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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
For the Fiscal Year Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____________ to _____________
Commission File Number 0-9204
EXCO RESOURCES, INC.
(Exact name of Registrant as specified in its charter)
Texas 74-1492779
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5735 Pineland Drive, Suite 235
Dallas, Texas 75231
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (214) 368-2084
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.02 PER SHARE
(Title of class)
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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 twelve (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 ninety (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 Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [ ]
The number of shares of Common Stock, par value $.02 per share, of the
Registrant outstanding on February 29, 2000, was 6,817,696. The aggregate market
value of the voting stock held by nonaffiliates (all directors, officers and 5%
or more shareholders are presumed to be affiliates) of the Registrant on
February 29, 2000, was $16,499,000 based on the average of the closing bid and
ask prices per share of the Common Stock on such date.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2000 Annual
Meeting of Shareholders, filed on March 21, 2000, are incorporated by reference
into Part III.
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TABLE OF CONTENTS
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PART I ......................................................................................................... 1
Item 1. Business ............................................................................ 1
Item 2. Properties .......................................................................... 22
Item 3. Legal Proceedings ................................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders ................................. 22
PART II ........................................................................................................ 23
Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters ........... 23
Item 6. Selected Financial Data ............................................................. 24
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations ..................................................................... 26
Item 7A. Quantitative and Qualitative Disclosures about Market Risk .......................... 30
Item 8. Financial Statements and Supplementary Data ......................................... 32
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .............................................................. 64
PART III ....................................................................................................... 65
Item 10. Directors and Executive Officers of the Registrant .................................. 65
Item 11. Executive Compensation .............................................................. 65
Item 12. Security Ownership of Certain Beneficial Owners and Management ...................... 65
Item 13. Certain Relationships and Related Transactions ...................................... 65
PART IV ........................................................................................................ 66
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ..................... 66
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EXCO RESOURCES, INC.
PART I
ITEM 1. BUSINESS
GENERAL
EXCO Resources, Inc. is an independent oil and natural gas company. We
have been engaged in the oil and natural gas business since 1955. We currently
conduct our primary operations in Texas and Louisiana and also operate or own
non-operated interests in wells in Kansas, Mississippi, North Dakota, Oklahoma
and Wyoming. At the end of 1997 and the beginning of 1998, new management bought
a controlling interest in EXCO and redirected its focus. We now focus on
acquiring, developing and exploiting properties which already produce oil or
natural gas (or are capable of producing oil or natural gas.)
Historically, we have financed our exploration, exploitation and
development expenditures primarily through cash flow from operations, bank
borrowings, equity capital from private sales of stock and promoted funds from
industry partners. With respect to our acquisition activities, we are focusing
on acquisitions of producing properties with additional development and
exploitation potential. We expect to use a combination of debt and equity
financing to fund these acquisitions.
We prefer to act as operator of the oil and natural gas properties and
prospects in which we own an interest. The operator of oil and natural gas
properties:
o supervises production;
o maintains production records;
o employs field personnel to oversee the general operations of the
properties;
o performs other functions required for the production of oil and
natural gas; and
o monitors performance, both operating and financial, necessary to
optimize cash flows derived from the properties.
Industry Language
The oil and natural gas industry is characterized by the use of very
precise specialized language. The following is a brief explanation of certain
industry terms which we use in this annual report. We believe this explanation
will help you understand our operations, risks and strategies. (Certain other
technical terms are defined in a "Glossary" located at page 21.)
We use five different terms to describe the status of our oil and
natural gas wells. A "development well" is a well drilled within a known oil and
natural gas reservoir with the intention of installing permanent equipment to
produce oil and natural gas. An "exploratory well" is a well drilled in an area
not known to be an oil and natural gas reservoir. A "producing well" (also
called a production well or a productive well) is a well that is currently
producing oil or natural gas or that is capable of production. A "dry hole" is
an exploratory or development well that is incapable of producing oil or natural
gas in sufficient quantities to justify completion of the well. Finally, a
"completed well" refers to a well in which permanent equipment for oil and
natural gas production has been installed, or in the case of a dry hole,
reporting the abandonment of the well to the appropriate agency.
When we count our wells, we use the terms gross wells and net wells. A
"gross well" is a well in which we own an interest that gives us the right to
drill, produce and conduct operating activities for the well and gives us the
right to a share of the oil and natural gas produced from the well. The interest
that gives us these rights is called a "working interest." Gross wells means the
total number of wells in which we own such an interest. A "net well" exists when
the sum of the fractional ownership interests in gross wells equals one. The
number of net wells we own equals the sum of the fractional working interests
owned in gross wells expressed as whole numbers.
When we describe the nature of our oil and natural gas properties, we
use the terms developed and undeveloped acreage. "Developed acreage" are those
acres assignable to producing wells. "Undeveloped acreage"
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are those acres on which wells have not been drilled or completed to a point
that permits the production of commercial quantities of oil and natural gas.
When we count the acres in which we own a working interest we use the terms
"gross acres" and "net acres." A "gross acre" is an acre in which we own a right
to drill, produce and conduct operating activities on the property and to a
share of the oil and natural gas production. A "net acre" exists when the sum of
the fractional working interests in gross acres equals one. The total net
acreage is the sum of the fractional working interests owned in gross acres
expressed in whole numbers.
When we describe our oil or natural gas reservoirs within current
developed and undeveloped acreage we use the term "reserves." We obtain
geological and engineering information which we use to estimate the amount of
reserves contained in our developed and undeveloped acreage. These estimates are
known as "proved reserves." We use two terms to describe our proved reserves.
"Proved developed" reserves are proved reserves which may be recovered from
known oil and natural gas reservoirs under existing economic and operating
conditions. "Proved undeveloped" reserves are proved reserves which may be
recovered from existing wells but would require a relatively large expense to
develop or are proved reserves in current undeveloped acreage.
DEVELOPMENTS DURING 1999
We Acquired and Subsequently Sold Oil and Natural Gas Properties
Through a Joint Venture
On December 31, 1999, EXUS Energy, LLC, a Delaware limited liability
company (EXUS), conveyed 100% of the leasehold and mineral interests it had
acquired on June 30, 1999, in Jackson Parish, Louisiana (the Jackson Parish
Properties), to its equity members in proportion to their respective membership
interests. EXUS was owned 50% by EXCO and 50% by Venus Exploration, Inc.
Subsequent to the conveyance of interests, on December 31, 1999 EXCO sold to
Anadarko Petroleum Corporation the property interests conveyed to EXCO by EXUS.
The gross consideration was approximately $18.7 million cash ($18.2 million cash
after adjustments which principally reflect production since October 1, 1999,
the effective date of the sale), and oil and natural gas leasehold interests
located in Seward and Meade Counties, Kansas, valued by the parties at $800,000.
EXCO booked a pre-tax gain from the sale of approximately $5.1 million in the
fourth quarter of 1999.
The Jackson Parish Properties which were owned by EXUS and subsequently
conveyed to Venus and EXCO included 17 gross (7.125 net to EXCO's interest)
producing wells, for which EXCO was the named operator. The Jackson Parish
Properties included approximately 6,410 gross (2,830 net to EXCO's interest)
developed acres and approximately 1,530 gross (570 net to EXCO's interest)
undeveloped acres. As of October 1, 1999, the Jackson Parish Properties were
estimated to contain net total proved reserves to our interest of 1,340 barrels
(Bbls) of oil and 32.7 billion cubic feet (Bcf) of gas. Net production to EXCO's
interest as of November 1999, was running approximately 85.7 million cubic feet
(Mmcf) per month of natural gas, and no barrels of oil or condensate. Anadarko
took over operations of the Jackson Parish Properties on January 1, 2000.
EXCO's proceeds were placed in a tax-deferred escrow account with Texas
Escrow Company, Inc. (Texas Escrow) of Dallas, Texas, under terms of a Deferred
Exchange Agreement (Exchange Agreement) between EXCO and Texas Escrow executed
on December 31, 1999. The Exchange Agreement is designed to comply with the
like-kind exchange provisions of Section 1031 of the Internal Revenue Code which
permits the deferral of gains from a sale of assets if specific like-kind
exchange reinvestment criteria are met. If we are successful in meeting the
like-kind exchange provisions, some, if not most, of the federal and state tax
payments on the gain from the sale of the Jackson Parish Properties will be
deferred to future periods. A portion of the assets purchased in Natchitoches
Parish, Louisiana, described below and meet the requirements for a like-kind
exchange. Therefore, EXCO will be permitted to defer at least some of its gain
on the sale of the Jackson Parish Properties.
We Completed An Acquisition of Oil and Gas Properties
On December 31, 1999, we purchased oil and gas assets located in
Natchitoches Parish, Louisiana from Western Gas Resources, Inc. (the
Natchitoches Parish Properties) for consideration of $7.8 million cash
(approximately $7.2 million after contractual adjustments). The assets included
Western's interest in the Black Lake Unit and the Black Lake processing and
treating facilities.
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The Natchitoches Parish Properties include 29 gross (20 net) producing
wells out of a total of 75 gross wells. We are the named operator of the
Natchitoches Parish Properties and assumed operations of all 75 wells acquired
in the transaction. The Natchitoches Parish Properties include approximately
14,250 gross (10,590 net) developed acres and approximately 10,390 gross (8,320
net) undeveloped acres. As of September 1, 1999, the Natchitoches Parish
Properties were estimated to contain net reserves of 570,000 Bbls of oil and
natural gas liquids (NGLs) and 4.5 Bcf of natural gas. Net production as of
December 1999, was running approximately 95 Mmcf per month of net residue gas,
7,100 Bbls per month of NGLs, and 5,400 Bbls of oil and condensate per month. We
took over operations on January 7, 2000.
We Dissolved an Acquisition Joint Venture
On October 9, 1998, we formed, EXCO Energy Investors, L.L.C., a $50
million joint venture with OCM Principal Opportunities Fund, L.P. to acquire oil
and natural gas related assets and securities. Under the terms of the joint
venture agreement, we were required to contribute 5% of any capital
expenditures. The joint venture had invested in various debt securities of
National Energy Group, Inc.
On November 11, 1999, the debt securities held by the joint venture
were sold for a profit. Then, later that month the proceeds were distributed on
a pro-rata basis after expenses to OCM and EXCO. On December 3, 1999, the joint
venture was dissolved. We recorded a pre-tax gain of approximately $65,000 on
our investment in the joint venture.
We Consummated an Acquisition after Acquiring a Promissory Note
On November 2, 1998, we acquired a $13 million promissory note from a
Texas bank for $6.4 million which was secured by substantially all of the assets
of Rio Grande, Inc., its subsidiaries and affiliated entities. Rio Grande, Inc.
was an oil and natural gas producer with principal operations in Texas,
Oklahoma, Louisiana, and Mississippi. At the same time we purchased the note, we
also entered into an agreement with Rio Grande, Inc. and Rio Grande, Inc.'s sole
holder of preferred stock regarding plans for the ultimate satisfaction of Rio
Grande, Inc.'s debt, including the proposed acquisition of Rio Grande, Inc. or
its assets by us through a plan of reorganization in bankruptcy court.
On November 12, 1998, Rio Grande, Inc., and its subsidiaries and
affiliated entities, announced that they filed for relief under Chapter 11 of
Title 11 of the U.S. Bankruptcy Code. As the largest secured creditor, we
negotiated a plan for financial restructuring with Rio Grande, Inc. and the
holder of its preferred stock. On March 5, 1999, the court confirmed the
proposed plan. Pursuant to the terms of the plan, Rio Grande, Inc. fully repaid
its trade creditors. The plan provided for the merger of several subsidiaries or
affiliates into Rio Grande, Inc. After the mergers, the outstanding shares of
Rio Grande, Inc.'s common and preferred stock were canceled. We issued new
shares of Rio Grande, Inc. as settlement of Rio Grande, Inc.'s $13 million
secured indebtedness owed to us. The new shares represented all of the
outstanding capital stock of Rio Grande, Inc., and we became the owners of Rio
Grande, Inc. effective on March 16, 1999. On March 30, 1999, Rio Grande, Inc.
was merged into EXCO.
INVESTMENT CONSIDERATIONS AND RISK FACTORS
Forward-Looking Statements
Before you invest in our common stock, you should be aware that there
are various risks associated with an investment, including the risks described
below and risks that we have highlighted in other sections of this annual
report. You should consider carefully these risk factors together with all of
the other information included in this annual report before you decide to
purchase shares of our common stock.
Some of the information in this annual report may contain
forward-looking statements. We use words such as "may," "will," "expect,"
"anticipate," "estimate," "believe," "continue," "intend," or other similar
words to identify forward-looking statements. You should read statements that
contain these words carefully because they: (1) discuss future expectations; (2)
contain projections of results of operations or of our financial conditions; or
(3) state other "forward-looking" information. We believe that it is important
to communicate our future expectations to our investors. However, there may be
events in the future that we are unable to accurately predict or over which we
have no control. When considering our forward-looking statements, you should
keep in mind the risk factors and other
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cautionary statements in this annual report. The risk factors noted in this
section and other factors noted throughout this annual report provide examples
of risks, uncertainties and events that may cause our actual results to differ
materially from those contained in any forward-looking statement.
Our Revenue Depends On Oil and Natural Gas Prices Which Fluctuate
Our future financial condition and results of operations depend upon
the prices we receive for our oil and natural gas. Historically, oil and natural
gas prices have been volatile and are subject to fluctuations in response to
changes in supply and demand, market uncertainty and a variety of additional
factors that are also beyond our control. Factors that affect the prices we
receive for our oil and natural gas include, without limitation:
o the level of domestic production;
o the availability of imported oil and natural gas;
o actions taken by foreign oil and natural gas producing nations;
o the availability of transportation systems with adequate capacity;
o the availability of competitive fuels;
o fluctuating and seasonal demand for natural gas;
o conservation and the extent of governmental regulation of production;
o weather;
o foreign and domestic government relations;
o the price of domestic and imported oil and natural gas; and
o the overall economic environment.
A substantial or extended decline in oil and/or natural gas prices may have a
material adverse effect on the estimated value of our natural gas and oil
reserves, and on our financial position, results of operations and access to
capital. Our ability to maintain or increase our borrowing capacity, to repay
current or future indebtedness and to obtain additional capital on attractive
terms is substantially dependent upon oil and natural gas prices.
Our Production Comes From a Small Number of Wells
Our existing proved oil and natural gas reserves and production are
highly concentrated in a small number of wells. Accordingly, to the extent that
we experience any operating difficulties with the wells, or to the extent our
actual proved reserves are less than those currently estimated to exist, we may
experience increased expenses and lower revenue.
We Have Incurred Losses in the Past
We had net losses of $205,000 and $511,000 for the years ended December
31, 1997 and 1998, respectively. We may incur net losses in the future, and
these losses may be substantial. Consequently, our liquidity may be reduced, and
we may be unable to raise capital. If our ability to raise capital is impaired
then we may be unable to implement our current business strategy.
We May Be Unable to Acquire or Develop Additional Reserves
Our future success as an oil and natural gas producer, as is generally
the case in the industry, depends upon our ability to find, develop or acquire
additional oil and natural gas reserves that are profitable. Factors which may
hinder our ability to acquire additional oil and natural gas reserves include
competition, access to capital, prevailing oil and natural gas prices and the
number of properties for sale. If we are unable to conduct successful
development activities or acquire properties containing proved reserves, our
proved reserves will generally decline as reserves are produced. We cannot
assure you that we will be able to locate additional reserves or that we will
drill economically productive wells or acquire properties containing proved
reserves.
We May Not Identify All Acquisition Risks
Generally, it is not feasible for us to review in detail every
individual property involved in an acquisition. Our business strategy includes
focused acquisitions of producing oil and natural gas properties. Any future
acquisitions will require an assessment of recoverable reserves, future oil and
natural gas prices, operating costs, potential environmental and other
liabilities and other similar factors. Ordinarily, our review efforts are
focused on
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the higher-valued properties. However, even a detailed review of these
properties and records may not reveal existing or potential problems, nor will
it permit us to become sufficiently familiar with the properties to assess fully
their deficiencies and capabilities. We do not inspect every well. Potential
problems, such as mechanical integrity of equipment and environmental conditions
that may require significant remedial expenditures, are not necessarily
observable even when we do inspect a well. Even if we identify problems, the
seller may be unwilling or unable to provide effective contractual protection
against all or part of these problems. We cannot assure you that newly acquired
oil and natural gas properties will be successfully integrated into our
operations or will achieve desired profitability.
We May Incur Significant Debt in the Future Which We May Be Unable to
Repay
Our level of indebtedness in the future may affect our operations in
the following ways:
o a substantial portion of our cash flow from operations may be
dedicated to the payment of interest and principal on our
indebtedness and would not be available for other purposes;
o the covenants contained in the credit facility which require us to
meet certain financial tests and other restrictions, will limit our
ability to borrow additional funds, to grant liens and to dispose
of assets and will affect our flexibility in planning for and
reacting to changes in our business, including possible acquisition
activities; and
o our ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions, general
corporate purposes or other purposes may be impaired.
Our ability to meet any future debt service obligations will be
dependent upon our future economic performance. Our future bank credit may not
be available in an amount sufficient to enable us to service our indebtedness or
make necessary expenditures. In that event, we would be required to obtain
financing from the sale of equity securities or other debt financing. Financing
may be unavailable on terms acceptable to us. Without sufficient capital, we may
be unable to continue to implement our business strategy.
We May Need Additional Financing for Growth Which We May Be Unable to
Obtain
The growth of our business will require substantial capital on a
continuing basis. The pledge of substantially all of our assets as collateral
for our credit facility will make it difficult in the foreseeable future for us
to obtain financing on an unsecured basis or to obtain secured financing other
than certain "purchase money" indebtedness collateralized by the acquired
assets. We may be unable to obtain additional capital on satisfactory
terms and conditions. Thus, we may lose opportunities to acquire oil and natural
gas properties and businesses. In addition, our pursuit of additional capital
may result in the incurrence of additional indebtedness or potentially dilutive
issuances of additional equity securities. We also may utilize the capital
currently expected to be available for our present operations. The amount and
timing of our future capital requirements, if any, will depend upon a number of
factors, including:
o drilling costs;
o transportation costs;
o equipment costs;
o marketing expenses;
o staffing levels and competitive conditions; and
o any purchases or dispositions of assets.
Our failure to obtain any required additional financing may have a material
adverse effect on our growth, cash flow and earnings.
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We Will Encounter Risks While Drilling
Our drilling involves numerous risks, including the risk that we will
not encounter commercially productive oil or natural gas reservoirs. We must
incur significant expenditures to identify and acquire properties and to drill
and complete wells. The cost of drilling, completing and operating wells is
often uncertain, and drilling operations may be curtailed, delayed or canceled
as a result of a variety of factors, including unexpected drilling conditions,
pressure or irregularities in formations, equipment failures or accidents,
weather conditions and shortages or delays in the delivery of equipment. In
addition, we may use 3-dimensional seismic and other advanced technology to
explore for oil and natural gas which may require greater pre-drilling
expenditures than traditional drilling strategies. We may be unsuccessful in our
future drilling activities.
Our Estimates of Oil and Natural Gas Reserves Involve Inherent
Uncertainty
Numerous uncertainties are inherent in estimating quantities of proved
oil and natural gas reserves, including many factors beyond our control. This
annual report contains an estimate of our proved oil and natural gas reserves
and the estimated future net cash flows and revenue generated by the proved oil
and natural gas reserves. These estimates are based upon reports of our
independent petroleum engineers. These reports rely upon various assumptions,
including assumptions required by the Securities and Exchange Commission, as to
constant oil and natural gas prices, drilling and operating expenses, capital
expenditures, taxes and availability of funds. These reports should not be
construed as the current market value of our estimated proved reserves. The
process of estimating oil and natural gas reserves is complex, requiring
significant decisions and assumptions in the evaluation of available geological,
engineering and economic data for each reservoir. As a result, these estimates
are inherently an imprecise evaluation of reserve quantities and future net
revenue. Our actual future production, revenue, taxes, development expenditures,
operating expenses and quantities of recoverable oil and natural gas reserves
may vary substantially from those we have assumed in the estimate. Any
significant variance in our assumptions could materially affect the estimated
quantity and value of reserves set forth in this annual report. In addition, our
reserves may be subject to downward or upward revision, based upon production
history, results of future exploitation and development activities, prevailing
oil and natural gas prices and other factors.
Our Properties are Geographically Concentrated
Currently, most of our properties are located in Texas, Oklahoma,
Louisiana, and Mississippi. Because of this concentration, we will be impacted
more adversely by regional events that increase our costs or level of
competition, reduce availability of equipment or supplies, and reduce demand or
limit production, than if we were geographically diversified.
We Are Exposed to Operating Hazards and Uninsured Risks
Our operations are subject to the risks inherent in the oil and natural
gas industry, including the risks of:
o fire, explosions, and blowouts;
o pipe failure;
o abnormally pressured formations; and
o environmental accidents such as oil spills, gas leaks, ruptures or
discharges of toxic gases, brine or well fluids into the environment
(including groundwater contamination).
These events may result in substantial losses to EXCO from:
o injury or loss of life;
o severe damage to or destruction of property, natural resources and
equipment;
o pollution or other environmental damage;
o clean-up responsibilities;
o regulatory investigation; and
o penalties and suspension of operations.
In accordance with customary industry practice, we maintain insurance against
some, but not all, of the risks we have described above. We cannot assure you
that our insurance will be adequate to cover these losses or liabilities.
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Further, we cannot predict the continued availability of insurance, or
availability of insurance at commercially acceptable premium levels. We do not
carry business interruption insurance. Losses and liabilities arising from
uninsured or under-insured events may have a material adverse effect on our
financial condition and operations.
From time to time, due primarily to contract terms, pipeline
interruptions or weather conditions, the producing wells in which we own an
interest have been subject to reduced or terminated production. These
curtailments may last from a few days to several months, or longer. We are not
currently experiencing any material curtailment on our production.
We May Writedown Our Asset Values
Under current accounting rules which we follow, we may be required to
writedown the value of our oil and natural gas properties if the present value
of the future cash flows from our oil and natural gas properties falls below the
net book value of these properties. This would affect our net worth which may
result in a covenant violation under our credit facility.
Our Stock Price May Be Volatile Due to Small Public Float
Because the number of shares of our common stock held by the public is
relatively small, the sale of a substantial number of shares of the common stock
in a short period of time may adversely affect the market price of the common
stock.
We Do Not Pay Dividends
We have never paid cash dividends on our common stock and do not
anticipate paying cash dividends on our common stock in the foreseeable future.
Our common stock is not a suitable investment for persons requiring current
income.
Our Articles of Incorporation or a Possible Issuance of Preferred Stock
May Prevent a Takeover Attempt
Provisions in our restated articles of incorporation effective
September 11, 1996 may delay, defer or prevent a tender offer or takeover
attempt that a shareholder might consider to be in the best interest of our
shareholders, including attempts that might result in a premium to be paid over
the market price for the stock held by our shareholders. The articles of
incorporation permit the board to issue up to 10,000,000 shares of preferred
stock and to establish by resolution one or more series of preferred stock and
to establish the powers, designations, preferences and relative, participating,
optional or other special rights of each series of preferred stock. The
preferred stock may be issued on terms that are unfavorable to the holders of
our common stock, including the grant of superior voting rights, the grant of
preferences in favor of preferred shareholders in the payment of dividends and
upon EXCO's liquidation and the designation of conversion rights that entitle
holders of preferred stock to convert their shares into common stock on terms
that are dilutive. The issuance of preferred stock may make a takeover or change
in control of EXCO more difficult. We do not intend to use the provisions of the
articles of incorporation to delay, defer or prevent a tender offer or takeover
attempt.
Our Business Depends on a Limited Number of Key Personnel
We are substantially dependent upon the skills of two key individuals
within our management, Mr. D. H. Miller and Mr. Eubank. Both individuals have
experience in restructuring oil and natural gas companies. Because we are
engaged in a new strategy, the loss of the services of either one of these
individuals may have a material adverse impact upon us.
We May Encounter Marketing Risks
Our future ability to market our oil and natural gas production will
depend upon the availability and capacity of natural gas gathering systems and
pipelines and other transportation facilities. With the exception of a few small
gathering systems, we do not currently operate our own pipelines or
transportation facilities, thus we are dependent on third parties to transport
our products.
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BUSINESS STRATEGY
We intend to become a leading independent oil and natural gas
acquisition, exploitation and production company by implementing the following
business strategies:
o Financial Growth. We plan to achieve asset, revenue and cash flow
growth as a result of the acquisition and further development of
producing oil and natural gas properties.
o Acquire and Enhance Producing Oil and Natural Gas Properties. We
plan to take advantage of opportunities that currently exist in the
United States to acquire producing oil and natural gas properties.
We continue to focus our acquisition activities onshore in Texas, New
Mexico, Oklahoma and Louisiana in order to complement our existing properties
and operations; however, we plan to review potential acquisitions in other
regions of the United States if they represent a significant concentration of
energy-related assets. We believe that numerous opportunities exist to acquire
additional energy assets and to enhance the value of these assets through
improved operating practices and by aggressively developing reserve potential.
o Emphasize Exploitation and Development Activities. We plan to
exploit existing oil and natural gas properties and to conduct
development evaluation and drilling on our existing and future oil
and natural gas properties. We intend to concentrate on enhancement
opportunities from activities such as infill drilling,
recompletions, secondary recovery projects, repairs and equipment
changes. We may participate, from time to time, in a limited number
of exploratory wells.
o Corporate Efficiencies. We plan to maximize corporate efficiencies
through the development and operation of a larger asset base with
the potential to limit increases in overhead in the future.
o Capital Management. We plan to maintain financial strength and
flexibility through effective management of debt and equity.
o Technology. We plan to increase exploitation efforts, focusing on
established geological trends where we can employ geological,
geophysical and engineering expertise. We are considering the
application of 3-D seismic and advanced drilling technologies.
In 1999, we evaluated approximately 223 acquisition opportunities with
an aggregate estimated market value of over $2.4 billion. We made offers on
properties totaling more than $970 million and successfully completed the
purchase of approximately $29.0 million. Offers varied in amounts from less than
$100,000 to $96.0 million. We intend to pursue large acquisitions that will have
a significant impact on our growth and smaller projects that have the potential
for high levels of profitability. We prefer to acquire properties with shallow
production, which offer lower geologic and mechanical risk of operations. In
evaluating prospective acquisitions, we generally focus on estimates of future
cash flows, rates of return, and net present values expected to be generated by
the acquired properties.
RECENT DEVELOPMENTS SINCE DECEMBER 31, 1999
We are Buying Our Stock from Shareholders Who Own Less Than 100 Shares
On January 15, 2000, we commenced an odd-lot stock repurchase program.
The program was originally scheduled to end on March 15, 2000, but was then
extended to May 15, 2000 by our board of directors. We are offering $8.50 per
share to any record or beneficial shareholder who owns less than 100 shares of
our common stock. The price was determined based upon a number of factors,
including trading prices for our common stock over the past 12 months and our
desire to maximize the response to this offer in order for us to achieve our
goal of reducing shareholder communication expenses. The record date to
determine eligible shareholders was December 31, 1999. As of December 31, 1999,
EXCO had approximately 1,400 odd-lot shareholders of record who owned 17,215
shares.
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We Executed a Second Amendment to Our Credit Agreement
On February 11, 2000, we entered into the second amendment to our
credit agreement. The credit facility consists of a regular revolver, which on
December 31, 1999, had a borrowing base of approximately $5.5 million. Under
terms of our credit agreement, on February 17, 2000 our borrowing base was
increased to $7.5 million. On February 29, 2000, our borrowing base was
increased to $13.0 million, and we had approximately $3.8 million available for
borrowing under the credit facility.
We Acquired Oil and Gas Natural Properties in Val Verde County, Texas
On February 25, 2000, we purchased certain oil and natural gas assets
located in Val Verde County, Texas from an undisclosed seller (the Val Verde
County Properties). The assets consist of 21 producing gas wells. Under terms of
the acquisition, we will become operator of 18 of the wells. As of September 30,
1999, total proved reserves net to our interest were estimated to include 19.8
Bcf of natural gas. Production for the month of December 1999, net to our
interest, was approximately 106 Mmcf of natural gas.
The purchase price of $12.2 million cash (approximately $11.4 million
after contractual adjustments and the waiver of certain preferential rights) was
paid from existing working capital and borrowings of $7.1 million under our
credit facility. The effective date of the acquisition was October 1, 1999.
These assets qualify as eligible replacement properties under our tax-deferred
exchange agreement. This use of tax-deferred exchange proceeds is in compliance
with the like-kind exchange provisions of Section 1031 of the Internal Revenue
Code. The price was determined through arms-length negotiation between the
parties.
We Executed a Letter of Intent to Form a Joint Venture and Acquire
Properties in Pecos County, Texas
On March 10, 2000, we entered into a letter of intent to form a joint
venture which will acquire certain natural gas assets located in Pecos County,
Texas from an undisclosed seller (the Pecos County Properties). The assets
consist of 8 producing gas wells. Under terms of the letter of intent, we will
become operator of 5 of the wells. As of January 1, 2000, under terms of the
current joint venture structure, total proved reserves net to our interest were
estimated to include 12.6 Bcf of natural gas.
The purchase price of approximately $10.3 million cash ($5.3 million
net to our interest) which is subject to contractual adjustments, will be paid
from existing working capital and anticipated borrowings of $6.8 million.
Borrowings are expected to be made under a new credit facility established for
the joint venture. The effective date of the acquisition is January 1, 2000. The
price was determined through arms-length negotiation between the parties.
Formation of the joint venture and acquisition of the Pecos County
Properties are subject to due diligence including title, environmental and
accounting reviews, as well as negotiation of a credit facility with terms
satisfactory to us.
OUR EXPLOITATION AND DEVELOPMENT ACTIVITIES
We made exploitation and development expenditures of $74,000, $257,000,
and $1.1 million during the years ended December 31, 1997, 1998, and 1999,
respectively. We made net acquisition expenditures of $2,000, $6.8 million, and
$13.6 million during the years ended December 31, 1997, 1998, and 1999,
respectively. Our ability to continue to fund our exploitation and development
activities depends upon cash flow and our ability to secure the necessary
financing for these activities.
OUR OPERATING ACTIVITIES
As of December 31, 1999, we were the operator of 117 gross (71.0 net)
wells, which represented approximately 41.2% of the gross wells and 51.5% of the
net wells in which we had an interest on that date. The remainder of the wells
in which we had an interest on December 31, 1999 are operated by third party
operators. The wells that we currently operate are located in Texas, Louisiana,
Mississippi and Kansas. On January 7, 2000, we took over operations of 29 gross
(20.0 net) producing wells of the Natchitoches Parish Properties at the Black
Lake Field in Louisiana. Although we elect to operate and manage most of our
properties and drilling activities, our wells are drilled by independent
drilling contractors.
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OUR OIL AND NATURAL GAS PROPERTIES
The following table sets forth the fields in which we have significant
oil and natural gas properties, and information as of December 31, 1999, with
respect to each of the fields.
YEAR ENDED
DECEMBER 31, 1999
WELLS PROVED RESERVES PERCENTAGE NET PRODUCTION
------------------ ------------------------ OF ------------------------
OIL(1) GAS EQUIVALENT OIL GAS
GROSS NET (BBLS) (MCF) RESERVES (BBLS) (MCF)
-------- --------- ----------- ------------ ------------ ------------ -----------
Black Lake Field................. 29 19.99 573,100 5,213,900 24.6% -- --
Ackerly Field.................... 8 4.02 454,900 312,600 8.6% 54,000 31,000
Chittim Field.................... 8 6.43 9,300 2,336,400 6.8% 1,100 143,000
Logansport Field................. 2 1.01 3,800 2,053,800 5.9% 200 29,100
Other............................ 237 106.50 2,072,600 6,631,300 54.1% 152,900 561,700
-------- --------- ----------- ------------ ------------ ------------ -----------
TOTAL.......................... 284 137.95 3,113,700 16,548,000 100.0% 208,200 764,800
======== ========= =========== ============ ============ ============ ===========
- ---------------
(1) Oil includes both oil and NGLs.
Black Lake Field
The Black Lake field is a prolific oil and natural gas field which is
located in Natchitoches Parish, Louisiana. The field produces oil, condensate,
NGLs and natural gas from the Pettit Lime formation at depths between 7,800 and
8,100 feet and is productive in over 19,000 acres. The field was discovered in
1964 and unitized prior to the start of production in 1966. Cumulative
production is over 1.1 trillion cubic feet of natural gas and 120 million Bbls
of oil. We purchased a 68.8% working interest in the field and currently serve
as the unit operator. Field production facilities include gas compression
equipment, a natural gas treating plant to remove carbon dioxide from the gas
stream and a refrigerated gas plant which recovers NGLs from the gas stream. The
field facilities also include a 60 Mmcf per day cryogenic gas plant which is
currently idle. Current reservoir pressure is low, but the field still has
significant recoverable reserves.
Ackerly Field
The Ackerly field is located in Dawson County, Texas. In 1998, we
acquired 8 gross (3.99 net) producing wells as the principal properties in the
Dawson County acquisition. These wells produce primarily oil from the Canyon
Reef and Dean formations at depths between 8,100 and 9,300 feet.
Chittim Field
The Chittim field is located in Maverick County, Texas. In 1998, we
acquired our interests in this field when we purchased the Chittim/Barclay Ranch
properties. Our wells produce natural gas from the Glen Rose Formation at depths
between 5,000 and 5,700 feet.
Logansport Field
We own working interests in two natural gas wells in the Logansport
field located in Desoto Parish, Louisiana. Our wells produce from a series of
low permeability reservoirs with long life natural gas reserves. Our reserves
are produced from the Hosston (Travis Peak) and Pettit formations from depths
between 6,000 and 7,500 feet.
Other
The other category consists of numerous unconcentrated fields located
in Kansas, Louisiana, Mississippi, North Dakota, Oklahoma, Texas and Wyoming.
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TITLE TO OUR PROPERTIES
When we acquire developed properties we conduct a title investigation,
however when we acquire undeveloped properties, as is common industry practice,
we conduct little or no investigation of title other than a preliminary review
of local mineral records. We do conduct title investigations and, in
most cases, obtain a title opinion of local counsel before we begin drilling
operations. We believe that the methods we utilize for investigating title prior
to acquiring any property are consistent with practices customary in the oil and
natural gas industry and that our practices are adequately designed to enable us
to acquire good title to properties. However, some title risks cannot be
avoided, despite the use of customary industry practices.
Our properties are generally subject to:
o customary royalty and overriding royalty interests;
o liens incident to operating agreements; and
o liens for current taxes and other burdens and minor encumbrances,
easements and restrictions.
We believe that none of these burdens either materially detract from the value
of our properties or materially interfere with their use in the operation of our
business. Substantially all of our properties are pledged as collateral under
our credit facility.
OUR OIL AND NATURAL GAS RESERVES
On December 31, 1999, our oil and natural gas reserves included direct
working interests in 280 wells in the states of Texas, Louisiana, Mississippi,
North Dakota, Kansas, Wyoming, and Oklahoma, as well as overriding royalties in
an additional 20 wells in Texas, Louisiana, Mississippi, Oklahoma and Michigan.
We also have direct working interests in 4 wells located offshore in the Gulf of
Mexico. On December 31, 1999, approximately 91.0% of the present value of the
estimated future net revenues attributable to our properties were attributable
to proved developed reserves and approximately 9.0% were attributable to proved
undeveloped reserves. In addition, approximately 53.0% of the proved reserves
were attributable to oil and NGLs and approximately 47.0% were attributable
to natural gas, on a Boe basis as discussed below.
The following table summarizes our proved reserves at December 31,
1999, and was prepared in accordance with the rules and regulations of the
Securities and Exchange Commission:
PROVED RESERVES
DECEMBER 31, 1999
(In thousands)
OIL(BBLS)(1) GAS (MCF) BOE(2)
------------ ----------- ---------
(In thousands)
Proved developed..................... 2,759 14,741 5,216
Proved undeveloped................... 355 1,807 656
------------ ----------- ---------
TOTAL................ 3,114 16,548 5,872
============ =========== =========
-----------
(1) Oil includes both oil and NGLs.
(2) Boe - Barrels of oil equivalent calculated by converting 6
Mcf of natural gas to 1 Bbl of oil. A Bbl is one stock
tank barrel, or 42 U.S. gallons liquid volume, of oil or
other liquid hydrocarbons. An Mcf is one thousand cubic
feet of natural gas.
A significant portion of the value of our proved undeveloped reserves
are in the Milroy, Palatine Hills, South Timbalier Block 76, Logansport and the
Nine Mile Draw fields. We must incur costs and undertake risks associated with
drilling and workover operations to recover these reserves.
The reserve estimates presented as of December 31, 1999 have been
prepared by Lee Keeling and Associates, Inc., independent petroleum engineers,
Tulsa, Oklahoma, and are a part of their report on our oil and natural gas
properties. Estimates of oil and natural gas reserves are, of necessity,
projections based on engineering data and, thus, are forward-looking in nature.
Moreover, because of the uncertainties inherent in the interpretation of
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this data, we cannot ensure that the reserves set forth herein will ultimately
be realized. Our actual results could differ materially. See Note 14,
Supplemental Oil and Natural Gas Reserve and Standardized Measure Information
included with our financial statements located elsewhere in this annual report
for additional information regarding our oil and natural gas reserves, including
the present value of future net revenues. Lee Keeling and Associates, Inc., also
prepared our reserve estimates as of December 31, 1996, 1997, and 1998.
WE HAVE NOT REPORTED RESERVES TO OTHER AGENCIES
As of December 31, 1999 our estimates of oil and natural gas reserves
have not been filed with or included in reports to any federal authority or
agency other than the Securities and Exchange Commission.
OUR PRODUCTION
The following table summarizes for the periods indicated, our revenues,
net production of oil (including condensate) and natural gas sold, the average
sales price per unit of oil (Bbl) and natural gas (Mcf) and costs and expenses
associated with the production of oil and natural gas:
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
Sales:
Oil:
Revenue ........................ $ 283,000 $ 634,000 $ 3,785,000
Production sold (Bbls) ......... 14,453 52,707 208,231
Average sales price per Bbl .... $ 19.56 $ 12.01 $ 18.18
Natural Gas:
Revenue ........................ $ 387,000 $ 751,000 $ 1,583,000
Production sold (Mcf) .......... 181,091 412,124 764,835
Average sales price per Mcf .... $ 2.14 $ 1.82 $ 2.07
Costs and Expenses:
Production costs per Boe ....... $ 7.21 $ 6.48 $ 7.07
Depreciation, depletion and
amortization per Boe .......... $ 1.41 $ 3.17 $ 4.31
Our total oil and natural gas revenues for the year ended December 31,
1999 increased 288% from the prior year primarily due to increases in production
volumes resulting from acquisitions we completed during 1999. Our average sales
price per barrel of oil increased $6.17 or 51%, and our average sales price per
Mcf of natural gas increased $.25, or 14%, from prices for the year ended
December 31, 1998.
Our total oil and natural gas revenues for the year ended December 31,
1998 increased 107% from the year ended December 31, 1997 due to increases in
our production volumes resulting from acquisitions we completed during 1998. The
effect of these increased volumes outweighed the decreased sales prices for both
oil and natural gas. Our average sales price per barrel of oil decreased $7.55,
or 39% and our average sales price per Mcf of natural gas decreased $.32, or
15%, from our prices for the period ended December 31, 1997.
The net production we reported in the preceding table only includes
revenue, production, production costs, and sales prices for our share of the oil
and natural gas after payment of royalties, if any. Our oil production for the
year ended December 31, 1999 was 295% higher and our natural gas production was
86% higher than for the year ended December 31, 1998. Our oil production for the
year ended December 31, 1998 was 265% higher and our natural gas production was
128% higher than the period ended December 31, 1997. On a Boe basis, our total
production for the year ended December 31, 1999 increased 177% from the year
ended December 31, 1998, and our total production for the year ended December
31, 1998 increased 172% from the period ended December 31, 1997.
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OUR INTEREST IN PRODUCTIVE WELLS
The following table sets forth our interest in productive wells
(producing wells and temporarily shut-in wells) on December 31, 1999. The number
of total gross oil and natural gas wells excludes any multiple completions. On
December 31, 1999, we did not own an interest in any well that was being
completed.
GROSS WELLS NET WELLS
------------------------------ --------------------------------
OIL GAS TOTAL OIL GAS TOTAL
-------- -------- -------- -------- -------- --------
Kansas .......... 1 2 3 1 1.08 2.08
Louisiana ....... 11 35 46 5.15 21.11 26.26
Mississippi ..... 23 -- 23 20.08 -- 20.08
North Dakota .... 2 -- 2 0.08 -- 0.08
Oklahoma ........ 37 27 64 34.52 2.31 36.83
Texas ........... 76 64 140 28.39 23.91 52.30
Wyoming ......... 6 -- 6 0.32 -- 0.32
-------- -------- -------- -------- -------- --------
TOTAL ........... 156 128 284 89.54 48.41 137.95
OUR DRILLING ACTIVITIES
We intend to continue concentrating on lower risk, development-type
properties by drilling to reservoirs from which production is, or was, being
obtained. In the past, we have drilled higher risk, exploratory-type wells. The
number and type of wells we drill will vary depending on the amount of funds we
have available for drilling, the cost of each well, the size of the fractional
working interests we acquire in each well and the estimated recoverable reserves
attributable to each well.
The following table summarizes our approximate gross and net interests
in the exploratory and development wells drilled during the periods indicated
and refers to the number of wells (holes) completed at any time during a period,
regardless of when drilling was initiated:
EXPLORATORY WELLS
------------------------------------------------------------------------
GROSS NET
---------------------------------- ----------------------------------
PRODUCTIVE DRY TOTAL PRODUCTIVE DRY TOTAL
------------ ---------- ---------- ------------ ---------- ----------
Year ended December 31, 1997 ............. -- -- -- -- -- --
Year ended December 31, 1998 ............. -- -- -- -- -- --
Year ended December 31, 1999 ............. -- 1 1 -- .40 .40
DEVELOPMENT WELLS
------------------------------------------------------------------------
GROSS NET
---------------------------------- ----------------------------------
PRODUCTIVE DRY TOTAL PRODUCTIVE DRY TOTAL
------------ ---------- ---------- ------------ ---------- ----------
Year ended December 31, 1997 ............. 1 -- 1 .12 -- .12
Year ended December 31, 1998 ............. 1 -- 1 .49 -- .49
Year ended December 31, 1999 ............. 2 2 4 1.25 1.41 2.66
The drilling activities referenced in the above tables were conducted
in Texas, Louisiana, Oklahoma and Mississippi. As of February 29, 2000, we were
participating in drilling one 10,600 foot development well in Val Verde County,
Texas. At this time, we have no additional commitments to drill any wells.
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OUR INTEREST IN DEVELOPED AND UNDEVELOPED ACREAGE
The following table sets forth our interest in developed and
undeveloped acreage on December 31, 1999:
DEVELOPED ACREAGE UNDEVELOPED ACREAGE
------------------------- ------------------------
GROSS NET GROSS NET
------------ ------------ ----------- ------------
Kansas ...................................... 240 93 768 178
Louisiana ................................... 26,562 12,317 10,604 8,431
Mississippi ................................. 1,562 1,340 1,586 1,265
North Dakota ................................ 472 15 320 8
Oklahoma .................................... 9,451 1,166 320 283
Texas ....................................... 24,986 8,018 12,652 6,219
Wyoming ..................................... 280 15 40 2
------------ ------------ ----------- ------------
TOTAL ..................................... 63,553 22,964 26,290 16,386
The primary terms of the oil and natural gas leases covering the
majority of our undeveloped acreage expire at various dates, generally ranging
from one to five years. We can retain our interest in undeveloped acreage by
drilling activity that establishes commercial reserves sufficient to maintain
these leases. Some of our undeveloped acreage in Texas is being "held by
production," meaning these leases are active as long as we produce oil and
natural gas from the acreage. Upon ceasing production, these leases will expire.
OUR PAST SALES OF PRODUCING PROPERTIES AND UNDEVELOPED ACREAGE
We evaluate properties on an ongoing basis to determine the economic
viability of the properties and whether these properties enhance our objectives.
During the course of normal business, we may dispose of producing properties and
undeveloped acreage if we believe that it is in our best interest.
In the year ended December 31, 1999, we sold our interest in three
major groups of producing oil and natural gas properties in Louisiana and the
Gulf of Mexico for a total of approximately $20.1 million after adjustments. In
the year ended December 31, 1998, we had no material sales of producing
properties. In the year ended December 31, 1997, we sold our interest in three
major groups of producing oil properties in Texas and Illinois for a total of
$270,000.
OUR PRODUCTS, MARKETS AND REVENUES
We produce oil and natural gas. We do not refine or process the oil
and, with the exception of the Natchitoches Parish Properties, the natural gas
that we produce. In the past, we sold the oil we produced under short-term
contracts at market prices in the areas in which the producing properties were
located, generally at F.O.B. field prices posted by the principal purchaser of
oil in these areas. In 1999, we switched a majority of our contracts to NYMEX
based pricing, which is typically calculated as the average of the daily
closing prices of quantities of oil and natural gas to be delivered one month in
the future. NYMEX is a commodities exchange where most oil and natural gas
futures contracts are traded in the U.S. This allows us to highly correlate
changes in the price we get for selling our oil and natural gas to changes in
the value of any NYMEX based hedging agreements we may enter into. A high
correlation between the product prices we receive and amounts we pay or
receive on our hedge agreements is necessary to avoid booking as expenses on
our consolidated statement of operations, unrealized hedge losses during the
term of the hedge agreements as will be required by Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities."
We sell the natural gas we produce under both short-term and long-term
contracts. We sell the natural gas to transmission and utility companies that
have pipelines in the vicinity of our producing properties or to companies that
will construct pipelines to our properties. Our sales contracts are of a type
common within the industry, and we negotiate a separate contract for each
property. Typically, we negotiate sales contracts for terms ranging from
day-to-day up to six months.
The availability of a ready market for oil and natural gas and the
prices of oil and natural gas are dependent upon a number of factors that are
beyond our control. These factors include, among other things:
o the level of domestic production and economic activity generally;
o the availability of imported oil and natural gas;
o actions taken by foreign oil producing nations;
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o the availability of natural gas pipelines with adequate capacity and
other transportation facilities;
o the availability and marketing of other competitive fuels,
fluctuating and seasonal demand for oil, natural gas and refined
products; and
o the extent of governmental regulation and taxation (under both
present and future legislation) of the production, refining,
transportation, pricing, use and allocation of oil, natural gas,
refined products and substitute fuels.
Accordingly, in view of the many uncertainties affecting the supply and demand
for oil, natural gas and refined petroleum products, we cannot predict
accurately the prices or marketability of the oil and natural gas from any
producing well in which we have or may acquire an interest.
Oil prices have been subject to significant fluctuations over the past
several decades. Levels of production maintained by the Organization of
Petroleum Exporting Countries member nations and other major oil producing
countries are expected to continue to be a major determinant of oil price
movements in the future. As a result, future oil price movements cannot be
predicted with any certainty. Similarly, during the past several years, the U.S.
market price for natural gas has been subject to significant fluctuations on a
monthly basis as well as from year to year. These frequent changes in the market
price make it impossible for us to predict natural gas price movements with any
certainty.
We cannot assure you that we will be able to market all the oil or
natural gas that we produce or, if our oil or natural gas can be marketed, that
we can negotiate favorable price and contractual terms. Changes in oil and
natural gas prices may significantly affect our revenues and cash flow and the
value of our oil and natural gas properties. Further, significant declines in
the prices of oil and natural gas may have a material adverse effect on our
business and financial condition.
We engage in oil and natural gas production activities in areas, where
from time to time the supply of oil and natural gas available for delivery
exceeds the demand. In this situation, companies purchasing oil and natural gas
in these areas reduce the amount of oil and natural gas that they may purchase
from us. If we cannot locate other buyers for our production or any of our newly
discovered oil and natural gas reserves, we may shut-in our oil and natural gas
wells for periods of time.
The following table sets forth the amount of our oil sales, natural gas
sales and the percent of these sales to total oil and natural gas revenues for
the periods indicated (in thousands):
PERCENT OF
SALES TO TOTAL OIL
AND GAS REVENUES
NATURAL TOTAL OIL ---------------------
PERIOD ENDED OIL SALES GAS SALES AND GAS SALES OIL GAS
- ----------------------------------------------------- --------- --------- ------------- ---------- ----------
Year ended December 31, 1997 ...................... $ 283 $ 387 $ 670 42% 58%
Year ended December 31, 1998 ...................... $ 634 $ 751 $ 1,385 46% 54%
Year ended December 31, 1999 ...................... $ 3,785 $ 1,583 $ 5,368 71% 29%
OUR CURRENT DELIVERY COMMITMENTS
We are not presently obligated to provide a fixed and determinable
quantity of oil or natural gas under any existing contract or agreement.
OUR PRINCIPAL CUSTOMERS
During the year ended December 31, 1999, sales of oil and
natural gas to 2 purchasers, EOTT Energy Operating Limited Partnership and
Plains All American, Inc., accounted for 27% and 36% respectively, of our total
oil and natural gas revenues. If we were to lose any one of our oil and natural
gas purchasers, then the loss could
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temporarily cease or delay production and sale of our oil and natural gas in
the purchaser's particular service area. We believe we would be able, under
current economic circumstances, to contract with other purchasers for our oil
and natural gas production if we were to lose any one of our oil and natural gas
purchasers.
During the year ended December 31, 1998, sales of oil and natural gas
to two purchasers, EOTT Energy Operating Limited Partnership and Scurlock
Permian LLC accounted for 17% and 10%, respectively, of our total revenues.
During the year ended December 31, 1997, sales of oil and natural gas to three
purchasers, Scurlock Permian Corporation, Delhi Gas Pipeline Corporation, and
Aurora Natural Gas, L.L.C., accounted for 22%, 19%, and 14%, respectively, of
our total revenues.
WE ENCOUNTER STRONG COMPETITION
The oil and natural gas industry is highly competitive. We encounter
strong competition from other independent operators and from major oil companies
in acquiring properties, contracting for drilling equipment and securing
trained personnel. Many of these competitors have financial and technical
resources and staffs substantially larger than those available to us. As a
result, our competitors may be able to pay more for desirable leases and they
may pay more to evaluate, bid for and purchase a greater number of properties or
prospects than our financial or personnel resources will permit.
We are also affected by competition for drilling rigs and the
availability of related equipment. Currently, with relatively high oil prices,
the oil and natural gas industry may experience shortages of drilling rigs,
equipment, pipe and personnel. We are unable to predict how long current market
conditions will continue, or its direct effect on our development and
exploitation program.
Competition for attractive oil and natural gas producing properties,
undeveloped leases and drilling rights is also strong, and we cannot assure you
that we will be able to compete satisfactorily in acquiring properties. Many
major oil companies have publicly indicated their decisions to concentrate on
overseas activities and have been actively marketing some of their existing
producing properties for sale to independent producers. We cannot assure you
that we will be successful in acquiring any of these properties.
WE ARE AFFECTED BY VARIOUS LAWS AND REGULATIONS
General
From time to time political developments and federal and state laws and
regulations affect our operations in varying degrees. Price control, tax and
other laws relating to the oil and natural gas industry, and changes in these
laws and regulations affect our oil and natural gas production, operations and
economics. There are currently no price controls on oil, condensate or NGLs. To
the extent price controls remain applicable after the enactment of the Natural
Gas Wellhead Decontrol Act of 1989, we are of the opinion that price controls
will not have a significant impact on the prices we receive for natural gas we
produce in the near future.
We review legislation affecting the oil and natural gas industry for
amendments. The legislative review frequently increases our regulatory burden.
Also, numerous departments and agencies, both federal and state, are authorized
by statute to issue and have issued rules and regulations binding on the oil and
natural gas industry and its individual members, compliance with which is often
difficult and costly and some of which may carry substantial penalties if we
were to fail to comply. We cannot predict how existing regulations may be
interpreted by enforcement agencies or the courts, nor whether amendments or
additional regulations will be adopted, nor what effect such interpretations and
changes may have on our business or financial condition.
Matters subject to regulation include:
o discharge permits for drilling operations;
o drilling and abandonment bonds or other financial responsibility
requirements;
o reports concerning operations;
o the spacing of wells;
o unitization and pooling of properties; and
o taxation.
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Natural Gas Regulation and the Effect on Marketing
Historically, interstate pipeline companies generally acted as
wholesale merchants by purchasing natural gas from producers and reselling the
natural gas to local distribution companies and large end users. Commencing in
late 1985, the Federal Energy Regulatory Commission issued a series of orders
that have had a major impact on interstate natural gas pipeline operations,
services, and rates, and thus have significantly altered the marketing and price
of natural gas. The FERC's key rule making action, Order No. 636, issued in
April 1992, required each interstate pipeline to, among other things, "unbundle"
its traditional bundled sales services and create and make available on an open
and nondiscriminatory basis numerous constituent services (such as gathering
services, storage services, firm and interruptible transportation services, and
standby sales and natural gas balancing services), and to adopt a new rate
making methodology to determine appropriate rates for those services. To the
extent the pipeline company or its sales affiliate makes natural gas sales as a
merchant in the future, it does so pursuant to private contracts in direct
competition with all other sellers, such as the Company; however, pipeline
companies and their affiliates were not required to remain "merchants" of
natural gas, and most of the interstate pipeline companies have become
"transporters only." In subsequent orders, the FERC largely affirmed the major
features of Order 636 and denied a stay of the implementation of the new rules
pending judicial review. By the end of 1994, the FERC had concluded the Order
636 restructuring proceedings, and, in general, accepted rate filings
implementing Order 636 on every major interstate pipeline. However, even through
the implementation of Order 636 on individual interstate pipelines is
essentially complete, many of the individual pipeline restructuring proceedings,
as well as Order 636 itself and the regulations promulgated thereunder, are
subject to pending appellate review and could possibly be changed as a result of
future court orders. We cannot predict for you whether the FERC's orders will be
affirmed on appeal or what the effects will be on our business.
In recent years the FERC also has pursued a number of other important
policy initiatives which could significantly affect the marketing of natural
gas. Some of the more notable of these regulatory initiatives include:
o a series of orders in individual pipeline proceedings articulating
a policy of generally approving the voluntary divestiture of
interstate pipeline owned gathering facilities by interstate
pipelines to their affiliates (the so-called "spin down" of
previously regulated gathering facilities to the pipeline's
nonregulated affiliate);
o the completion of a rule making involving the regulation of
pipelines with marketing affiliates under Order No. 497;
o the FERC's ongoing efforts to promulgate standards for pipeline
electronic bulletin boards and electronic data exchange;
o a generic inquiry into the pricing of interstate pipeline
capacity;
o efforts to refine the FERC's regulations controlling operation of
the secondary market for released pipeline capacity; and
o a policy statement regarding market based rates and other
non-cost-based rates for interstate pipeline transmission and
storage capacity.
Several of these initiatives are intended to enhance competition in natural gas
markets, although some, such as "spin downs," may have the adverse effect of
increasing the cost of doing business to some in the industry as a result of the
monopolization of those facilities by their new, unregulated owners. The FERC
has attempted to address some of these concerns in its orders authorizing such
"spin downs," but it remains to be seen what effect these activities will have
on access to markets and the cost of doing business. As to all of these recent
FERC initiatives, the ongoing, or in some instances, preliminary nature of these
regulatory initiatives makes it impossible at this time for us to predict their
ultimate impact on our business.
We own, directly or indirectly, certain natural gas facilities that we
believe meet the traditional tests the FERC has used to establish a company's
status as a gatherer not subject to FERC jurisdiction under the Natural Gas Act
of 1938. Moreover, recent orders of the FERC have been more liberal in their
reliance upon or use of the traditional tests, such that in many instances, what
was once classified as "transmission" may now be classified as "gathering." We
transport our own natural gas through these facilities. We also transport a
portion of our natural
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gas through gathering facilities owned by others, including interstate
pipelines. Although these FERC orders have created the potential for
increasing our natural gas shipping costs on third party gathering facilities,
our shipping activities have not been materially affected by these orders.
Federal Taxation
The federal government may propose tax initiatives that affect us. We
are unable to determine what effect, if any, future proposals would have on
product demand or our results of operations.
State Regulation
The various states in which we conduct activities regulate our
drilling, operation and production of oil and natural gas wells, including the
method of developing new fields, spacing of wells, the prevention and clean-up
of pollution, and maximum daily production allowables based on market demand and
conservation considerations.
Environmental Regulation
Our exploration, development and production of oil and natural gas,
including our operation of saltwater injection and disposal wells, are subject
to various federal, state and local environmental laws and regulations. These
laws and regulations can increase the costs of planning, designing, installing
and operating oil and natural gas wells. Our domestic activities are subject to
a variety of environmental laws and regulations, including, but not limited to:
o the Oil Pollution Act of 1990;
o the Clean Water Act;
o the Comprehensive Environmental Response, Compensation and Liability
Act;
o the Resource Conservation and Recovery Act;
o the Clean Air Act; and
o the Safe Drinking Water Act,
as well as state regulations promulgated under comparable state statutes. These
laws and regulations:
o require the acquisition of a permit before drilling commences;
o restrict the types, quantities and concentration of various
substances that can be released into the environment in connection
with drilling and production activities;
o limit or prohibit drilling activities on certain lands lying within
wilderness, wetlands and other protected areas; and
o impose substantial liabilities for pollution which might result from
our operations.
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We also are subject to regulations governing the handling, transportation,
storage and disposal of naturally occurring radioactive materials that are found
in our oil and natural gas operations. Civil and criminal fines and penalties
may be imposed for non-compliance with these environmental laws and regulations.
Additionally, these laws and regulations require the acquisition of permits or
other governmental authorizations before undertaking certain activities, limit
or prohibit other activities because of protected areas or species and impose
substantial liabilities for cleanup of pollution.
Under the Oil Pollution Act, a release of oil into water or other areas
designated by the statute could result in the Company being held responsible for
the costs of remediating a release, specified damages and natural resource
damages. The extent of that liability could be extensive, as set forth in the
statute, depending on the nature of the release. A release of oil in harmful
quantities or other materials into water or other specified areas could also
result in the Company being held responsible under the Clear Water Act for the
cost of remediation, and civil and criminal fines and penalties.
CERCLA and comparable state statutes, also known as "Superfund" laws,
can impose joint, several and retroactive liability, without regard to fault or
the legality of the original conduct, on certain classes of persons for the
release of a "hazardous substance" into the environment. In practice, cleanup
costs are usually allocated among various responsible parties. Potentially
liable parties include site owners or operators, past owners or operators under
certain conditions and entities that arrange for the disposal or treatment of,
or transport of hazardous substances found at the site. Although CERCLA, as
amended, currently exempts petroleum, including, but not limited to, crude oil,
gas and natural gas liquids from the definition of hazardous substance, our
operations may involve the use or handling of other materials that may be
classified as hazardous substances under CERCLA. Furthermore, we cannot assure
you that the exemption will be preserved in future amendments of the Act, if
any.
RCRA and comparable state and local requirements impose standards for
the management, including treatment, storage and disposal of both hazardous and
nonhazardous solid wastes. We generate hazardous and nonhazardous solid waste in
connection with our routine operations. From time to time, proposals have been
made that would reclassify certain oil and natural gas wastes, including wastes
generated during pipeline, drilling and production operations, as "hazardous
wastes" under RCRA which would make these solid wastes subject to much more
stringent handling, transportation, storage, disposal and clean-up requirements.
This development could have a significant impact on our operating costs. While
state laws vary on this issue, state initiatives to further regulate oil and
natural gas wastes may have a similar impact on our operations.
Because oil and natural gas exploration and production, and possibly
other activities, have been conducted at some of our properties by previous
owners and operators, materials from these operations remain on some of the
properties and in some instances require remediation. In addition, we have
agreed to indemnify the sellers of producing properties from whom we have
acquired reserves against certain liabilities for environmental claims
associated with the properties. While we do not believe the costs to be incurred
by us for compliance and remediating previously or currently owned or operated
properties will be material, we cannot guarantee that these potential costs will
not result in material expenditures.
Additionally, in the course of our routine oil and natural gas
operations, surface spills and leaks, including casing leaks, of oil or other
materials occur, and we may incur costs for waste handling and environmental
compliance associated with these leaks. Moreover, we are able to control
directly the operations of only those wells which we operate. Notwithstanding
our lack of control over wells owned by us but operated by others, the failure
of the operator to comply with applicable environmental regulations may be, in
certain circumstances, attributable to us.
It is not anticipated that we will be required in the near future to
expend amounts that are material in relation to our total capital expenditures
program by reason of environmental laws and regulations, but inasmuch as these
laws and regulations are frequently changed, we are unable to predict the
ultimate cost of compliance. More stringent laws and regulations protecting the
environment may be adopted and we may be required to incur material expenses in
connection with environmental laws and regulations in the future.
Other Proposed Legislation
The recent trend toward stricter standards in environmental legislation
and regulation is likely to continue. For instance, legislation has been
proposed in the U.S. Congress from time to time that would reclassify certain
crude
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oil and natural gas exploitation and production wastes as "hazardous wastes"
which would make the reclassified wastes subject to much more stringent
handling, disposal and clean-up requirements. If this legislation were to be
enacted, it may have a significant impact on our operating costs, as well as the
oil and natural gas industry in general. Initiatives to further regulate the
disposal of crude oil and natural gas wastes are also pending in various states,
and these various initiatives may have a similar impact on us. We may incur
substantial costs to comply with environmental laws and regulations. In addition
to compliance costs, government entities and other third parties may assert
substantial liabilities against owners and operators of oil and natural gas
properties for oil spills, discharge of hazardous materials, remediation and
clean-up costs and other environmental damages, including damages caused by
previous property owners. As a result, substantial liabilities to third parties
or governmental entities may be incurred, the payment of which may reduce or
eliminate the funds available for project investment or result in loss of our
properties. Although we maintain insurance coverage we consider to be customary
in the industry, we are not fully insured against all of these risks, either
because insurance is not available or because of high premium costs.
Accordingly, we may be subject to liability or may lose substantial portions of
properties due to hazards that cannot be insured against or have not been
insured against due to prohibitive premium costs or for other reasons. The
imposition of any of these liabilities on us may have a material adverse effect
on our financial condition and results of operations.
OUR EMPLOYEES
As of December 31, 1999, we employed 25 persons of which 4 were
involved in field operations and 21 were engaged in office and administrative
activities. None of our employees are represented by unions or covered by
collective bargaining agreements. To date, we have not experienced any strikes
or work stoppages due to labor problems, and we consider our relations with our
employees to be good. We also utilize the services of independent consultants on
a contract basis.
OUR EXECUTIVE OFFICERS
DOUGLAS H. MILLER, 52, was elected Chairman and Chief Executive Officer
of EXCO in December 1997. Mr. Miller was Chairman of the Board and Chief
Executive Officer of Coda Energy, Inc., an independent oil and gas company, from
October 1989 until November 1997 and served as a director of Coda from 1987
until November 1997.
T. W. EUBANK, 57, was elected President, Treasurer and a director of
EXCO in December 1997. Mr. Eubank was a consultant to various private companies
from February 1996 to December 1997. Mr. Eubank served as President of Coda from
March 1985 until February 1996. He was a director of Coda from 1981 until
February 1996.
J. DOUGLAS RAMSEY, PH.D., 39, was elected a Vice President and Chief
Financial Officer of EXCO in December 1997. Dr. Ramsey has been a director of
EXCO since March 1998. Dr. Ramsey most recently was Financial Planning Manager
of Coda and has worked in various capacities for Coda from 1992 until 1997. Dr.
Ramsey also teaches finance at Southern Methodist University.
CHARLES R. EVANS, 46, joined EXCO in February 1998 and became a Vice
President in March 1998. Mr. Evans graduated from Oklahoma University with a
B.S. degree in Petroleum Engineering in 1976. After working for Sun Oil Co., he
joined TXO Production Corp. in 1979 and was elected Vice President of
Engineering and Evaluation in 1989 and Vice President of Engineering and Project
Development for Delhi Gas Pipeline Corporation, a natural gas gathering,
processing and marketing company, in 1990. Mr. Evans most recently was
Director-Environmental Affairs and Safety for Delhi until December 1997.
JOHN D. JACOBI, 47, became a Vice President of EXCO in February 1999.
Mr. Jacobi received his B.S. degree from West Texas State University. He
co-founded Jacobi-Johnson Energy, Inc., an independent oil and natural gas
producer, in 1991 and was its President until January 1997. He then served as
its Vice President and Treasurer until May 8, 1998, when the company was sold to
EXCO.
DANIEL A. JOHNSON, 48, became a Vice President of EXCO in February
1999. Mr. Johnson graduated from Texas A&M University with a B.S. degree in
Petroleum Engineering. In 1991, he co-founded Jacobi-Johnson
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Energy, Inc., an independent oil and natural gas producer. He served as its
President from January 1997 until the company was sold to EXCO on May 8, 1998.
RICHARD E. MILLER, 46, became General Counsel and General Land Manager
and was elected Secretary of EXCO in December 1997. Mr. Miller was a senior
partner and head of the Energy Section of Gardere & Wynne, L.L.P., a Dallas
based law firm, from December 1991 to September 1994. Mr. Miller practiced law
as a sole practitioner from September 1994 to December 1997.
GLOSSARY OF SELECTED OIL AND NATURAL GAS TERMS
The following are abbreviations and definitions of certain terms
commonly used in the oil and natural gas industry and this annual report.
"BBL." One stock tank barrel, or 42 U.S. gallons liquid volume, used
herein in reference to crude oil or other liquid hydrocarbons.
"BCF." One billion cubic feet of natural gas.
"BOE." Barrels oil equivalent. Calculated by converting 6 Mcf of
natural gas to 1 Bbl of oil.
"INFILL DRILLING." Drilling of a well between known producing wells to
better exploit the reservoir.
"MBOE." One thousand barrels oil equivalent.
"MCF." One thousand cubic feet of natural gas.
"NGL." The combination of ethane, propane, butane and natural gasolines
that when removed from natural gas become liquid under various levels of higher
pressure and lower temperature.
"OVERRIDING ROYALTY INTEREST." An interest in an oil and/or natural gas
property entitling the owner to a share of oil and natural gas production free
of costs of production.
"PRESENT VALUE OF ESTIMATED FUTURE NET REVENUES." The present value of
estimated future net revenues is an estimate of future net revenues from a
property at December 31, 1999, at its acquisition date, or as otherwise
indicated, after deducting production and ad valorem taxes, future capital costs
and operating expenses, but before deducting federal income taxes. The future
net revenues have been discounted at an annual rate of 10% to determine their
"present value." The present value is shown to indicate the effect of time on
the value of the net revenue stream and should not be construed as being the
fair market value of the properties. Estimates have been made using constant oil
and natural gas prices and operating costs at December 31, 1999, at its
acquisition date, or as otherwise indicated. We believe that the present value
of estimated future net revenues before income taxes, while not in accordance
with generally accepted accounting principles, is an important financial measure
used by investors and independent oil and natural gas producers for evaluating
the relative significance of oil and natural gas properties and acquisitions.
"TCF." One trillion cubic feet of natural gas.
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ITEM 2. PROPERTIES
GENERAL
We lease approximately 7,700 square feet of office space in Dallas,
Texas, for our corporate offices. The lease expires December 31, 2000 and
requires a monthly rental payment of approximately $9,200. We consider this
space adequate for our present needs. We also have an office in Tyler, Texas.
OTHER
We have described our oil and natural gas properties, oil and natural
gas reserves, acreage, wells, production and drilling activity in Item 1
beginning on page 1 of this annual report.
ITEM 3. LEGAL PROCEEDINGS
During 1999, we were not a party to any material legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the last three months of the year ended December 31, 1999, we
did not submit any matter to a vote by our shareholders through the solicitation
of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION FOR OUR COMMON STOCK
Our common stock is currently quoted on the Nasdaq National Market
System (Nasdaq NMS) under the symbol "EXCO", however there is limited trading in
our common stock. The following table sets forth the high and low bid prices
from January 1, 1997 through December 31, 1999, based upon quotations
periodically published on the Nasdaq NMS and the OTC Bulletin Board where our
stock was traded until September 16, 1998. The price quotations below have been
adjusted to estimate the effect of our one-for-two reverse stock split of the
common stock in the case of quotations for periods prior to March 31, 1998, the
effective date of the stock split. All price quotations represent prices between
dealers, without retail mark-ups, mark-downs or commissions and may not
represent actual transactions.
HIGH LOW
-------- --------
Year ended December 31, 1998
First Quarter ................... $ 7.00 $ 6.00
Second Quarter .................. 6.50 6.50
Third Quarter ................... 7.50 6.00
Fourth Quarter .................. 7.88 7.00
Year ended December 31, 1999
First Quarter ................... $ 7.50 $ 6.25
Second Quarter .................. 6.75 6.00
Third Quarter ................... 7.75 7.00
Fourth Quarter .................. 7.00 6.00
The bid price for our common stock was $6.625 on February 29, 2000.
OUR SHAREHOLDERS
According to the records of our transfer agent, there were
approximately 1,380 holders of record of our common stock on February 29, 2000
(including nominee holders such as banks and brokerage firms who hold shares for
beneficial holders).
OUR DIVIDEND POLICY
We have not paid any cash dividends on our common stock, and do not
anticipate paying cash dividends on our common stock in the foreseeable future.
In addition, our credit facility currently prohibits us from paying dividends.
We anticipate that any income generated in the foreseeable future will be
retained for the development and expansion of our business. Our future dividend
policy is subject to the discretion of the board of directors and will depend
upon a number of factors, including future earnings, debt service, capital
requirements, restrictions in our credit facility, business conditions, our
financial condition and other factors that our board of directors deems
relevant.
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ITEM 6. SELECTED FINANCIAL DATA
The following table presents our selected historical financial data.
You should read this financial data in conjunction with our consolidated
financial statements, the notes to our consolidated financial statements and the
other financial information, including pro forma information, included in this
annual report. This information does not replace the consolidated financial
statements. In our opinion, the data we have presented reflects all adjustments
we consider necessary for a fair presentation of the results for such periods.
NINE MONTH
TRANSITION
PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------- ------------------------------------------------
1995(1) 1996(1) 1997 1998 1999
------------- --------- --------- --------- ---------
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and natural gas .............................. $ 560 $ 872 $ 670 $ 1,385 $ 5,368
Other ............................................ 76 39 28 690 1,934
Gain on disposition of properties ................ -- -- -- -- 5,102
--------- --------- --------- --------- ---------
Total revenues ............. 636 911 698 2,075 12,404
Costs and expenses:
Oil and natural gas production ................... 333 429 322 786 2,375
Depreciation, depletion and
amortization .................................. 92 114 84 465 1,446
General and administrative ....................... 366 373 486 1,231 1,934
Interest expense ................................. 5 18 11 104 17
Other (2) ........................................ -- 303 -- -- --
--------- --------- --------- --------- ---------
Total expenses ............. 796 1,237 903 2,586 5,772
--------- --------- --------- --------- ---------
Income (loss) before income taxes
and minority interest .............................. (160) (326) (205) (511) 6,632
Minority interest in limited partnership .............. -- -- -- -- (7)
--------- --------- --------- --------- ---------
Income (loss) before income taxes ..................... (160) (326) (205) (511) 6,639
Income taxes .......................................... -- -- -- -- 2,139
--------- --------- --------- --------- ---------
Net income (loss) before extraordinary items .......... (160) (326) (205) (511) 4,500
Fee income from early extinguishment of debt,
net of tax ......................................... -- -- -- -- 165
--------- --------- --------- --------- ---------
Net income (loss) ..................................... $ (160) $ (326) $ (205) $ (511) $ 4,665
========= ========= ========= ========= =========
Basic and diluted earnings (loss) per share (3)(4)..... $ (.47) $ (.85) $ (.51) $ (.18) $ .69
========= ========= ========= ========= =========
Weighted average common and common
equivalent shares outstanding:
Basic ............................................ 338 383 403 2,871 6,698
========= ========= ========= ========= =========
Diluted .......................................... 338 383 403 2,874 6,714
========= ========= ========= ========= =========
DECEMBER 31,
---------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
BALANCE SHEET DATA: (In thousands)
Current assets ................. $ 582 $ 373 $ 727 $ 22,157 $ 31,599
Oil and gas properties, net .... 820 749 473 7,554 18,674
Total assets ................... 1,511 1,226 1,270 36,888 50,932
Current liabilities ............ 861 658 328 648 10,017
Long-term debt ................. 40 36 15 -- --
Stockholders' equity ........... 610 532 927 36,240 40,880
- ---------------
(1) The data for all prior years has been restated to reflect the change in
our method of accounting for oil and natural gas operations to the full
cost method of accounting. See Note 2 to our Consolidated Financial
Statements. As a result of the change in the accounting
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method, the net loss for the nine month period ended December 31, 1995
and the year ended December 31, 1996, has been decreased by $184,000
($0.54 per share) and $3,000 ($0.01 per share), respectively. Effective
December 31, 1995 we changed our year-end from March 31 to December 31.
(2) The $303,000 expense in 1996 represents the legal, accounting and other
expenses associated with our attempted acquisition of Taurus Energy
Corp.
(3) Per share data has been restated to reflect the one-for-five reverse
stock split effective July 19, 1996, and the one-for-two reverse stock
split effective March 31, 1998. The adoption of Financial Accounting
Standards Board No. 128, "Earnings per Share", did not have a material
impact on earnings per share amounts.
(4) We have not declared nor paid any dividends during any of the periods
presented.
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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OUR RESULTS OF OPERATIONS
Comparison of Year Ended December 31, 1998 and December 31, 1999
Revenues. Oil and natural gas sales increased $4.0 million or 288%, to
$5.4 million in 1999 from $1.4 million in 1998. The increase was due primarily
to the Rio Grande, Inc. acquisition and other smaller acquisitions as well as
higher oil and natural gas prices during 1999.
We sold 208,231 Bbls of oil in 1999 versus 52,707 Bbls in 1998, a 295%
increase. We sold 764,835 Mcf of natural gas in 1999 versus 412,124 Mcf in 1998,
a 86% increase. The increases in oil and natural gas volumes were also
attributable to our acquisitions.
During 1999 we received an average oil price of $18.18 per Bbl versus
$12.01 per Bbl during 1998, a $6.17 per Bbl or 51% increase. During 1999 we
received an average natural gas price of $2.07 per Mcf versus $1.82 per Mcf for
1998, a $.25 per Mcf or 14% increase.
Our other income in 1999 was $1.4 million compared to $690,000 in 1998.
This income primarily includes interest income, salt water disposal income, and
well supervision fees. Other income increased primarily due to a $646,000
increase in interest income which we received from cash equivalent investments
and the Venus note.
In 1999, we also recorded a pre-tax gain of approximately $5.1 million
from the sale of various oil and natural gas assets.
Costs and Expenses. Our costs and expenses increased $3.2 million, or
123%, to $5.8 million in 1999 as compared to costs and expenses of $2.6 million
in 1998. Our costs and expenses primarily increased due to a $703,000 increase
in general and administrative costs. This increase reflects expenses associated
with our increased staffing and our focus on reserve acquisitions. Our costs and
expenses also increased due to a $1.6 million increase in oil and natural gas
production expenses and a $981,000 increase in depreciation, depletion and
amortization expenses, both increases due to our 1999 acquisitions. We also had
a decrease of $87,000 in interest expense.
Extraordinary Item. In 1999 we had extraordinary income of $165,000, or
$.02 per share, net of income taxes, from the prepayment of a promissory note we
purchased on June 30, 1999. There was no extraordinary income in 1998.
Net Income. We had net income in 1999 of $4.7 million, or $.69 per
share, compared to a loss of $511,000, or $.18 per share in 1998. We have based
our earnings per share figures on restated weighted average shares outstanding
after the retroactive effect of the one-for-two reverse stock split approved at
our shareholders' meeting held on March 31,1998.
Comparison of Year Ended December 31, 1997 and December 31, 1998
Revenues. Oil and natural gas sales increased $715,000, or 107%, to
$1.4 million in 1998 from $670,000 in 1997. The increase was due primarily to
the acquisition we made in Maverick County, the Jacobi-Johnson Energy, Inc.
acquisition, and the acquisition we made in Dawson County.
We sold 52,707 Bbls of oil during 1998 versus 14,453 Bbls in 1997, a
265% increase. We sold 412,124 Mcf of natural gas during 1998 versus 181,091 Mcf
in 1997, a 128% increase. The increases in oil and natural gas volumes were also
attributable to our acquisitions.
During 1998 we received an average oil price of $12.01 per Bbl versus
$19.56 per Bbl during 1997, a $7.55 per Bbl or 39% decrease. During 1998 we
received an average natural gas price of $1.82 per Mcf versus $2.14 per Mcf for
1997, a $.32 per Mcf or 15% decrease.
Our other income in 1998 was $690,000 as compared to $28,000 in 1997.
This income primarily includes interest income, salt water disposal income, and
well supervision fees. Other income increased due primarily to a
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$591,000 increase in interest income which we received from cash equivalent
investments and an additional $64,000 in income we received from our two salt
water disposal wells. We have reclassified amounts in the prior years'
statements of operations to reflect a change in the way we classify fees from
overhead charges billed to working interest owners, including ourselves. We
previously recorded these overhead charges as management fee revenue, and we now
record them as a reduction in general and administrative expenses.
Costs and Expenses. Our costs and expenses increased $1.7 million, or
186%, to $2.6 million in 1998 as compared to costs and expenses of $903,000 in
1997. Our costs and expenses primarily increased due to a $745,000 increase in
general and administrative costs. This increase reflects expenses associated
with our increased staffing and our new focus on reserve acquisitions. Our costs
and expenses also increased due to a $464,000 increase in oil and natural gas
production expenses and a $381,000 increase in depreciation, depletion and
amortization expenses, both increases due to our 1998 acquisitions. We also had
an increase of $93,000 in interest expense as a result of periodic borrowings
against our credit facility.
In 1997, we changed our method of accounting for oil and natural gas
properties from successful efforts to the full cost method of accounting. We
have restated prior years to reflect this change in accounting method as though
we had been using the full cost method for all periods we are comparing in this
annual report. Effective December 31, 1997, we effected a quasi-reorganization
by applying approximately $8.8 million of our additional paid-in capital account
to eliminate our accumulated deficit.
Net Loss. We had a net loss in 1998 of $511,000, or $.18 per share,
compared to a loss of $205,000, or $.51 per share in 1997. We have based our
earnings per share figures on restated weighted average shares outstanding after
the retroactive effect of the one-for-two reverse stock split approved at our
shareholders' meeting held on March 31, 1998.
1997 QUASI-REORGANIZATION
Effective December 31, 1997, we effected a quasi-reorganization by
applying approximately $8.8 million of our additional paid-in capital account to
eliminate our accumulated deficit. Our board of directors decided to effect this
quasi-reorganization given the change in management in December 1997, the
infusion of new equity capital during December 1997 and an expected increase in
acquisition, exploitation and development activities. Based on these factors and
the establishment of a strategic growth plan, our board of directors and
management believed reflecting prior losses on our balance sheet would not be
meaningful in presenting our financial position. Our accumulated deficit was
primarily related to past operations and properties that had been disposed of;
the accumulated deficit was not, in management's view, reflective of our
financial condition at that time. We did not adjust the historical carrying
values of our assets and liabilities in connection with the
quasi-reorganization.
WE CHANGED OUR METHOD OF ACCOUNTING FOR OIL AND NATURAL GAS OPERATIONS
In the fourth quarter of 1997, we changed from the successful efforts
method to the full cost method of accounting for our oil and natural gas
operations. We have restated all of the prior financial statements which we
present in this annual report to reflect the change.
During the ten years ending in December 1997, we incurred minimal
exploration and acquisition costs, liquidated substantially all our properties
and completed "out of court" debt restructurings. The "out of court" debt
restructurings were completed during 1987 and 1988. During the fourth quarter of
1997, we experienced a change in ownership control and we appointed new
management. Our management views us as a new company and believes our past
operations are insignificant and not relevant to our future plans.
Our new management changed the accounting method for oil and natural
gas properties because management believes the full cost method more
appropriately reflects our change in focus for future operations. Further, our
new management does not believe that using the successful efforts method of
accounting is appropriate for a small to medium size acquisition, development
and exploitation company.
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OUR LIQUIDITY AND CAPITAL RESOURCES
General
On December 31, 1999 we had working capital of $21.6 million compared
to $21.5 million on December 31, 1998. Our working capital at December 31, 1999
includes a receivable of approximately $18.1 million due from an escrow agent as
a result of the sale by us of certain oil and natural gas properties located in
Jackson Parish, Louisiana. This receivable was subsequently paid on January 6,
2000. The payment consisted of approximately $18.1 million cash. Our working
capital on December 31, 1998 was $21.5 million compared to $399,000 on December
31, 1997. The sale of common stock through a rights offering in August 1998 for
net proceeds of $35.2 million contributed to this $21.1 million increase in our
working capital. Our 2000 budget for capital expenditures is approximately $2.0
million.
Deferred Income Taxes
Under applicable Federal and State tax laws, we are able to
carry forward, subject to limitations, net operating losses (NOLs) incurred by
EXCO and Rio Grande, Inc. in prior years. We are able to apply a portion of
these NOLs to reduce the amount of income taxes accrued by us in subsequent
years. We account for these NOLs by establishing an off balance sheet deferred
tax asset. We believe that some of our NOLs may expire unused and, accordingly,
we must reduce the value of the deferred tax asset. We have established a
valuation allowance of $1.7 million to reflect this reduction. Additional
discussion can be found in "Item 8. Consolidated Financial Statements and
Supplementary Data, Note 4. Income Taxes".
Long-Term Debt
On December 31, 1999, we had no long-term debt.
Sale of Equity
On July 16, 1998, we commenced a rights offering to our existing
shareholders. Each shareholder received ten rights for each share of our common
stock held. Each right entitled the shareholder to purchase one share of our
common stock for $6.00 per share. The rights offering expired on Au