Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the year ended December 31, 2001
Commission File No. 0-9092
CHENIERE ENERGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4352386
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Clay Street, Suite 3400 77002-4102
Houston, Texas (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 659-1361
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $ 0.003 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant was approximately $14,244,127 as of March 29,
2002 (based upon the March 29, 2002 closing market price of such common stock as
reported on The American Stock Exchange). 13,297,393 shares of the registrant's
Common Stock were outstanding as of March 29, 2002.
Documents incorporated by reference: Proxy Statement for the registrant's
Annual Meeting of Stockholders (to be filed within 120 days of the close of the
registrant's fiscal year) is incorporated by reference into Part III.
1
CHENIERE ENERGY, INC.
Index to Form 10-K
PART I......................................................................................................3
Items 1 and 2. Business and Properties......................................................................3
Item 3. Legal Proceedings..................................................................................22
Item 4. Submission of Matters to a Vote of Security Holders................................................22
PART II....................................................................................................23
Item 5. Market Price of Dividends on the Registrant's Common Equity and Related Stockholder Matters........23
Item 6. Selected Financial Data............................................................................23
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..............24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................33
Item 8. Financial Statements and Supplementary Data........................................................34
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...............62
PART III...................................................................................................62
Items 10-13. (Incorporated by reference to Proxy Statement)................................................62
PART IV....................................................................................................62
SIGNATURES.................................................................................................66
Gryphon Exploration Company Audited Financial Statements...................................................67
2
PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
General
Cheniere Energy, Inc., a Delaware corporation, is a Houston-based
company engaged in oil and gas exploration, development and exploitation and in
the development of a liquefied natural gas (LNG) receiving terminal business.
The terms Cheniere and the Company refer to Cheniere Energy, Inc. and its
subsidiaries. The Company has historically focused on evaluating and generating
drilling prospects using a regional and integrated approach with a large seismic
database as a platform. The Company is currently focusing, and expects to
continue to focus, its attention on the development of its LNG receiving
terminal business. Cheniere's management expects that the Company's active
interpretation of 3D seismic data and generation of prospects will continue,
though its participation in the drilling of wells within the coming year or two
will be accomplished through farmout arrangements and back-in interests, whereby
the capital costs are borne by industry partners.
Cheniere has been publicly traded since July 3, 1996 under the name
Cheniere Energy, Inc. The Company's principal executive offices are located at
333 Clay Street, Suite 3400, Houston, Texas 77002, and its telephone number is
(713) 659-1361. Cheniere's internet website is located at www.cheniere.com.
On October 16, 2000 the Company's stockholders approved a one-for-four
reverse stock split. The reverse stock split became effective on October 18,
2000 and reduced Cheniere's issued and outstanding shares from 43,989,572 shares
to 10,997,393 shares. All historical share and per share data appearing in this
document have been restated to reflect the reverse stock split.
As used in this Report, Mcf means thousand cubic feet, Mmcf means
million cubic feet, Bcf means billion cubic feet, Bbl means barrel or 42 U.S.
gallons liquid volume, Mbbl means thousand barrels, Mcfe means thousand cubic
feet of natural gas equivalent using the ratio of six Mcf of natural gas to one
Bbl of crude oil, condensate and natural gas liquids, Mmcfe means million cubic
feet of natural gas equivalent, Bcfe means billion cubic feet of natural gas
equivalent, and Mmbtu means million British thermal units. This Report includes
various other capitalized terms that are defined when first used.
General Development of Business
Cheniere Energy Operating Co., Inc. (Cheniere Operating) was
incorporated in Delaware in February 1996 for the purpose of engaging in the oil
and gas exploration business, initially on the Louisiana Gulf Coast. On July 3,
1996, Cheniere Operating underwent a reorganization whereby Bexy Communications,
Inc., a publicly held Delaware corporation (Bexy), received 100% of the
outstanding shares of Cheniere Operating, and the former stockholders of
Cheniere Operating received approximately 93% of the issued and outstanding Bexy
shares. As a result of the share exchange, a change in the control of the
Company occurred. The transaction was accounted for as a recapitalization of
Cheniere Operating. Bexy spun off its existing assets and liabilities to its
original stockholders and changed its name to Cheniere Energy, Inc. Cheniere
Operating became a wholly owned subsidiary of the Company.
Cameron Project. In 1996, Cheniere entered into an exploration
agreement with an industry partner to acquire and process proprietary seismic
data along the transition zone (the area approximately 3-5 miles on either side
of the Gulf of Mexico shore line) in Cameron Parish, Louisiana, covering a
228-square-mile area (the Cameron Project). The 228-square-mile survey was
acquired jointly by Cheniere and its industry partner, and initial processing
was completed in 1997. Interpretation of the data yielded drilling prospects
located onshore and in the state and federal waters of offshore Louisiana.
Leasing activity occurred over identified prospects throughout these areas, and
five prospects were drilled during 1999. Leasing over additional prospects began
in 2000 and continues. In September 2001, Cheniere acquired for $500,000 all
rights to the Cameron Project from the industry partner with whom it had jointly
acquired the data in 1996 and 1997. Cheniere subsequently sold the seismic data
to a seismic marketing company for $2,500,000 and a 50% share in licensing
proceeds generated by the marketing company. Cheniere retains a license to all
of the seismic data for use in its exploration program. See Exploration
Programs.
Offshore Louisiana Area. In an effort to provide continued access to
high quality drilling prospects, the Company expanded beyond the Cameron Project
and into the shallow waters of the Gulf of Mexico. In 1999,
3
Cheniere licensed 8,800 square miles of seismic data from Fairfield Industries
(the Offshore Louisiana Area). The Company also made a commitment to fund the
reprocessing of the entire 8,800-square-mile seismic database.
On September 15, 2000 Cheniere entered into an agreement (the Gryphon
Transaction) with Warburg, Pincus Equity Partners, L.P. (Warburg), a global
private equity fund based in New York, to fund exploration and development in
the Offshore Louisiana Area through a newly formed private corporation, Gryphon
Exploration Company (Gryphon). The Company contributed to Gryphon: (i) the
Company's license from Fairfield Industries to seismic data covering the
Offshore Louisiana Area; (ii) the Company's interest in its Joint Exploration
Agreement with Samson Offshore Company (Samson), (iii) certain offshore leases,
including its Shark prospect on West Cameron Block 49, and (iv) certain other
assets and liabilities, all in exchange for 100% of the common stock of the
subsidiary and cash. Warburg invested $25,000,000 and received preferred stock,
with an 8% accruing dividend, convertible into 63.2% of Gryphon's common stock.
Cheniere and Warburg also have an option, under certain circumstances, to
contribute to Gryphon their respective shares of an additional $75,000,000
investment. The Gryphon Transaction was consummated on October 11, 2000. See
Investment in Gryphon Exploration Company.
Offshore Texas Project Area. Between June 2000 and October 2000,
Cheniere acquired licenses to approximately 6,800 square miles of seismic data
primarily in the shallow waters offshore Texas and also in the West Cameron area
in the Gulf of Mexico (the Offshore Texas Project Area) in separate transactions
with Seitel Data Ltd., a division of Seitel Inc., and JEBCO Seismic, L.P.
Cheniere has committed to reprocess all of the data from the Offshore Texas
Project Area at a cost of approximately $8,500,000, payable in installments
beginning in October 2000 and continuing through the final delivery of
reprocessed data, which is expected to occur in 2002.
In June 2001, Cheniere sold to Gryphon for $3,500,000 one of its two
licenses to the Seitel 3D seismic data. Gryphon paid $853,197 in cash to
Cheniere and agreed to pay $2,646,803 of Cheniere's obligations related to the
reprocessing of the data. Cheniere remained responsible for payment of the final
$1,061,692 in reprocessing charges upon final delivery of all reprocessed data,
which is expected to be completed in 2002. (See Note 16 in Notes to Consolidated
Financial Statements for complete discharge of this obligation in March 2002.)
Cheniere retains one license to the seismic data.
In July 2001, Cheniere sold to Gryphon one of its two licenses to
certain 3D seismic data covering an additional 3,000 square miles. Gryphon
agreed to pay Cheniere's accounts payable of $1.3 million and the remaining
commitment of $2.9 million related to the reprocessing of the data. In
connection with the transaction, Cheniere also transferred to Gryphon 6,740
shares of Gryphon common stock, valued by the parties at approximately $418,000
or $62 per share, based on the estimated fair market value of the Gryphon common
stock, which considered the fair value of such stock at the formation of Gryphon
and any significant changes in Gryphon's operations or market conditions since
that date. The proceeds at closing of $1.3 million were allocated as a reduction
to the carrying amount of Cheniere's investment in Gryphon ($418,000) and
unproved oil and gas properties ($882,000). Cheniere retains one license to the
seismic data.
Cheniere's existing data set covering the Cameron Project and the
reprocessed data set covering the Offshore Texas Project Area, as it is
delivered, provide the Company the framework with which to identify potential
drilling prospects which may then be acquired through leasing at the area-wide
federal and state lease sales, through farm-ins (agreements whereby a third
party owner of lease interests grants to the Company the right to earn an
assignment of an interest in the lease, typically by drilling one or more
wells), and through participation in industry prospects. Cheniere plans to
continue to identify potential drilling prospects and may participate in any
drilling activities through farm-ins or by selling an interest to an industry
partner.
As a part of its plans to add exploration staff, in December 2000,
Cheniere entered into a consulting agreement with Aurora Exploration, LLC
(Aurora) to assist Cheniere in the interpretation of the Company's seismic data
sets and in the Company's prospect generation activities. The initial term of
the agreement was through March 2001, but it was extended through September
2001. Aurora, based in Lafayette, LA, focused its efforts on the Mustang Island,
Matagorda and West Cameron areas of the Gulf of Mexico shelf, using a portion of
Cheniere's licensed seismic data from the Offshore Texas Project Area.
LNG Receiving Terminal Development. In late 2000, Cheniere undertook a
feasibility study to assess the long-term natural gas markets in the U.S. and,
in particular, the potential role of LNG in meeting a portion of the gas supply
deficit expected to develop later in this decade. Based on that analysis,
Cheniere's management concluded that LNG would become an economically viable
source of natural gas supply in the U.S.
4
In 2001, Cheniere assembled an experienced LNG project development
team and began a study to determine viable locations for LNG receiving terminals
in the U.S. The Company then acquired options to enter into long-term leases for
two terminal sites and an option to purchase one terminal site, all along the
Texas Gulf Coast. The options may be renewed through the payment of annual or
semi-annual rentals. Cheniere has undertaken preliminary engineering due
diligence work on its initial terminal site in Freeport, Texas, with the
objective of filing by mid-2002 an application with the Federal Energy
Regulatory Commission (FERC) to permit the construction of an LNG receiving
terminal.
Business Strategy
It is the Company's belief that the long-term outlook for natural gas
prices in the U.S. is one that will sustain prices at or above $3.00 per Mcf.
The Company believes that such an environment will favor not only domestic
exploration and production, but also LNG imports into the U.S. The Company's
objective is to develop its LNG receiving terminal business and to expand the
net value of its assets by building an oil and gas reserve base in a
cost-efficient manner, through its investment in Gryphon and through
exploitation of its seismic database to facilitate identifying drilling
prospects. Cheniere's exploration program combines the use of regional seismic
data in shallow water areas of the Gulf of Mexico, advanced analytical
technologies, a methodology that integrates geoscience and engineering
disciplines, and a core of experienced staff.
LNG Receiving Terminals
Cheniere has assembled a team of professionals with extensive
experience in the LNG industry. The Company has researched the LNG opportunity,
developed a plan to exploit the opportunity and initiated the process of
identifying and securing sites for LNG receiving terminals as well as
undertaking the necessary regulatory and permitting work to advance the project.
A substantial portion of the time and attention of Cheniere's employees is
currently focused on developing an LNG terminal.
Seismic Data
Cheniere has acquired two significant seismic database assets: (i) a
license to a 228-square-mile seismic program covering the transition zone in
Cameron Parish (the Cameron Project described above), and (ii) a
6,800-square-mile seismic database comprising several seismic surveys in the
shallow waters offshore Texas (the Offshore Texas Project Area described above).
The offshore Texas database has been available previously to the industry and
was processed using a technique called dip move out (DMO). Cheniere has acquired
the DMO data and is underwriting the reprocessing of the data utilizing another
technology known as prestack time migration (PSTM). Both DMO and PSTM are
processing techniques which improve seismic data quality to more accurately
image subsurface features. Of the two techniques, PSTM is more advanced and
technically accurate. The regional PSTM data is the technology tool which
management believes gives Cheniere a competitive advantage.
Analysis and Methodology
Cheniere has developed a prospect generation infrastructure capable of
detailed analyses of large volumes of seismic, geological, and engineering data.
Cheniere employs a rigorous methodology which includes: 1) the detailed analyses
of existing fields to identify geological and geophysical attributes for use as
analogs, 2) regional trend mapping to extend prolific plays into under-explored
areas, 3) the use of workstation interpretation techniques to rapidly identify
prospects with attributes similar to those identified in the analog fields, 4)
the integration of seismic interpretation, well control, structure,
stratigraphy, timing, sourcing factors, and production data to quantify prospect
potential, and 5) the integration of the above sciences with experience and
conservative economic evaluation to focus the exploration program on highly
commercial projects. By conducting a thorough analysis of the data and strict
adherence to the methodology, Cheniere believes it can reduce the risk of dry
holes and achieve significant growth, while maintaining a competitive cost of
finding and development.
Experience
Cheniere has built a technical and management team that is experienced
in the Gulf of Mexico and in various technical specialties required for its
exploration program. The technical staff averages over 20 years of experience
exploring for oil and gas in the Gulf Coast, and each individual has a proven
track record of discoveries. The Company believes this experienced team allows
it to be very productive in the generation and acquisition of
5
prospects.
LNG Receiving Terminal Business
LNG is natural gas that has been reduced to a fraction of its volume
through a sophisticated refrigeration process. The liquefication of natural gas
(into LNG) allows it to be transported long distances comparatively safely and
economically. Outside the U.S., utilization of LNG has grown dramatically, with
12 countries capable of producing 5 Tcf (gas equivalent) of LNG per year and 13
countries capable of importing LNG. In the U.S., due mainly to an abundant
supply of natural gas, LNG has not historically been a major energy source.
However, with expected increases in natural gas demand, the recent experience of
U.S. natural gas producers' limited ability to increase supply and the
increasing cost of domestic exploration and production, the Company believes LNG
will become a competitive supply alternative to domestic natural gas and other
import alternatives. Assuming current construction costs of LNG-related
facilities and tankers, LNG can be economically produced and delivered as
natural gas into U.S. pipelines at a cost of $2.50 - $3.50/MMBtu.
Cheniere has been developing its LNG business since late 2000 and has
made substantial progress. After completing a U.S. gas market study and
preliminary terminal location study in 2000, Cheniere decided to focus on
developing terminals in Texas. Texas offers several important advantages,
including (i) it is the largest natural gas-consuming state in the U.S., (ii)
the government and general population are familiar with and supportive of the
energy industry, (iii) with declining production, Texas has under-utilized
intrastate and interstate pipelines with access to Midwest and Northeast U.S.
markets, and (iv) Texas has an extended coast providing a number of ports with
adequate facilities for such a terminal.
Cheniere secured lease options on sites in Freeport, Texas and
Brownsville, Texas and has a purchase option on a site in Sabine Pass, Texas.
The options may be renewed through the payment of annual or semi-annual option
payments.
Initially, Cheniere plans to permit the Freeport site with average
annual capacity of 365 Bcf of gas per year. Cheniere has commenced development
of its Freeport, Texas site, including (i) completing a feasibility study, (ii)
initiating the preparation of forms and collection of information for the
permitting and Federal Energy Regulatory Commission related filings, (iii)
meeting with local agencies and planners and (iv) conducting preliminary
discussions concerning the financing of the project. In order to exploit the
opportunity to develop an LNG receiving terminal, Cheniere will need to obtain
additional equity or debt financing. Cheniere has executed non-binding Memoranda
of Understanding (MOUs) for the sale of 450 MMcf per day of natural gas from the
proposed terminal and is pursuing discussions with other consumers of natural
gas to arrange for additional gas sales through the terminal. Cheniere has also
held discussions with several LNG suppliers. Assuming prompt regulatory
approvals and adequate financing, and subject to all of the risks inherent in a
new venture of this type, construction of the first terminal could commence as
early as 2003 with LNG being imported at the beginning of 2006. However, there
can be no assurance whether or when such regulatory approvals and financing may
be obtained. See Forward Looking Statements and Risk Factors.
Exploration Programs
The Company's current oil and gas exploration and development
activities are focused on two areas: (i) the Cameron Project, which covers an
area extending roughly three to five miles on either side of the westernmost 28
miles of Louisiana coastline; and (ii) the Offshore Texas Project Area, which
covers approximately 6,800 square miles in the shallow waters offshore Texas.
Substantial infrastructure along the Gulf Coast and in the shallow Gulf of
Mexico should permit Cheniere to lower its development costs compared to those
in other geographic regions and facilitate timely development of oil and gas
discoveries. The Company's officers and technical staff have extensive
experience both onshore and offshore in the Gulf Coast and believe the Company
is well-positioned to evaluate, explore and develop properties in these areas.
Cameron Project Seismic Exploration Program
Under the terms of an exploration agreement with an industry partner
covering the Cameron Project, Cheniere paid for certain seismic costs and
acquired ownership of seismic data covering the Cameron Project, among other
interests that have subsequently expired or terminated. After the termination of
the exploration agreement, Cheniere sold the seismic data to a seismic marketing
company for $2,500,000 and a 50% share in
6
licensing proceeds generated by the marketing company. Cheniere also retained a
license to all of the seismic data for use in its exploration program.
Seismic Exploration Program in Offshore Texas Project Area
In June 2000, Cheniere acquired a license to approximately 1,900
square miles of seismic data from Seitel Data Ltd., a division of Seitel Inc. In
October 2000, Cheniere exercised its option to expand the agreement with Seitel
Data Ltd. to cover an additional 1,900 square miles of seismic data. Together,
the licenses acquired from Seitel represent coverage of over 433 Outer
Continental Shelf blocks in the shallow waters offshore Texas and Louisiana in
the Gulf of Mexico.
In October 2000, Cheniere negotiated a Master Data Users Agreement
with the Houston-based firm, JEBCO Seismic L.P., to acquire 3,000 square miles
(333 blocks) of seismic data in both state and federal waters offshore Texas,
bringing Cheniere's total data set in the shallow waters offshore Texas and
Louisiana to approximately 6,800 square miles of seismic coverage. Cheniere has
committed to reprocess all of the data from the Offshore Texas Project Area at a
cost of approximately $8,500,000, payable in installments beginning in October
2000 and continuing through the final delivery of reprocessed data, which is
expected to occur in 2002. As of December 31, 2001, Cheniere had received
reprocessed data for the 3,000 square miles of seismic data in the Jebco data
set, representing 43% of the total reprocessing to be done in the Offshore Texas
Project Area.
Cheniere's exploration team generated ten prospects during 2001 and
sold interests in eight of the prospects to industry partners, retaining various
overriding royalty interests and working interests. Cheniere expects that the
prospects will be drilled by its industry partners during 2002, but Cheniere
does not serve as operator of the wells and does not control the timing of such
drilling activities.
Drilling Activities
In 1999, the Company drilled and completed two discovery wells located
in adjacent fault blocks on West Cameron Block 49 in Louisiana state waters: the
Redfish well and the Stingray well. The wells were tied into a common platform
and began production during September 1999. Both wells are located in shallow
waters of approximately 25 feet and were drilled into the Lower Miocene
formation, from 9,000 to 11,000 feet. Cheniere owns a 30% working interest in
the Redfish well and a 45% working interest in the Stingray well.
During 2000, the Company commenced drilling an additional exploration
well on West Cameron Block 49, known as the Shark well. In connection with the
Gryphon Transaction, Cheniere assigned its interest in the Shark well, which was
then being drilled, to Gryphon. Gryphon subsequently completed the well in
February 2001. Production of natural gas from the Shark well is handled through
a common platform which, since September 1999, has also handled production from
the Company's Stingray and Redfish wells.
During 2001, Cheniere did not participate in the drilling of any
wells.
Investment in Gryphon Exploration Company
Cheniere owns 100% of the outstanding common stock of Gryphon and
exercises significant influence over Gryphon's financial and operating policies
through its participation on Gryphon's board of directors; however, Cheniere
does not participate in the day-to-day management of Gryphon, does not exercise
control over Gryphon and cannot effect a change in the management of Gryphon.
Cheniere's equity share of Gryphon's losses for 2001 was $2,974,191, calculated
by applying Cheniere's 100% common stock ownership interest to Gryphon's net
income of $84,000 and reducing such result for Gryphon's preferred dividend
arrearages of $3,058,191 for the year. As of December 31, 2001, after giving
effect to the conversion of all shares of Gryphon's convertible preferred stock
to shares of Gryphon common stock, Cheniere had a 20.2% interest in Gryphon.
Subsequent to the period covered by this report, in March 2002, Cheniere sold
51,400 shares of its Gryphon common stock to Gryphon, subject to certain
repurchase options, thereby further reducing its interest to 13.7% on an
as-converted basis. See Liquidity and Capital Resources - Exploration Funding
under Item 7 of this report.
In the Gryphon Transaction, the Company contributed the license to
8,800 square miles of seismic data that it had originally licensed from
Fairfield Industries. The data covered more than 1,100 outer continental shelf
blocks in the shallow waters of the Gulf of Mexico (the Offshore Louisiana
Area). Cheniere also assigned its rights in its
7
Joint Exploration Agreement with Samson, which ran from March 2000 through
August 2001.
From its inception in October 2000 through December 2001, Gryphon
drilled nine exploratory wells, yielding four discoveries and five dry holes. As
of March 22, 2002, Gryphon had three wells on production, one well awaiting
completion and production facilities and one well drilled in 2002 for which
completion activities were underway. Depending on rig availability, Gryphon
anticipates drilling up to twelve exploration wells during 2002. Gryphon is also
engaged in acquiring drilling prospects through leasing at area-wide federal and
state lease sales and through farm-ins of leased acreage.
Production and Sales
The following table presents certain information with respect to oil
and natural gas production attributable to the Company, average sales prices
received and average production costs during 2001, 2000 and 1999. The Company
commenced oil and gas production on September 9, 1999.
Year Ended December 31,
--------------------------------
2001 2000 1999
-------- ---------- --------
Production:
Oil (bbls) 2,608 3,703 2,975
Gas (mcf) 542,774 1,459,897 633,432
Gas equivalents (mcfe) 558,422 1,482,117 651,282
Average sales prices:
Oil (per barrel) $ 27.43 $ 29.78 $ 23.18
Gas (per mcf) $ 4.48 $ 3.79 $ 2.59
Selected data per mcfe:
Average sales price $ 4.25 $ 3.59 $ 2.48
Production costs $ 0.75 $ 0.26 $ 0.20
Oil and gas depreciation, depletion and
amortization excluding impairments $ 1.84 $ 2.04 $ 1.84
For the year ended December 31, 2001 Gryphon had production of 824,458 mcfe.
Acreage and Wells
The following table sets forth certain information with respect to the
Company's developed and undeveloped leased acreage as of December 31, 2001.
Developed Acres Undeveloped Acres (1)
---------------- ---------------------
Gross Net Gross Net
----- --- ------ -----
Louisiana 1,333 499 10,157 9,563
Texas -- -- 1,440 209
----- --- ------ -----
Total 1,333 499 11,597 9,772
===== === ====== =====
(1) The Company has no leases which expire in 2002.
At December 31, 2001, the Company had working interests in 2 gross
(0.75 net) producing gas wells.
At December 31, 2001, Gryphon held interests in leases covering 7,188
gross (3,407 net) developed acres in 103,979 gross (52,901 net) undeveloped
acres. Gryphon has interests in 3 gross (0.95 net) producing wells at December
31, 2001.
Drilling Activities
All of Cheniere's drilling activities are conducted through
arrangements with independent contractors. Cheniere owns no drilling equipment.
During the years ended December 31, 2001 and 2000, the Company did not drill any
wells. Certain information with regards to the Company's drilling activities for
the year ended
8
December 31, 1999 is set forth below:
Year Ended
December 31, 1999
------------------
Net
Working
Gross Interest
----- --------
Development wells -- --
--- ---
Exploratory wells:
Oil -- --
Gas 2.0 0.8
Nonproductive 4.0 2.5
--- ---
Total 6.0 3.3
--- ---
Total wells 6.0 3.3
=== ===
All of the Company's wells are located in the United States. In 1999,
the Company completed two wells. In 2000, the Company commenced drilling a well
on its Shark Prospect, but prior to completion the Company assigned its interest
in the Shark well to Gryphon, its unconsolidated affiliate in connection with
the Gryphon Transaction in October 2000. In 2001, the Company did not
participate in the drilling of any wells.
During 2001, Gryphon drilled 9 gross (3.1 net) wells of which 4 gross
(1.6 net) wells were successful.
Oil and Gas Reserves
All information herein regarding estimates of Cheniere's proved
reserves, related future net revenues and PV-10 is taken from reports generated
by Ryder Scott Company, the Company's independent petroleum engineers, in
accordance with the rules and regulations of the SEC. The independent engineers'
estimates were based upon a review of production histories and other geologic,
economic, ownership and engineering data provided by the Company.
December 31, 2001
Proved Reserves
-----------------------------------------------
Oil Gas
(Bbls) (Mcf) Mcfe PV-10 (1)
------- ---------- ---------- -----------
Cheniere Reserves
West Cameron Block 49 15,088 3,245,000 3,335,528 $ 2,922,901
------- ---------- ---------- -----------
Proved Reserves 15,088 3,245,000 3,335,528 $ 2,922,901
======= ========== ========== ===========
Proved Developed Reserves 15,088 3,245,000 3,335,528 $ 2,922,901
======= ========== ========== ===========
Equity Interest in Reserves of Unconsolidated Affiliate (2)
Proved Reserves 210,151 17,468,000 18,728,906 $32,568,000
======= ========== ========== ===========
Proved Developed Reserves 192,569 13,022,000 14,177,414 $27,033,000
======= ========== ========== ===========
(1) The PV-10 amount (present value of estimated pre-tax future net revenues
discounted at 10%) is calculated using year-end prices of $19.00 per barrel
of oil and $2.61 per Mcf of gas.
(2) Includes Cheniere's proportional share, based on its 100% common stock
ownership, of the proved reserves, proved developed reserves and PV-10
value of Gryphon. Such proportional share of Gryphon reserves and PV-10
value is based upon Cheniere's ownership of 100% of Gryphon's common stock
and will be reduced to 20.2% upon the conversion of Gryphon's preferred
shares outstanding at December 31, 2001. Upon such conversion Cheniere's
equity interest in Gryphon's proved reserves and PV-10 value would be
reduced to 3,783,239 Mcfe and $6,578,736, respectively. See General
Development of Business.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting
9
future rates of production and future amounts and timing of development
expenditures, including many factors beyond the control of the Company. Reserve
engineering is a subjective process of estimating underground accumulations of
crude oil and natural gas that cannot be measured in an exact manner, and the
accuracy of any reserve estimate is a function of the quality of available data
and of engineering and geological interpretation and judgment. Estimates of
proved undeveloped reserves are inherently less certain than estimates of proved
developed reserves. The quantities of oil and gas that are ultimately recovered,
production and operating costs, the amount and timing of future development
expenditures, geologic success and future oil and gas sales prices may all
differ from those assumed in these estimates. In addition, the Company's
reserves may be subject to downward or upward revision based upon production
history, purchases or sales of properties, results of future development,
prevailing oil and gas prices and other factors. Therefore, the present value
shown above should not be construed as the current market value of the estimated
oil and gas reserves attributable to the Company's properties.
In accordance with SEC guidelines, the independent engineers'
estimates of future net revenues from the Company's proved reserves and the
present value thereof are made using oil and gas sales prices in effect as of
the dates of such estimates and are held constant throughout the life of the
properties except where such guidelines permit alternate treatment, including,
in the case of gas contracts, the use of fixed and determinable contractual
price escalations. The Company may receive amounts different than the
independent engineers' estimates for a number of reasons, including changes in
prices. See Supplemental Information to Consolidated Financial Statements.
Estimates of the Company's proved oil and gas reserves were not filed with or
included in reports to any other federal authority or agency other than the SEC
during the fiscal year ended December 31, 2001.
Competition and Markets
Competition in the industry is intense, particularly with respect to
the acquisition of producing properties and proved undeveloped acreage. The
Company competes with the major oil companies and other independent producers of
varying sizes, all of which are engaged in the exploration, development and
acquisition of producing and non-producing properties. Many of the Company's
competitors have financial resources and exploration and development budgets
that are substantially greater than those of the Company, which may adversely
affect the Company's ability to compete.
Although the LNG receiving business is in its developmental stages,
several companies are exploring the possibility of engaging or developing an LNG
business. Many of these companies have financial resources and exploration and
development budgets that are substantially greater than those of the Company,
which may adversely affect the Company's ability to compete.
The Company anticipates selling a portion of its interest in certain
prospects as a means of funding its participation in the development of these
properties. The Company anticipates that competition will arise from other
companies seeking drilling funds from potential working interest partners. There
can be no assurance that the Company will be successful in securing funds in
this manner.
The availability of a ready market for and the price of any
hydrocarbons produced by the Company will depend on many factors beyond the
control of the Company, including the extent of domestic production and imports
of foreign oil, the marketing of competitive fuels, the proximity and capacity
of natural gas pipelines, the availability of transportation and other market
facilities, the demand for hydrocarbons, the political conditions in
international oil-producing regions, the effect of federal and state regulation
of allowable rates of production, taxation, the conduct of drilling operations,
and federal regulation of natural gas. In the past, as a result of excess
deliverability of natural gas, many pipeline companies curtailed the amount of
natural gas taken from producing wells, shut in some producing wells,
significantly reduced gas taken under existing contracts, refused to make
payments under applicable take-or-pay provisions, and have not contracted for
gas available from some newly completed wells. The Company can give no assurance
that such conditions will not arise again.
In addition, the restructuring of the natural gas pipeline industry
has eliminated the gas purchasing activity of traditional interstate gas
transmission pipeline buyers. Producers of natural gas, therefore, have been
required to develop new markets among gas marketing companies, end-users of
natural gas, and local distribution companies. All of these factors, together
with economic factors in the marketing area, generally may affect the supply
and/or demand for oil and gas and thus the prices available for sales of oil and
gas.
In addition, in the event the Company completes the LNG receiving
facility, the profitability of its
10
operations and the price of its gas will be dependent on the availability of
liquefied natural gas, the volume and price of domestic production of natural
gas, the marketing of competitive fuels, the proximity and capacity of natural
gas pipelines, the availability of transportation and other market facilities,
the demand for hydrocarbons, the political conditions in international
oil-producing regions, taxation and the domestic demand for natural gas.
Government Regulation
The Company's oil and gas exploration, production and related
operations are, and its LNG receiving facility will be, subject to federal and
state statutes and extensive rules and regulations promulgated by federal and
state agencies. Failure to comply with such laws can result in substantial
penalties. The regulatory burden on the oil and gas industry increases the
Company's cost of doing business and affects its profitability. Because such
laws are frequently amended or reinterpreted, the Company is unable to predict
the future cost or impact of complying with them.
Cheniere's construction and operation of the proposed LNG receiving
terminal will be subject to extensive federal, state and local laws and
regulations, including laws and regulations relating to safety, as well as laws
and regulations governing environmental protection and pollution control. These
laws and regulations will require the acquisition of certain permits or other
authorizations before construction and operation of the terminal may occur. For
example, in order to site, construct and operate the proposed receiving
terminal, Cheniere will be required to apply for and receive authorization from
the FERC under Section 3 of the Natural Gas Act of 1938 (NGA). While Cheniere
believes that the likelihood is great that it will be able to obtain all permits
and approvals necessary for the construction and operation of the proposed
facilities, including NGA Section 3 authorization from FERC, Cheniere cannot
guarantee that it will be able to do so. Nor can Cheniere guarantee that the
authorizations and permits will not include unfavorable terms or conditions. The
permits and authorizations required for various operations and activities are,
in many instances, subject to revocation, modification and renewal by the
issuing authorities.
While these compliance activities increase the cost of planning,
installing and operating facilities, Cheniere does not expect environmental and
other regulatory compliance matters to have a material adverse effect on its
financial position or results of operations. However, because such laws and
regulations are frequently changed and may impose increasingly stricter
requirements, Cheniere is unable to predict the ultimate cost of complying with
such laws and regulations.
Production
In most, if not all, areas in which the Company conducts activities,
statutes concerning the production of oil and natural gas authorize
administrative agencies to adopt rules which, among other matters, (i) regulate
the operation of, and production from, both oil and gas wells, (ii) determine
the reasonable market demand for oil and gas, and (iii) establish allowable
rates of production. Such regulation may restrict the rate at which the
Company's wells may produce oil or gas, with the result that the amount or
timing of the Company's revenues could be adversely affected.
MMS Regulation
The Company may conduct certain activities on federal oil and gas
leases which the Minerals Management Service (MMS) administers. The MMS grants
leases through competitive bidding. These leases contain relatively standardized
terms and require compliance with detailed MMS regulations and orders pursuant
to The Outer Continental Shelf Lands Act (OCSLA) (which regulations and orders
are subject to change by the MMS). For offshore operations, lessees must obtain
MMS approval for exploration plans and development and production plans prior to
the commencement of such operations. In addition to permits which may be
required from other agencies (such as the Coast Guard, the Army Corps of
Engineers and the Environmental Protection Agency), lessees must obtain a permit
from the MMS prior to the commencement of drilling. The MMS has adopted
regulations requiring offshore production facilities located on the Outer
Continental Shelf (OCS) to meet stringent engineering and construction
specifications. The MMS also has regulations restricting the flaring or venting
of natural gas, and has amended such regulations to prohibit the flaring of
liquid hydrocarbons and oil without prior authorization except under certain
limited circumstances. Also, the MMS has promulgated other regulations governing
the plugging and abandonment of wells located offshore and the removal of all
production facilities. To cover the various obligations of lessees on the OCS,
the MMS generally requires that lessees post substantial bonds or other
acceptable assurances
11
that such obligations will be met. The cost of such bonds or other surety can be
substantial and there is no assurance that the Company will be able to obtain
such bonds or other surety in all cases.
In March 2000, the MMS amended its regulations governing the
calculation of royalties and the valuation of crude oil produced from federal
leases. This rule modifies the valuation procedures for both arm's length and
non-arm's length crude oil transactions to decrease reliance on oil posted
prices and assign a value to crude oil that better reflects its market value.
The Company cannot predict how it will be affected by this regulation.
In April 1997, after two years of study, the MMS withdrew proposed
changes to the way it values natural gas for royalty payments and requested
comment on two alternative options for natural gas valuation. The changes as
originally proposed would have established an alternative market-based method to
calculate royalties on certain natural gas sold to affiliates or pursuant to
non-arm's length sales contracts. Informal discussions among the MMS and
industry officials are continuing, although it is uncertain whether, and what,
changes may be proposed regarding gas royalty valuation.
Bonding and Financial Responsibility Requirements
The Company is required to obtain bonding, or otherwise demonstrate
financial responsibility at varying levels, by governmental agencies in
connection with obtaining state or federal leases or acting as an owner or
operator on such leases or of exploration and production related facilities.
These bonds may cover such obligations as plugging and abandonment of
unproductive wells, removal and closure of related exploration, production
facilities and pollution liabilities. The costs of such bonding and financial
responsibility requirements can be substantial, and there can be no assurance
that the Company will be able to obtain such bonds and/or otherwise demonstrate
financial responsibility in all cases.
Natural Gas Marketing and Transportation
The FERC regulates the transportation and sale for resale of natural
gas in interstate commerce pursuant to the NGA and the Natural Gas Policy Act of
1978 (the NGPA). In the past, the federal government has regulated the prices at
which natural gas could be sold. Deregulation of wellhead sales of natural gas
began with the enactment of the NGPA in 1978. In 1989, Congress enacted the
Natural Gas Wellhead Decontrol Act (the Decontrol Act) which removed all NGA and
NGPA price and non-price controls affecting wellhead sales of natural gas
effective January 1, 1993. While sales by producers of natural gas can currently
be made at uncontrolled market prices, Congress could reenact price controls in
the future.
Commencing in April 1992, the FERC issued its Order No. 636 and
related clarifying orders (Order No. 636), which, among other things,
restructured the interstate natural gas industry and required interstate
pipelines to provide transportation services separate, or unbundled, from the
pipelines' sales of natural gas. Order No. 636 and certain related proceedings
have been the subject of a number of judicial appeals and orders on remand by
the FERC. Order No. 636 has largely been upheld on appeal. The Company cannot
predict when these remaining appeals will be completed or their impact on the
Company. The FERC continues to address Order 636-related issues (including
capacity brokering, alternative and negotiated ratemaking and transportation
policy matters) in a number of pending proceedings. It is unclear what impact,
if any, increased competition within the natural gas industry under Order Nos.
636, et al., will have on the Company's activities. Although Order No. 636 could
provide the Company with additional market access and more fairly applied
transportation service rates, Order No. 636 could also subject the Company to
more restrictive pipeline imbalance tolerances and greater penalties for
violations of these tolerances.
The FERC has announced its intention to re-examine certain of its
transportation-related policies, including the appropriate manner in which
interstate pipelines release transportation capacity under Order No. 636, and
the use of market-based rates for interstate gas transmission. While any
resulting FERC action would affect the Company only indirectly, the FERC's
current rules and policy statements may have the effect of enhancing competition
in natural gas markets by, among other things, encouraging non-producer natural
gas marketers to engage in certain purchase and sale transactions. The Company
cannot predict what action the FERC will take on these matters, nor can it
accurately predict whether the FERC's actions will achieve the goal of
increasing competition in markets in which the Company's natural gas is sold.
However, the Company does not believe that it will be treated materially
differently than other natural gas producers and marketers with which it
competes.
12
OCSLA requires that all pipelines operating on or across the OCS
provide open-access, non-discriminatory service. Although the FERC has opted not
to impose the regulations of Order No. 509, in which the FERC implemented OCSLA,
on gatherers and other non-jurisdictional entities, the FERC has retained the
authority to exercise jurisdiction over those entities, if necessary, to permit
non-discriminatory access to service on OCS. In this regard, the FERC issued a
Statement of Policy (Policy Statement) regarding the application of its
jurisdiction under the NGA and OCSLA over natural gas facilities and service on
OCS. In the Policy Statement, the FERC concluded that facilities located in
water depths of 200 meters or more shall be presumed to have a primary purpose
of gathering up to the point of interconnection with the interstate pipeline
grid. The FERC has determined that gathering facilities are outside of its
jurisdiction, and thus it will no longer regulate the rates and services of such
OCS facilities under the NGA. While it is not possible to determine what the
actual impact of this new policy will be, it is possible that the Company could
experience an increase in transportation costs associated with its OCS natural
gas production and possibly reduced access to OCS transmission capacity.
The FERC has also issued numerous orders approving the sale and
abandonment of natural gas gathering facilities previously owned by interstate
pipelines and has acknowledged that if the FERC does not have jurisdiction over
services provided thereon, then such facilities and services may be subject to
regulation by state authorities in accordance with state law. A number of states
have either enacted new laws or are considering the inadequacy of existing laws
affecting gathering rates and/or services. In addition, the FERC's approval of
transfers of previously regulated gathering systems to independent or
pipeline-affiliated gathering companies that are not subject to FERC regulation
may affect both the costs and the nature of gathering services that will be
available to interested producers or shippers in the future. The effects, if
any, of state and federal gathering policies on the Company's operations are
uncertain.
Oil Sales and Transportation Rates
Sales of crude oil, condensate, and gas liquids by the Company are not
currently regulated under federal or state law and are made at market prices.
The FERC regulates the transportation of oil in interstate commerce pursuant to
the Interstate Commerce Act. However, the price a Company receives from the sale
of these products is affected by the cost of transporting the products to
market. Effective as of January 1, 1995, the FERC implemented regulations
establishing an indexing system for transportation rates for oil pipelines,
which would generally index such rates to inflation, subject to certain
conditions and limitations. Over time, these regulations could increase the cost
of transporting crude oil, liquids, and condensate by pipeline. The Company is
not able to predict with certainty what effect, if any, these regulations will
have on it; but other factors being equal, these regulations may tend to
increase transportation costs or reduce wellhead prices for such commodities.
Operating Hazards and Environmental Matters
The oil and gas business involves a variety of operating risks,
including the risk of fire, explosions, blow-outs, pipe failure, casing
collapse, abnormally pressured formations and environmental hazards such as oil
spills, natural gas leaks, ruptures and discharge of toxic gases, the occurrence
of any of which could result in substantial losses to the Company due to injury
or loss of life, severe damage to or destruction of property, natural resources
and equipment, pollution or other environmental damage, clean-up
responsibilities, regulatory investigation and penalties and suspension of
operations. Such hazards may hinder or delay drilling, development and on-line
production operations.
Extensive federal, state and local laws and regulations applicable to
oil and gas operations regulate the discharge of substances into the environment
or otherwise relate to the protection of the environment. These laws and
regulations may require the acquisition of a permit before drilling commences,
restrict or prohibit the types, quantities and concentration of substances that
can be released into the environment or wastes that can be disposed of in
connection with drilling and production activities, prohibit drilling activities
on certain lands lying within wetlands or other protected areas and impose
substantial liabilities for pollution or releases of hazardous substances
resulting from drilling and production operations. Failure to comply with these
laws and regulations may also result in civil and criminal fines and penalties.
Moreover, state and federal environmental laws and regulations may become more
stringent.
The Comprehensive Environmental Response, Compensation and Liability
Act (CERCLA), also known as the Superfund law, imposes liability, without regard
to fault or the original conduct, on certain classes of persons who are
considered to be responsible for the release of a hazardous substance into the
environment. These persons
13
include the owner or operator of the disposal site or sites where the release
occurred and companies that disposed or arranged for the disposal of the
hazardous substances. Under CERCLA, such persons may be subject to joint and
several liability for the costs of cleaning up the hazardous substances that
have been released into the environment, for damages to natural resources and
for the costs of certain health studies, and it is not uncommon for neighboring
landowners and other third parties to file claims for personal injury and
property damage allegedly caused by the release of hazardous substances.
The Company's operations may be subject to the Clean Air Act (CAA) and
comparable state and local requirements. Amendments to the CAA were adopted in
1990 and contain provisions that may result in the gradual imposition of certain
pollution control requirements with respect to air emissions from the operations
of the Company. The EPA and states have been developing regulations to implement
these requirements. The Company may be required to incur certain capital
expenditures in the next several years for air pollution control equipment in
connection with maintaining or obtaining permits and approvals addressing other
air emission-related issues. The Company does not believe, however, that its
operations will be materially adversely affected by any such requirements.
In addition, the U.S. Oil Pollution Act (OPA) requires owners and
operators of facilities that could be the source of an oil spill into waters of
the United States (a term defined to include rivers, creeks, wetlands and
coastal waters) to adopt and implement plans and procedures to prevent any spill
of oil into any waters of the United States. OPA also requires affected facility
owners and operators to demonstrate that they have at least $35 million in
financial resources to pay for the costs of cleaning up an oil spill and
compensating any parties damaged by an oil spill. Such financial assurances may
be increased to as much as $150 million if a formal assessment indicates such an
increase is warranted.
Operations of the Company are also subject to the federal Clean Water
Act (CWA) and analogous state laws. In accordance with the CWA, the state of
Louisiana has issued regulations prohibiting discharges of produced water in
state coastal waters, effective July 1, 1997. Producers may be required to incur
certain capital expenditures in the next several years in order to comply with
the prohibition against the discharge of produced waters into Louisiana coastal
waters or increase operating expenses in connection with offshore operations in
Louisiana coastal waters. Pursuant to other requirements of the CWA, the EPA has
adopted regulations concerning discharges of storm water runoff. This program
requires covered facilities to obtain individual permits, participate in a group
permit or seek coverage under an EPA general permit. The Company believes that
it will be able to obtain, or be included under, such storm water discharge
permits, where necessary.
In addition, the disposal of wastes containing naturally occurring
radioactive material, which are commonly generated during oil and gas
production, is regulated under state law. Typically, wastes containing naturally
occurring radioactive material can be managed on site or disposed of at
facilities licensed to receive such waste at costs that are not expected to be
material.
Operational Risks and Insurance
The Company anticipates that any wells established by it will be
drilled by proven industry contractors. Based on financial considerations, the
Company may choose to utilize turnkey drilling contracts that limit its
financial and legal exposure. Under a turnkey drilling contract, a negotiated
price is agreed upon and the money is placed in escrow. The drilling contractor
then assumes all of the risk and expense, including any cost overruns, of
drilling a well to contract depth and completing any agreed upon evaluation of
the wellbore. Upon performance of all these items, the escrowed money is
released to the contractor. Circumstances may arise where the Company is unable
to secure a turnkey contract on satisfactory terms. In this case, the Company
may decide to drill, or cause to be drilled, the applicable test well(s) on
either a footage or day-rate basis. Under a footage drilling contract, the
operator pays to the drilling contractor an agreed sum per foot drilled. Under a
day-rate drilling contract, the operator pays an agreed sum for each day of
drilling required to reach contract depth. All risk and expense, including cost
overruns, of drilling a well to total depth lies with the operator in both
footage and day-rate contracts. The drilling of such test wells will be subject
to the usual drilling hazards such as cratering, explosions, uncontrollable
flows of oil, gas or well fluids, fires, pollution and other environmental
risks. The Company's activities are also subject to perils specific to marine
operations, such as capsizing, collision and damage or loss from severe weather.
These hazards can cause personal injury and loss of life, severe damage to and
destruction of property and equipment, pollution or environmental damage and
suspension of operations. In accordance with customary industry practices, the
Company intends to maintain insurance against some, but not all, of such risks
and
14
some, but not all, of such losses. The occurrence of a significant event not
fully insured or indemnified against could materially and adversely affect the
Company's financial condition and operations. Moreover, no assurance can be
given that the Company will be able to maintain adequate insurance in the future
at rates considered reasonable by the Company.
Employees
The Company had 12 full-time employees as of March 22, 2002.
Forward-Looking Statements and Risk Factors
This annual report contains certain statements that may be deemed
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (Securities Act), and Section 21E of the United Stated
Securities Exchange Act of 1934, as amended (Exchange Act). Readers of this
annual report are cautioned that such forward-looking statements are not
guarantees of future performance and that actual results, developments and
business decisions may differ from those envisaged by such forward-looking
statements.
All statements, other than statements of historical facts, so included
in this annual report that address activities, events or developments that the
Company intends, expects, projects, believes or anticipates will or may occur in
the future, including, without limitation: statements regarding the Company's
business strategy, plans and objectives and statements expressing beliefs and
expectations regarding the ability of the Company to successfully raise the
additional capital necessary to meet its obligations, the ability of the Company
to secure the leases necessary to facilitate anticipated drilling activities and
the ability of the Company to attract additional working interest owners to
participate in the exploration and development of oil and gas reserves, are
forward-looking statements within the meaning of the Act. These forward-looking
statements are and will be based on management's then-current views and
assumptions regarding future events.
The following are some of the important factors that could affect the
Company's financial performance or could cause actual results to differ
materially from estimates contained in the Company's forward-looking statements.
The important factors are not exclusive.
The Company is a development stage company, and it is subject to the expenses,
difficulties and uncertainties generally associated with early stage companies.
Cheniere has a limited operating history with respect to its oil and
gas exploration activities, which were commenced in April 1996, and the Company
has not yet started operating any LNG receiving facilities. As a development
stage company, Cheniere faces all of the risks inherent in the establishment and
growth of any new business. From the Company's inception until the quarter ended
June 30, 2000 and subsequently, Cheniere has incurred losses and may continue to
incur losses, depending on whether it generates sufficient revenue either from
producing reserves acquired through acquisitions or drilling activities or from
the eventual commencement of LNG receiving operations. Cheniere may be unable to
implement and complete its business plan, and the Company's business may be
ultimately unsuccessful. These factors make evaluating Cheniere's business and
forecasting its future operating results difficult. Furthermore, any continued
losses and any delays in the implementation or completion of the Company's
business plan may have a material adverse effect on Cheniere's business, its
results of operations, its financial condition and the market price of its
common stock.
The Company's future growth and profitability are highly dependent on the
success of its exploration program and the development of its LNG receiving
terminal business.
The primary focus of Cheniere's operations has been identifying
drilling prospects, but Cheniere is also currently focusing on developing its
LNG receiving facilities. Almost all of the Company's assets are represented by
investments to date in its exploration program, including the seismic data
related thereto. Through its drilling in 1999 and 2000, Cheniere has established
only limited proved reserves (oil and gas reserves that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions). Furthermore, the Company has achieved only limited oil and gas
production as of the date of this report. Cheniere's future growth and
profitability therefore depend heavily on the success of its exploration program
in locating additional proved reserves and achieving additional oil and gas
production or the development of its LNG receiving facilities. Failure to locate
such additional reserves and to
15
achieve additional production may have a material adverse effect on Cheniere's
business, results of operations and financial condition.
Failure to obtain approvals and permits from governmental and regulatory
agencies with respect to the Company's LNG project could have a detrimental
effect on the project and on the Company.
Cheniere is currently focusing on developing its LNG receiving
facilities. The transportation of LNG is highly regulated, and Cheniere has yet
to obtain several governmental and regulatory approvals and permits required in
order to complete and maintain its LNG project. Company management estimates
that it may take two to three years of work to obtain the approvals and permits
necessary to proceed with the construction and operation of an LNG receiving
terminal. The Company has no control over the outcome of the review and approval
process. If Cheniere is unable to obtain the approvals and permits, the Company
may not be able to recover its investment in the project. In addition, failure
to obtain these approvals and permits may have a material adverse effect on the
Company's business, results of operations and financial condition.
Failure of LNG to become a competitive factor in the U.S. oil and gas industry
could have a detrimental effect on the Company's ability to implement and
complete its business plan.
In the U.S., due mainly to an abundant supply of natural gas, LNG has
not historically been a major energy source. Furthermore, LNG may not become a
competitive factor in the U.S. oil and gas industry. The failure of LNG to
become a competitive supply alternative to domestic natural gas and other import
alternatives may have a material adverse effect on Cheniere's ability to
implement and complete its business plan as well as the Company's business,
results of operations and financial condition.
The Company may not be able to obtain additional financing on terms that are
acceptable to the Company, which could harm its ability to conduct business.
As of December 31, 2001, Cheniere had $1,344,159 of current assets and
a working capital deficit of $530,242. Because of its low level of current
assets, the Company may need additional capital for a number of purposes. If the
Company is unable to obtain additional financing, it could significantly harm
Cheniere's ability to conduct its business, including its ability to take
advantage of opportunities that come from its exploration program and its
ability to construct LNG terminals. Cheniere's needs for additional financing
include the following:
. Additional capital may be required to pay for Cheniere's share of
costs relating to the drilling of prospects and development of those
that are successful, to exercise lease options and to acquire
additional oil and gas leases. The total amount of the Company's
capital needs will be determined in part by the number of prospects
generated within its exploration program and by the working interest
that the Company retains in those prospects.
. The Company may need capital to fund its pro-rata share of the capital
calls by Gryphon that are approved by Gryphon's board of directors. If
the Company subscribes to its pro-rata portion of such capital calls
but fails to fund, it would lose its ability to subscribe to any
future capital calls and would suffer further dilution of its holdings
in Gryphon. In 2001, Gryphon made cash calls in the aggregate amount
of $30,000,000, which were funded entirely by Warburg, in May, July
and November 2001. Cheniere declined to participate in these cash
calls and its interest in Gryphon has been reduced from 36.8% to 20.2%
on an as-converted basis, as of December 31, 2001. Subsequent to the
period covered by this report, in March 2002, Cheniere sold 51,400
shares of its Gryphon common stock to Gryphon, subject to certain
repurchase options, thereby further reducing Cheniere's interest to
13.7% on an as-converted basis. Also in March 2002, Gryphon made a
cash call for $5,000,000 and Cheniere declined to participate. If
Warburg funds the full amount of the cash call in April 2002, as it is
entitled to do, Cheniere's effective interest will be reduced to
12.7%. It is anticipated that Gryphon will make cash calls for
additional funds. The Company's share of such future capital calls
could total up to approximately $5,000,000. If the Company elects not
to fund its pro-rata portion of such capital calls, and Warburg funds
its portion, as they would be entitled to do, and as they have since
the formation of Gryphon, the Company's ownership percentage of
Gryphon's common stock on an as-converted basis will be further
reduced (to as low as 8%) if it chooses not to participate in such
additional cash calls or to exercise its option to repurchase all or a
portion of the 51,400 shares it sold to Gryphon in March 2002. See
Liquidity and Capital Resources - Exploration Funding under Item 7 of
this report.
16
. The Company will need substantial additional funds to execute its plan
for developing and implementing an LNG receiving terminal business,
including engineering, environmental, marine, regulatory, construction
and legal work, including any such work involved in permitting and
FERC filings. Such costs are estimated to be approximately $8,000,000
for the two-year period ending December 31, 2003, and include
semi-annual rental payments totaling approximately $500,000 per year
to renew lease and purchase options on potential sites for LNG
receiving terminals.
Additional capital could be obtained from a combination of funding
sources, many of which may have a material adverse effect on the Company's
business, results of operations and financial condition. These potential funding
sources include:
. cash flow from operating activities, which is sensitive to prices the
Company receives for its oil and natural gas,
. borrowings from financial institutions, which may subject the Company
to certain restrictive covenants, including covenants restricting the
Company's ability to raise additional capital or pay dividends,
. debt offerings, which would increase the Company's leverage and add to
its need for cash to service such debt,
. additional offerings of the Company's equity securities, which would
cause dilution of its common stock,
. sales of portions of its working interest in the prospects within its
exploration program, which would reduce future revenues from its
exploration program,
. sale to an industry partner of a participation in the Company's
exploration program, which would reduce future revenues from its
exploration program,
. sale of all or a portion of the Company's producing oil and gas
properties, which would reduce future revenues (see Note 16 in Notes
to the Consolidated Financial Statements concerning March 2002
agreement to sell the Company's producing oil and gas properties),
. sale of an interest in the Company's LNG project and
. arrangement of a business development loan from, or prepayment of
terminal use fees by, prospective sellers or purchasers of LNG.
Cheniere's ability to raise additional capital will depend on the
results of its operations and the status of various capital and industry markets
at the time such additional capital is sought. Accordingly, capital may not
become available to the Company from any particular source or at all. Even if
additional capital becomes available, it may not be on terms acceptable to the
Company. Failure to obtain additional financing on acceptable terms may have a
material adverse effect on the Company's business, results of operations and
financial condition.
Because of the Company's lack of diversification, factors harming the oil and
gas industry in general, including downturns in prices for oil and gas, would be
especially harmful to it.
The Company is an independent energy company and is not actively
engaged in any other industry. Cheniere's revenues and profits are substantially
dependent on the oil and gas industry in general and the prevailing prices for
oil and gas in particular. Circumstances that harm the oil and gas industry in
general will have an especially harmful effect on Cheniere. Oil and gas prices
have been and are likely to continue to be volatile and subject to wide
fluctuations in response to any of the following factors:
. relatively minor changes in the supply of and demand for oil and gas,
. political conditions in international oil producing regions,
. the extent of domestic production and importation of oil in relevant
markets,
17
. the level of consumer demand,
. weather conditions,
. the competitive position of oil or gas as a source of energy as
compared with other energy sources,
. the refining capacity of oil purchasers and
. the effect of federal and state regulation on the production,
transportation and sale of oil and gas.
It is likely that adverse changes in the oil market or the regulatory
environment would have an adverse effect on the Company's business results of
operations and financial condition, including its ability to develop and
implement its LNG project and to obtain capital from lending institutions,
industry participants, private or public investors or other sources.
The Company experiences intense competition in the oil and gas industry, which
may make it difficult for the Company to succeed.
The oil and gas industry is highly competitive. If Cheniere is unable
to compete effectively, it will not succeed. A number of factors may give the
Company's competitors advantages over Cheniere. For example, most of the
Company's current and potential competitors have significantly greater financial
resources and a significantly greater number of experienced and trained
managerial and technical personnel than the Company does. In addition, the
businesses of such competitors are in many cases more diversified than that of
Cheniere. Cheniere may not be able to compete effectively with such companies.
Moreover, the oil and gas industry competes with other industries in supplying
the energy and fuel needs of industrial, commercial and other consumers.
Increased competition causing over-supply and depressed prices could have a
substantially negative impact on Cheniere's operating revenues.
Fluctuation in energy prices or supply of liquefied natural gas could adversely
affect our LNG receiving terminals business.
If LNG prices are higher than prices of domestically produced natural
gas or natural gas derived from other sources, our ability to compete with such
suppliers may be negatively impacted. In addition, in the event the supply of
LNG is limited or restricted for any reason, our ability to profitably operate
an LNG receiving facility could be materially impacted. Revenues generated by an
LNG receiving terminal depend on the volume of LNG processed and the price of
the natural gas produced, both of which can be affected by the price of natural
gas and natural gas liquids.
The Company is subject to significant operating hazards and uninsured risks, one
or more of which may create significant liabilities for it.
The Company's oil and gas operations are subject to all of the risks
and hazards typically associated with the exploration for and the development
and production of oil and gas. In accordance with customary industry practices,
the Company intends to maintain insurance against some, but not all, of these
risks and losses. Moreover, the Company may not be able to maintain adequate
insurance in the future at rates it considers reasonable. The occurrence of a
significant event not fully insured or indemnified against could seriously harm
the Company's business, results of operations and financial condition.
Risks in drilling operations include cratering, explosions,
uncontrollable flows of oil, gas or well fluids, fires, pollution and other
environmental risks. The Company's activities are also subject to perils
specific to marine operations, such as capsizing, collision and damage or loss
from severe weather. These hazards can cause personal injury and loss of life,
severe damage to and destruction of property and equipment, pollution or
environmental damage and suspension of operations.
In the event the Company completes the LNG receiving terminal, the
operations of such facility will be subject to the inherent risks normally
associated with those operations, including explosions, pollution, release of
toxic substances, fires, hurricanes and adverse weather conditions and other
hazards, each of which could result in
18
damage to or destruction of the Company's facilities or damages to persons and
property. In addition, the Company's operations face possible risks associated
with acts of aggression on our assets. If any of these events were to occur, the
Company could suffer substantial losses. The Company will maintain insurance
against these types of risks to the extent and in the amounts that it believes
are reasonable. Its financial condition and operations could be adversely
affected if a significant event occurs that is not fully covered by insurance.
The Company is subject to significant exploration risks, including the risk that
it may not be able to find or produce enough oil and gas to generate any
profits.
The Company's exploration activities involve significant risks,
including the risk that it may not be able to find or produce enough oil and gas
to generate any profits. The wells drilled by the Company may not discover any
oil or gas. Further, there is no way to know in advance of drilling and testing
whether any prospect will yield oil or gas in sufficient quantities to make
money for the Company. In addition, the Company is highly dependent on seismic
activity and the related application of new technology as a primary exploration
methodology. This methodology, however, requires greater pre-drilling
expenditures than traditional drilling strategies. Even when fully used and
properly interpreted, 3D seismic data can only assist the Company in identifying
subsurface reservoirs and hydrocarbon indicators, and will not allow the Company
to determine conclusively if hydrocarbons will in fact be present and
recoverable. If the Company's exploration efforts are unsuccessful, its business
and financial condition will be substantially harmed.
The Company may not be able to acquire the oil and gas leases it needs to
sustain profitable operations.
In order to engage in oil and gas exploration in the areas covered by
its 3D seismic data, the Company must first acquire rights to conduct
exploration and recovery activities on such properties. Cheniere may not be
successful in acquiring farm-outs (agreements whereby the Company, as owner of
lease interests, grants to a third party the right to earn an assignment of an
interest in the lease, typically by drilling one or more wells), seismic
permits, lease options, leases or other rights to explore for or recover oil and
gas. Both the United States Department of the Interior and the States of Texas
and Louisiana award oil and gas leases on a competitive bidding basis.
Non-governmental owners of the onshore mineral interests within the area covered
by the Company's exploration program are not obligated to lease their mineral
rights to the Company except where the Company has already obtained lease
options. In addition, other major and independent oil and gas companies with
financial resources significantly greater than Cheniere's may bid against
Cheniere for the purchase of oil and gas leases. If the Company is unsuccessful
in acquiring these leases, permits, options and other interests, the area
covered by the Company's 3D seismic data that could be explored through drilling
will be significantly reduced, and Cheniere's business, results of operations
and financial condition will be substantially harmed.
If the Company is unable to obtain satisfactory turnkey contracts, it may have
to assume additional risks and expenses when drilling wells.
Cheniere anticipates that any wells drilled in which it has an
interest will be drilled by established industry contractors under turnkey
contracts that limit its financial and legal exposure. Under a turnkey drilling
contract, a negotiated price is agreed upon and the money placed in escrow. The
contractor then assumes all of the risk and expense, including any cost
overruns, of drilling a well to contract depth and completing any agreed upon
evaluation of the wellbore. Upon performance of all these items, the escrowed
money is released to the contractor.
Circumstances may arise, however, where a turnkey contract is not
economically beneficial to the Company or is otherwise unobtainable from proven
industry contractors. In such instances, the Company may decide to drill wells
on a day-rate basis. Under a day-rate drilling contract, the operator pays an
agreed sum for each day of drilling required to reach contract depth. All risk
and expense of drilling a well to total depths lies with the operator in
day-rate contracts. The drilling of such test wells would subject the Company to
the usual drilling hazards such as cratering, explosions, uncontrollable flows
of oil, gas or well fluids, fires, pollution and other environmental risks. The
Company would also be liable for any cost overruns attributable to drilling
problems that otherwise would have been covered by a turnkey contract. These
liabilities, if incurred, may have a materially adverse impact on Cheniere's
business and financial condition.
Existing and future United States governmental regulation, taxation and price
controls could seriously harm the Company.
19
Oil and gas production and exploration are subject to comprehensive
federal, state and local laws and regulations controlling the exploration for
and production and sale of oil and gas and the possible effects of such
activities on the environment. Failure to comply with such rules and regulations
can result in substantial penalties and may harm the Company. Present, as well
as future, legislation and regulations could cause additional expenditures,
restrictions and delays in the Company's business, the extent of which cannot be
predicted and which may require the Company to limit substantially, delay or
cease operations in some circumstances. In most areas where the Company plans to
conduct activities, there are statutory provisions regulating the production of
oil and natural gas which may restrict the rate of production and adversely
affect revenues. The Company plans to acquire oil and gas leases in the Gulf of
Mexico, which, if acquired, would be granted by the federal government and
administered by the U.S. Department of Interior Minerals Management Service. The
Department strictly regulates the exploration, development and production of oil
and gas reserves in the Gulf of Mexico. Such regulations could seriously harm
the Company's operations in the Gulf of Mexico. The federal government regulates
the interstate transportation of oil and natural gas, through the Federal Energy
Regulatory Commission (FERC). The FERC has in the past regulated the prices at
which oil and gas could be sold. Federal reenactment of price controls or
increased regulation of the transport of oil and natural gas could seriously
harm the Company.
The Company's operations are also subject to extensive federal, state
and local laws and regulations governing the discharge of oil and hazardous
materials into the environment or otherwise relating to environmental
protection. These laws and regulations may require the acquisition of a permit
before drilling commences, restrict or prohibit the types, quantities and
concentration of substances that can be released into the environment or wastes
that can be disposed of in connection with drilling and production activities,
prohibit drilling activities on certain lands lying within wetlands or other
protected areas and impose substantial liabilities for pollution or releases of
hazardous substances resulting from drilling and production operations. Failure
to comply with these laws and regulations may also result in civil and criminal
fines and penalties. Moreover, state and federal environmental laws and
regulations may become more stringent.
Federal laws and regulations such as the Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA), the Clean Air Act (CAA), the
Oil Pollution Act of 1990 (OPA) and the Clean Water Act (CWA) and analogous
state laws have continually imposed increasingly strict requirements for water
and air pollution control, solid waste management and strict financial
responsibility and remedial response obligations relating to oil spill
protection. The cost of complying with such environmental legislation could have
a general harmful effect on the Company's operations.
There is only limited trading in the Company's common stock, which makes its
stock more difficult to sell than the stock of companies with more active
markets.
There is only limited trading in Cheniere's common stock, which makes
its stock more difficult for an investor to sell than the stock of companies
with more active markets. For the year 2001, the average daily trading volume of
Cheniere's common stock on The American Stock Exchange was approximately 19,000
shares.
The Company has not paid dividends and does not expect to do so in the
foreseeable future, so its stockholders will not be able to receive a return on
their investment without selling their shares.
The Company has not paid dividends since its inception and does not
expect to in the foreseeable future, so Cheniere's stockholders will not be able
to receive a return on their investments without selling their shares. The
Company presently anticipates that all earnings, if any, will be retained for
development of its business. Any future dividends will be subject to the
discretion of the Company's board of directors and will depend on, among other
things, future earnings, the Company's operating and financial condition, its
capital requirements and general business conditions.
The Company's stockholders could experience dilution in the value of their
shares because of additional issuances of shares.
Any issuance of common stock by the Company may result in a reduction
in the book value per share or market price per share of its outstanding shares
of common stock and will reduce the proportionate ownership and voting power of
such shares. The Company has 45,000,000 authorized shares of stock, consisting
of 40,000,000 shares of common stock and 5,000,000 shares of preferred stock. As
of December 31, 2001, approximately 67% of the shares of the common stock
remained unissued. The board of directors has the power to issue any and all of
such
20
shares without shareholder approval. It is likely that the Company will issue
shares of common stock, among other reasons, in order to raise capital to
sustain operations and/or to finance future oil and gas exploration projects. In
addition, the Company has reserved 2,850,288 shares of the common stock for
issuance upon the exercise of outstanding warrants and 1,500,000 shares of the
common stock for issuance upon the exercise of stock options. As of December 31,
2001, there were 1,741,111 issued and outstanding options to purchase common
stock, 241,111 of which are conditional upon subsequent approval by the
Company's stockholders of an amendment to the Company's option plan, increasing
the number of shares authorized for issuance under the plan from 1,500,000 to
2,000,000. To the extent that outstanding warrants and options are exercised,
the percentage ownership of common stock of the Company's stockholders will be
diluted. Moreover, the terms upon which the Company will be able to obtain
additional equity capital may be adversely affected because the holders of
outstanding warrants and options can be expected to exercise them at a time when
the Company would, in all likelihood, be able to obtain any needed capital on
terms more favorable than the exercise terms provided by such outstanding
securities. In the event of the exercise of a substantial number of warrants and
options, within a reasonably short period of time after the right to exercise
commences, the resulting increase in the amount of the Company's common stock in
the trading market could substantially adversely affect the market price of the
common stock or the Company's ability to raise money through the sale of equity
securities.
The Company depends on key personnel and could be seriously harmed if it lost
their services.
Cheniere depends on its executive officers for various activities. The
Company does not maintain key person life insurance policies on any of its
personnel. The loss of the services of any of these individuals could seriously
harm the Company. In addition, the Company's future success will depend in part
on its ability to attract and retain additional qualified personnel. Cheniere
currently has 12 full-time employees.
The Company depends on industry partners and could be seriously harmed if they
do not perform satisfactorily, which is usually not within the Company's
control.
Because the Company has few employees and limited operating revenues,
it is and will continue to be largely dependent on industry partners for the
success of the Company's oil and gas exploration projects. Cheniere could be
seriously harmed if its industry partners do not perform satisfactorily on
projects that affect it. The Company often has and will continue to have no
control over factors that would influence the performance of its partners.
The Company is controlled by a small number of principal stockholders who may
exercise a proportionately larger influence on Cheniere than its stockholders
with smaller holdings.
Cheniere is controlled by a small number of principal stockholders who
may cause events to occur that are not in the interests of the Company's
stockholders with smaller holdings. BSR Investments, Ltd. (BSR) is an entity
controlled by the mother of Charif Souki, Cheniere's chairman. BSR owns
approximately 11% of the outstanding common stock. Accordingly, it is likely
that BSR will have significant influence on the election of Cheniere's directors
and on its management, operations and affairs, including the ability to prevent
or cause a change in control of the Company.
Anti-takeover provisions of the certificate of incorporation, bylaws and
Delaware law could adversely impact a potential acquisition by third parties
that may ultimately be in the financial interests of the Company's stockholders.
Cheniere's certificate of incorporation, bylaws and the Delaware
General Corporation Law contain provisions that may discourage unsolicited
takeover proposals. These provisions could have the effect of inhibiting
fluctuations in the market price of the Company's shares that could result from
actual or rumored takeover attempts, preventing changes in its management or
limiting the price that investors may be willing to pay for shares of common
stock. These provisions, among other things, authorize the board of directors to
designate the terms of and to issue new series of preferred stock, to limit the
personal liability of directors, to require the Company to indemnify directors
and officers to the fullest extent permitted by applicable law and to impose
restrictions on business combinations with some interested parties.
A significant portion of the value of the Company is derived from its ownership
interest in Gryphon, over which the Company exercises no day-to-day control.
21
Cheniere owns 100% of the outstanding common stock of Gryphon (13.7%
effective ownership after giving effect to the conversion of Gryphon's preferred
stock outstanding at December 31, 2001 and Cheniere's March 2002 sale of 51,400
shares of its Gryphon common stock to Gryphon) and a significant portion of the
Company's value is derived from this investment. Cheniere exercises significant
influence, primarily through board participation. Cheniere does not exercise
control over Gryphon and therefore does not have the ability to effect a change
of control of Gryphon. Accordingly, Gryphon's management team could make
business decisions without Cheniere's consent that could impair the value of
Cheniere's investment in Gryphon.
Item 3. Legal Proceedings
The Company has been and may in the future be involved as a party to
various legal proceedings, which are incidental to the ordinary course of
business. Management regularly analyzes current information and as necessary,
provides accruals for probable liabilities on the eventual disposition of these
matters. In the opinion of management and legal counsel, as of December 31,
2001, there were no threatened or pending legal matters that would have a
material impact on the Company's consolidated results of operations, financial
position or cash flows.
In February 2002, the Company received a copy of a lawsuit styled
Fairfield Industries Incorporated Fairfield vs. Cheniere Energy, Inc. and
Gryphon Exploration Company, which was filed in district court in Harris County,
Texas. The lawsuit related to a seismic license agreement between Fairfield
and Cheniere, which was later assigned to Gryphon. In the lawsuit, Fairfield
alleged that Cheniere and Gryphon conspired to defraud the plaintiff of certain
transfer payments, which may be owed by Cheniere in connection with the transfer
to Gryphon of the initial seismic contributed at the time of its formation. In
March 2002, Fairfield, Gryphon, and the Company settled this lawsuit. Existing
and contingent obligations to Fairfield by Cheniere totaling $2,500,000 have
been fully discharged through agreement by Gryphon to make current and
contingent payments in exchange for the transfer of 30,000 Gryphon common shares
from Cheniere to Gryphon.
Item 4. Submission of Matters to a Vote of Security Holders
None.
22
PART II
Item 5. Market Price of Dividends on the Registrant's Common Equity and Related
Stockholder Matters
Beginning on March 5, 2001, the common stock of the Company has traded
on The American Stock Exchange under the symbol CXY. Between December 14, 2000
and March 2, 2001, Cheniere's common stock traded on the OTC Bulletin Board
under the symbol CHEX. Between April 11, 1997 and December 13, 2000, the common
stock of the Company traded on The Nasdaq SmallCap Market under the symbol CHEX.
From the time the Company first traded publicly until April 11, 1997, the
Company's common stock traded on the OTC Bulletin Board. The table below
presents the high and low daily closing sales prices of the common stock, as
reported by the Nasdaq SmallCap Market, the OTC Bulletin Board and The American
Stock Exchange, for each quarter during 2000 and 2001, and for a portion of the
Company's current quarter, as reported by The American Stock Exchange.
High Low
----- -----
Three Months Ended
March 31, 2000 $4.57 $3.91
June 30, 2000 $4.00 $2.13
September 30, 2000 $3.30 $2.91
December 31, 2000 $2.27 $1.98
Three Months Ended
March 31, 2001 $3.38 $2.09
June 30, 2001 $2.88 $1.85
September 30, 2001 $2.19 $0.90
December 31, 2001 $1.25 $0.75
Three Months Ended
March 31, 2002 $1.50 $0.93
As of March 29, 2002, there were 13,297,393 shares of the Company's
common stock outstanding held by approximately 2,800 beneficial owners.
The Company has never paid a cash dividend on its common stock. The
Company currently intends to retain earnings to finance the growth and
development of its business and does not anticipate paying any cash dividends on
the common stock in the foreseeable future. Any future change in the Company's
dividend policy will be made at the discretion of the Company's board of
directors in light of the financial condition, capital requirements, earnings
and prospects of the Company, and any restrictions under any credit agreements,
as well as other factors the board of directors deems relevant.
Item 6. Selected Financial Data
Selected financial data set forth below are derived from the Company's
audited Consolidated Financial Statements for the periods indicated, except for
the data as of December 31, 1996 and for the four months ended December 31,
1996, which is derived from the Company's unaudited financial data. The
financial data should be read in conjunction with the Management's Discussion
and Analysis of Financial Condition and Results of Operations and the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
report.
23
Year Ended
December 31,
---------------------------------------------------------
2001 2000 1999 1998
------------ ----------- ----------- -----------
Revenues $ 2,372,632 $ 5,320,432 $ 1,614,055 $ --
Production costs 420,242 388,637 128,859 --
Depreciation, depletion and amortization 1,243,828 3,371,383 1,361,644 39,171
Ceiling test write-down 5,126,248 -- -- --
General and administrative expenses 4,291,963 1,938,659 1,908,805 1,619,307
Loss from operations (8,709,649) (378,247) (1,785,253) (1,658,478)
Interest income (expense) 18,578 23,916 31,530 20,634
Equity in net loss of affiliate (2) (2,974,191) (426,649) -- --
Net loss (11,665,262) (780,980) (1,753,723) (1,637,844)
Net loss per share (basic and diluted)(3) (0.89) (0.07) (0.27) (0.41)
Cash dividends per share $ -- $ -- $ -- $ --
Weighted average shares outstanding (3) 13,035,256 10,732,678 6,449,104 4,003,864
Four Months Ended Period Ended
December 31, August 31,
------------------------ -------------------------
1997 1996 (1) 1997 1996
---------- ---------- ----------- ----------
Revenues $ -- $ -- $ -- $ --
Production costs -- -- -- --
Depreciation, depletion and amortization 2,936 2,695 8,268 3,603
Ceiling test write-down -- -- -- --
General and administrative expenses 444,087 189,635 1,705,193 100,211
Loss from operations (447,023) (192,330) (1,713,461) (103,814)
Interest income (expense) 58,662 (1,223) 36,993 (18,033)
Equity in net loss of affiliate (2) -- -- -- --
Net loss (388,361) (193,553) (1,676,468) (121,847)
Net loss per share (basic and diluted)(3) (0.11) (0.07) (0.55) (0.06)
Cash dividends per share $ -- $ -- $ -- $ --
Weighted average shares outstanding (3) 3,587,032 2,650,342 3,035,980 2,152,735
December 31,
--------------------------------------------------------------------------------
2001 2000 1999 1998 1997 1996 (1)
----------- ----------- ----------- ----------- ----------- ----------
Cash $ 610,718 $ 1,888,562 $ 1,175,950 $ 143,868 $ 787,523 $2,419,264
Oil and gas properties, proved, net 1,929,124 6,727,613 9,459,041 -- -- --
Oil and gas properties, unproved 16,236,962 18,253,731 20,648,923 20,000,425 16,534,054 6,000,000
Total assets 25,023,676 34,665,618 34,481,275 20,840,474 17,705,627 8,476,710
Long-term notes payable -- -- -- 2,025,020 2,025,000 --
Total liabilities 1,874,401 1,604,410 6,735,537 4,523,144 4,285,599 262,798
Total stockholders' equity 23,149,275 33,061,208 27,745,738 16,317,330 13,420,028 8,213,912
August 31,
------------------------
1997 1996
----------- ----------
Cash $ 234,764 $1,093,180
Oil and gas properties, proved, net -- --
Oil and gas properties, unproved 13,500,000 4,000,000
Total assets 13,841,712 5,145,310
Long-term notes payable -- --
Total liabilities 888,291 718,855
Total stockholders' equity 12,953,421 4,426,455
(1) On April 7,1998, the Company's board of directors approved a change in
fiscal year-end. The change in year-end resulted in a transition period
from September 1, 1997 to December 31, 1997.
(2) Represents the Company's equity in the net loss of Gryphon. See Note 7 to
the Company's Consolidated Financial Statements.
(3) Net loss per share and weighted average shares outstanding have been
restated to give effect to the one-for-four reverse stock split which was
effective in October 2000. See Note 2 to Consolidated Financial Statements.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Cheniere is engaged in oil and gas exploration, development and
exploitation and in the development of an LNG receiving terminal business. The
Company has historically focused on evaluating and generating drilling prospects
using a regional and integrated approach with a large seismic database as a
platform. The Company is currently focusing, and expects to continue to focus,
its attention and resources on the development of its LNG receiving terminal
business. Cheniere's management expects that the Company's active interpretation
of 3D seismic data and generation of prospects will continue, though its
participation in the drilling of wells will be accomplished through farmout
arrangements and back-in interests, whereby the capital costs are borne by
industry partners.
Production and Product Prices
Information concerning the Company's production and average prices
received for the years ended December 31, 2001, 2000 and 1999 is presented in
the following table. Cheniere commenced its production of oil and gas on
September 9, 1999.
24
Year Ended December 31,
--------------------------------
2001 2000 1999
-------- ---------- --------
Production
Oil (Bbls) 2,608 3,703 2,975
Gas (Mcf) 542,774 1,459,897 633,432
Gas equivalents (Mcfe) 558,422 1,482,117 651,282
Average sales prices:
Oil (per Bbl) $ 27.43 $ 29.78 $ 23.18
Gas (per Mcf) $ 4.48 $ 3.79 $ 2.59
Results of Operations - Comparison of the Fiscal Years Ended December 31, 2001
and 2000
The Company's financial results for the year ended December 31, 2001
reflect a loss of $11,665,262, or $0.89 per share (basic and diluted), compared
to a loss of $780,980, or $0.07 per share (basic and diluted) in 2000. The major
factors contributing to the Company's loss in 2001 were: $5,126,248 in ceiling
test write-downs, general and administrative expenses of $4,291,963 and equity
in loss of unconsolidated affiliate of $2,974,911 (including accrued dividend
obligations totaling $3,058,191 for the year, payable by Gryphon, related to its
preferred stock).
Oil and gas revenues decreased to $2,372,632 in 2001 from $5,320,432
in 2000 as a result of decreased production volumes (558,422 Mcfe in 2001
compared with 1,482,117 Mcfe in 2000). The decline in production volumes
represents normal depletion of currently producing zones for the Company's two
producing wells at West Cameron Block 49. The effect of declining production was
partially offset by an increase in average gas prices to $4.48 per Mcf in 2001
compared to $3.79 per Mcf in the prior year. Production costs increased 8% to
$420,242 in 2001 from $388,637 in 2000.
Depreciation, depletion and amortization (DD&A) decreased to
$1,243,828 in 2001 from $3,371,383 in 2000 as a result of both a lower DD&A rate
per unit ($1.84 per Mcfe versus $2.04 per Mcfe) and the decline in the Company's
production volumes.
Gross general and administrative (G&A) expenses totaled $5,073,963 in
2001, compared to $4,366,207 in 2000. The most significant component of the
increase between years was in legal fees, which increased by $716,588 to
$912,514 in 2001 compared to $195,926 in 2000. The increased legal expenses in
2001 include approximately $545,000 related to the Company's development of an
LNG receiving terminal business and approximately $120,000 related to Cheniere's
buyout of its partner's interest in the proprietary Cameron 3D seismic data set.
Also affecting the net G&A expenses reported between the years were reduced
recoveries from management fees and reduced amounts capitalized as oil and gas
property costs. In 2000, Cheniere received management fees from an industry
partner in the amount of $1,684,193 of which $988,548 was recorded as a recovery
of G&A expenses. The exploration agreement under which these management fees
were received was assigned to Gryphon in October 2000. Cheniere received no
management fees in 2001. Cheniere capitalizes as oil and gas property costs that
portion of G&A expenses directly related to its exploration and development
activities. Cheniere capitalized $782,000 in 2001 compared to $1,439,000 in
2000, the change being a direct result of the decreased level of exploration
activity following the Gryphon Transaction in October 2000. G&A expenses, net of
recoveries and amounts capitalized, were $4,291,963 and $1,938,659 in 2001 and
2000, respectively.
Equity in net loss of unconsolidated affiliate for 2001 includes
Cheniere's equity share of Gryphon's losses of $2,974,191, calculated by
applying Cheniere's 100% common stock ownership interest to Gryphon's net income
of $84,000 and reducing such result for Gryphon's preferred dividend arrearages
of $3,058,191 for the year. Cheniere's equity share of Gryphon's losses for the
period from October 11, 2000 through December 31, 2000 was $426,649, calculated
by applying Cheniere's 100% common stock ownership interest to Gryphon's net
income of $19,003 and reducing such result for Gryphon's preferred dividend
arrearages of $445,652. At such time as Warburg converts its preferred shares to
common shares, Cheniere's equity share of Gryphon's earnings will be calculated
at 20.2% based on ownership interests outstanding at December 31, 2001.
Results of Operations - Comparison of the Fiscal Years Ended December 31, 2000
and 1999
25
The Company's financial results for the year ended December 31, 2000,
reflect a loss of $780,980 or $0.07 per share (basic and diluted), as compared
to a loss of $1,753,723, or $0.27 per share (basic and diluted), for the fiscal
year ended December 31, 1999.
Cheniere commenced production of oil and gas on September 9, 1999.
Accordingly, oil and gas revenues and related costs and expenses include a full
year of production in 2000, compared to approximately four months of production
in 1999. As a result, revenues totaled $5,320,432 for the year ended December
31, 2000, compared to $1,614,055 in 1999; production costs were $388,637 in 2000
compared to $128,859 in 1999; and DD&A increased to $3,371,383 in 2000 from
$1,361,644 in 1999.
Gross G&A expenses totaled $4,366,207 in 2000, compared to $2,868,805
in 1999. In mid-1999, Cheniere licensed 8,800 square miles of seismic data (the
Fairfield Database) and doubled the number of its employees, adding management
and exploration professionals to exploit its expanded database. In October 2000,
Cheniere transferred to Gryphon the Fairfield Database, other assets and
liabilities and substantially all of the management and technical team assembled
in mid-1999 to exploit the Fairfield Database. As a result, salaries, benefits
and consulting expenses increased to $2,735,337 for 2000, compared to $1,674,200
for 1999. In connection with the October 2000 Gryphon Transaction, Cheniere
issued its financial advisers warrants to purchase 125,000 shares of common
stock, valued at $165,000. Also in 2000, Cheniere received management fees
totaling $1,684,193, of which $988,548 was recorded as a recovery of G&A
expenses. The management fees were received from the Company's industry partner,
Samson, beginning in March 2000 and running through October 11, 2000, at which
time the related exploration agreement was assigned to Gryphon. G&A expenses,
net of recoveries, were $3,377,659 in 2000 compared with $2,868,805 in 1999.
Cheniere capitalizes as oil and gas property costs that portion of G&A expenses
directly related to its exploration and development activities. Cheniere
capitalized $1,439,000 in 2000 compared to $960,000 in 1999, the change being a
direct result of the increased level of exploration activity. G&A expenses, net
of recoveries and amounts capitalized, were $1,938,659 and $1,908,805 in 2000
and 1999, respectively.
Cheniere's equity share of Gryphon's losses for the period from
October 11, 2000 through December 31, 2000 was $426,649, calculated by applying
Cheniere's 100% common stock ownership interest to Gryphon's net income of
$19,003 and reducing such result for Gryphon's preferred dividend arrearages of
$445,652.
Liquidity and Capital Resources
Cash balances and cash flows from current operations will not be
adequate to meet the future liquidity requirements of the Company. In addition
to its operating expenses, the Company will need to finance approximately
$8,000,000 of costs and expenses in connection with the developing of its LNG
receiving terminal. As a result of this, there is some uncertainty about the
Company's ability to continue as a going concern. The Company expects that
future liquidity requirements will be met by one or more of the following: the
divestiture of producing oil and gas properties, sales of portions of its
working interest in the prospects within its exploration program, sale to an
industry partner of a participation in the Company's exploration program, sale
of Cameron Project 3D seismic data licenses, sale of a participation interest in
the Company's LNG project and/or additional offerings of the Company's equity
securities. Management expects to meet all of its liquidity requirements for the
next twelve months through such sources. In the event that the Company is unable
to obtain additional capital from one or more of these sources, its operations
could be adversely affected.
Cash Flow from Operating Activities
Cheniere commenced production of oil and gas in September 1999. Net
cash used in operations for the year ended December 31, 2001 totaled $2,212,277,
compared to net cash provided by operations of $5,203,406 in 2000 and $603,133
in 1999. During 2001, declines in daily production rates and in natural gas
prices resulted in a