000 gross acres of leasehold over the prospect.
Southeast Maricopa - During 1998, the Company completed acquisition of approximately 52 square miles of 3-D seismic data over its Southeast Maricopa exploration project. Western Geophysical Company acted as the Company's seismic contractor for the data acquisition. The processed data was delivered to the Company in late October, 1998 and the Company is currently in the process of interpreting the data in order to identify drillable prospects. It is anticipated that the interpretation will be complete in February of 1999. At that time, the Company intends to take this project to potential industry partners for participation. The Company intends to sell an appropriate portion of its interest in this project in order to receive a cash consideration and/or a carried interest in the drilling of one or more exploration wells. The Company intends to drill an exploration well on this prospect during the second quarter of calendar 1999. No drilling commitments have been made or received.
San Emidio - In November 1998, as part of its $2,500,000 private placement, the Company exchanged 266,666 shares of its common stock for 39 square miles of 3-D seismic data and oil and gas leases covering approximately 5,400 acres adjacent to the Company's Southeast Maricopa exploration project. The Company intends to incorporate this 3-D seismic data with the newly acquired data at its Southeast Maricopa acreage in order to further understand the complex stratigraphic geometries and trapping mechanisms. After interpretation and evaluation, there have been two prospective areas identified within the acreage position. The Company may present this project to potential industry partners in conjunction with its Southeast Maricopa project or may create an independent project for presentation. The Company's approach will be to obtain industry participation in order to receive a carried interest in the drilling of one or more exploration wells. The Company expects to drill an exploration well here in the second quarter of calendar year 1999. No drilling commitments have been made or received.
School Road - On June 1, 1998, the Company executed a participation agreement with Houston based Seneca Resources for the Company's School Road acreage. The drill to earn agreement provided PYR with a prospect fee and a carried through-the-tanks working interest in an initial exploration well. PYR would ultimately retain a 40% working interest in the School Road acreage. Drilling operations on the Federal #67X-30 located in SE1/4, SEC 30, T32S, R25E were commenced on July 28, 1998. The well was drilled to a total depth of 12,508 feet and although hydrocarbons were encountered, detailed log analysis of the well indicated that the reservoir was tight and incapable of sustaining commercial production. The well was plugged and abandoned on September 18, 1998. PYR continues to evaluate the results of the well and is incorporating the new well control into the seismic model in order to determine any potential future exploration opportunities at its School Road acreage.
The Company has other projects identified in the Denver Basin of Colorado and Nebraska, the Williston Basin of North Dakota and in the Big Horn Basin of Wyoming and Montana. In addition, the Company continues to identify and evaluate acquisition opportunities for exploration and exploitation opportunities.
At November 30, 1998, the Company had a negative working capital amount of ($1,422,000). During the quarter ended November 30, 1998, the Company completed a private placement which provided a total of $2,500,000 to the Company. The private placement securities issued are 10% convertible notes that will automatically convert to 10% convertible preferred stock at the time, if any, that PYR has obtained stockholder approval for, and issued, the convertible preferred shares. The preferred stock is ultimately convertible into common stock at a conversion price of $.60 per common share. The Company incurred costs of approximately $75,000 in connection with this issuance of the notes. To date, the Company has funded its oil and gas exploration activities principally through cash provided by the sale of its securities.
The Company had no outstanding long-term debt at November 30, 1998 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. The Company is currently in the process of interpreting and evaluating 3-D seismic data on two of its California exploration projects and is in the process of drilling and evaluating an exploration well at East Lost Hills. Depending upon the extent of industry participation in the two seismic generated exploration projects and the ultimate results at East Lost Hills, the Company may require as much as $4,800,000 for capital expenditures during the next 12 months. The Company intends to limit capital expenditures by forming industry alliances and exchanging an appropriate portion of its interest for cash and/or a carried interest in its exploration projects. Although currently there are no commitments for additional funding, the Company may need to raise additional funds to cover capital expenditures. In addition, the exploratory well at East Lost Hills experienced a blowout on November 23, 1998. Although the Company currently believes that costs related to the blowout and the release of potential pollutants into the atmosphere are covered by insurance, there is no assurance that all of the costs will be covered.
Results of Operations
The quarter ended November 30, 1998 ("1998") compared with the quarter ended November 30, 1997 ("1997").
Operations during the quarter ended November 30, 1998 resulted in a net loss of ($169,468) compared to a net loss of ($165,511) for the quarter ended November 30, 1997.
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 November 30, 1998 or 1997. The Company has not owned any proved reserves and had no oil or gas production. The Company recorded $6,386 and $3,333 in depreciation expense associated with capitalized office furniture and equipment during the quarters ended November 30, 1998 and 1997, respectively.
General and Administrative Expense. The Company incurred $137,775 and $187,917 in general and administrative expenses during the quarters ended November 30, 1998 and 1997, respectively. The decrease results from lower amounts incurred for legal fees, accounting fees, employee salaries and promotional expenses.
Interest Expense. The Company recorded $29,832 in interest expense for the quarter ended November 30, 1998 associated with the Company's convertible debentures.
Consulting Fee Revenue. The Company generated $10,000 from consulting fees during the quarter ended November 30, 1997. 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 currently is reviewing 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 June 30, 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.
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