UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
þ
. QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended
March
31, 2009
OR
p
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For the
transition period from _____________ to _________________
Commission
File No.
0-9120
TXCO
RESOURCES INC.
(Exact
Name of Registrant as Specified in its Charter)
DELAWARE
|
84-0793089
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
777
E. SONTERRA BLVD., SUITE 350 SAN ANTONIO,
TEXAS 78258
(Address
of principal executive offices, Zip code)
Registrant's
telephone number, including area code:
(210) 496-5300
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of "large accelerated filer," "accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer
p
|
Accelerated
filer
þ
|
Non-accelerated
filer
p
(Do
not check if a smaller reporting company)
|
Smaller-reporting
company
p
|
Indicate
by check mark if the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Indicate
the number of shares outstanding of each of the issuer's classes of common stock
as of May 13, 2009.
Common
Stock $0.01 par value
|
38,553,311
|
(Class
of Stock)
|
(Number
of Shares)
|
For
more information go to www.txco.com.
The
information at www.txco.com is not incorporated into this report.
PART
I - FINANCIAL INFORMATION
ITEM
1. FINANCIAL
STATEMENTS
TXCO
RESOURCES INC.
Consolidated
Balance Sheets
(Unaudited)
($
in thousands)
|
March
31,
2009
|
|
December
31,
2008
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$2,889
|
|
|
$12,236
|
|
Accounts
receivable, net
|
|
15,954
|
|
|
20,641
|
|
Prepaid
expenses and other
|
|
2,804
|
|
|
4,470
|
|
Derivative
settlements receivable
|
|
608
|
|
|
1,586
|
|
Accrued
derivative asset
|
|
-
|
|
|
5,916
|
|
Total
Current Assets
|
|
22,255
|
|
|
44,849
|
|
|
|
|
|
|
|
|
Property and Equipment,
net - successful efforts
method
of accounting for oil and natural gas properties
|
|
405,871
|
|
|
433,126
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
|
|
|
|
Deferred
financing fees
|
|
2,698
|
|
|
2,950
|
|
Other
assets
|
|
1,074
|
|
|
1,143
|
|
Accrued
derivative asset
|
|
-
|
|
|
4,782
|
|
Total
Other Assets
|
|
3,772
|
|
|
8,875
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$431,898
|
|
|
$486,850
|
|
TXCO
RESOURCES INC.
Consolidated
Balance Sheets
(Unaudited)
($
in thousands)
|
March
31,
2009
|
|
December
31,
2008
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
Accounts
payable, trade
|
|
$49,821
|
|
|
$49,661
|
|
Other
payables and accrued liabilities
|
|
13,786
|
|
|
25,114
|
|
Undistributed
revenue
|
|
1,919
|
|
|
3,262
|
|
Notes
payable
|
|
322
|
|
|
1,518
|
|
Bank
debt
|
|
150,414
|
|
|
153,000
|
|
Redeemable
preferred stock
|
|
94,488
|
|
|
66,909
|
|
Interest
on redeemable preferred stock payable
|
|
2,194
|
|
|
-
|
|
Accrued
derivative obligation
|
|
-
|
|
|
2,324
|
|
Total
Current Liabilities
|
|
312,944
|
|
|
301,788
|
|
|
|
|
|
|
|
|
Long-Term
Liabilities
|
|
|
|
|
|
|
Deferred
income taxes
|
|
-
|
|
|
19,602
|
|
Accrued
derivative obligation
|
|
-
|
|
|
1,162
|
|
Asset
retirement obligation
|
|
9,889
|
|
|
8,569
|
|
Total
Long-Term Liabilities
|
|
9,889
|
|
|
29,333
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
|
Preferred
stock, authorized 10,000,000 shares;
Series
A, B & C, -0- shares issued and outstanding
Series
D, 51,909 and 56,909 shares issued and outstanding
Series
E, 15,000 and 20,000 shares issued and outstanding
|
|
-
|
|
|
-
|
|
Common
stock, par value $0.01 per share; authorized
100,000,000
shares; issued 38,885,543 and 37,420,953 shares,
outstanding
38,681,155 and 37,254,100 shares
|
|
389
|
|
|
374
|
|
Additional
paid-in capital
|
|
150,589
|
|
|
148,534
|
|
Retained
earnings (deficit)
|
|
(44,694
|
)
|
|
3,088
|
|
Accumulated
other comprehensive income, net of tax
|
|
3,872
|
|
|
4,759
|
|
Less
treasury stock, at cost, 204,388 and 166,853 shares
|
|
(1,091
|
)
|
|
(1,026
|
)
|
Total
Stockholders' Equity
|
|
109,065
|
|
|
155,729
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$431,898
|
|
|
$486,850
|
|
TXCO
RESOURCES INC.
Consolidated
Statements Of Operations
(Unaudited)
|
|
Three
Months
Ended
|
|
Three
Months
Ended
|
(in
thousands, except earnings per share data)
|
|
March
31, 2009
|
|
March
31, 2008
|
Revenues
|
|
|
|
|
|
|
Oil
and natural gas sales
|
|
$13,946
|
|
|
$28,648
|
|
Gas
gathering operations
|
|
589
|
|
|
3,225
|
|
Other
operating income
|
|
1,097
|
|
|
453
|
|
Total
Revenues
|
|
15,632
|
|
|
32,326
|
|
|
|
|
|
|
|
|
Costs
and Expenses
|
|
|
|
|
|
|
Lease
operations
|
|
5,383
|
|
|
4,232
|
|
Drilling
operations
|
|
781
|
|
|
432
|
|
Production
taxes
|
|
577
|
|
|
1,484
|
|
Exploration
expenses
|
|
716
|
|
|
644
|
|
Impairment
and abandonments
|
|
19,902
|
|
|
255
|
|
Gas
gathering operations
|
|
804
|
|
|
3,387
|
|
Depreciation,
depletion and amortization
|
|
17,489
|
|
|
11,275
|
|
General
and administrative
|
|
3,480
|
|
|
4,031
|
|
Total
Costs and Expenses
|
|
49,132
|
|
|
25,740
|
|
|
|
|
|
|
|
|
(Loss)
Income from Operations
|
|
(33,500
|
)
|
|
6,586
|
|
|
|
|
|
|
|
|
Other
Income (Expense)
|
|
|
|
|
|
|
Interest
expense
|
|
(4,720
|
)
|
|
(2,235
|
)
|
Interest
income
|
|
18
|
|
|
72
|
|
Gain
on sale of assets
|
|
630
|
|
|
-
|
|
Accretion
of premium on redeemable preferred stock
|
|
(27,579
|
)
|
|
-
|
|
Loan
fee amortization
|
|
(305
|
)
|
|
(290
|
)
|
Total
Other Income (Expense)
|
|
(31,956
|
)
|
|
(2,453
|
)
|
|
|
|
|
|
|
|
(Loss)
income before income taxes
|
|
(65,456
|
)
|
|
4,133
|
|
Income
tax (benefit) expense -- current
|
|
121
|
|
|
-
|
|
deferred
|
|
(19,016
|
)
|
|
(119
|
)
|
|
|
|
|
|
|
|
Net
(Loss) Income
|
|
(46,561
|
)
|
|
4,252
|
|
Preferred
dividends
|
|
1,222
|
|
|
984
|
|
Net
(Loss) Income Available to Common Stockholders
|
|
$(47,783
|
)
|
|
$3,268
|
|
|
|
|
|
|
|
|
Earnings
(Loss) Per Share
|
|
|
|
|
|
|
Basic
|
|
$(1.26
|
)
|
|
$0.10
|
|
Diluted
|
|
$(1.26
|
)
|
|
$0.09
|
|
TXCO
RESOURCES INC.
Consolidated
Statements Of Cash Flows
(Unaudited)
(in
thousands, except earnings per share data)
|
|
Three
Months
Ended
March
31, 2009
|
Three
Months
Ended
March
31, 2008
|
Operating
Activities
|
|
|
|
|
|
|
Net
(loss) income
|
|
$(46,561
|
)
|
|
$4,252
|
|
Adjustments
to reconcile net (loss) income to
net
cash used by operating activities:
|
|
|
|
|
|
|
Depreciation,
depletion and amortization
|
|
17,794
|
|
|
11,565
|
|
Impairment,
abandonments and dry hole costs
|
|
19,902
|
|
|
255
|
|
Gain
on sale of assets
|
|
(630
|
)
|
|
-
|
|
Non-cash
accretion of premium on preferred stock
|
|
27,579
|
|
|
-
|
|
Deferred
tax benefit
|
|
(19,016
|
)
|
|
(119
|
)
|
Excess
tax benefits from stock-based compensation
|
|
-
|
|
|
(1,453
|
)
|
Non-cash
compensation expense
|
|
849
|
|
|
1,041
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
Receivables
|
|
5,664
|
|
|
(4,340
|
)
|
Prepaid
expenses and other
|
|
1,682
|
|
|
(1,122
|
)
|
Accounts
payable and accrued expenses
|
|
(11,259
|
)
|
|
(19,929
|
)
|
Current
income taxes payable (receivable)
|
|
176
|
|
|
(1
|
)
|
Net
cash used by operating activities
|
|
(3,820
|
)
|
|
(9,851
|
)
|
Investing
Activities
|
|
|
|
|
|
|
Development
and purchases of oil and natural gas properties
|
|
(14,048
|
)
|
|
(26,404
|
)
|
Purchase
of other equipment
|
|
(73
|
)
|
|
(174
|
)
|
Proceeds
from sale of assets
|
|
5,937
|
|
|
-
|
|
Net
cash used by investing activities
|
|
(8,184
|
)
|
|
(26,578
|
)
|
Financing
Activities
|
|
|
|
|
|
|
Proceeds
from bank credit facilities
|
|
3,000
|
|
|
10,700
|
|
Payments
on bank credit facilities
|
|
(6,586
|
)
|
|
-
|
|
Payments
on installment and other obligations
|
|
(195
|
)
|
|
(136
|
)
|
Proceeds
from termination of commodity hedges
|
|
9,688
|
|
|
-
|
|
Payment
to terminate interest rate hedge
|
|
(3,186
|
)
|
|
-
|
|
Purchase
of treasury shares
|
|
(64
|
)
|
|
(225
|
)
|
Issuance
of preferred stock, net of expenses
|
|
-
|
|
|
19,139
|
|
Net
payment for call option spread
|
|
-
|
|
|
(1,333
|
)
|
Cost
of shares retired upon option exercises
|
|
-
|
|
|
(2,414
|
)
|
Proceeds
from exercise of stock options & related tax benefits
|
|
-
|
|
|
2,303
|
|
Proceeds
from issuance of common stock, net of expenses
|
|
-
|
|
|
33
|
|
Net
cash provided by financing activities
|
|
2,657
|
|
|
28,067
|
|
Change
in Cash and Equivalents
|
|
(9,347
|
)
|
|
(8,362
|
)
|
Cash
and equivalents at beginning of period
|
|
12,236
|
|
|
9,831
|
|
Cash
and Equivalents at End of Period
|
|
$2,889
|
|
|
$1,469
|
|
TXCO RESOURCES INC.
Notes
To Consolidated Financial Statements
Periods Ended March
31
, 2009, and
March 31
, 2008
(Unaudited)
1. Basis
of Presentation
The
accompanying unaudited consolidated financial statements of TXCO Resources Inc.
("TXCO," "the Company," "we," "us," or "our") have been prepared in accordance
with U.S. generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by U.S. generally accepted accounting principles for complete financial
statements. The accounting policies followed by the Company are set forth in
Note A to the audited consolidated financial statements contained in the
Company's
Annual
Report on Form 10-K
for the year ended
December 31, 2008.
During
2008, the Company engaged in its largest capital expenditure program in its
history. Our costs incurred in the development and purchase of oil and natural
gas properties increased beyond planned 2008 levels to $182 million. The
expansion in the capital program was due to escalating capital costs caused by
tight service availability during the extremely active industry period in
mid-2008 and, specifically, cost overruns on certain significant wells that
encountered severe problems in the drilling process and exceeded their original
budget. The capital cost escalations throughout 2008 have been followed by an
unprecedented commodity price collapse. As a result of the time lag between
incurring drilling costs and the resulting increase in revenues from new
production, and deteriorating economic conditions, we have experienced severe
cash flow constraints. At March 31, 2009, TXCO had a working capital deficiency
of $290.7 million, including reclassifications to current liabilities of $150.4
million from long-term debt and $94.5 million from preferred stock, and $49.8
million in trade payables. Faced with these constraints, on May 17, 2009, the
Company and its subsidiaries filed voluntary petitions for relief (collectively,
the "Bankruptcy Filing") under Chapter 11 ("Chapter 11") of the United States
Bankruptcy Code (the "Bankruptcy Code") with the United States Bankruptcy Court
for the Western District of Texas (the "Bankruptcy Court"). The Company intends
to continue to operate its business as debtor-in-possession under the
jurisdiction of the Bankruptcy Court and in accordance with the applicable
provisions of the Bankruptcy Code and orders of the Bankruptcy Court. See
Note 12 "Subsequent Events," for details regarding the Bankruptcy Filing
and the Chapter 11 cases. The accompanying unaudited condensed consolidated
financial statements have been prepared assuming we will continue as a going
concern, which assumes continuity of operations and realization of assets and
satisfaction of liabilities in the ordinary course of business. Our ability to
continue as a going concern is dependent upon, among other things, (i) our
ability to secure adequate debtor-in-possession financing; (ii) our ability
to comply with the terms and conditions of any debtor-in-possession financing
and any cash collateral order entered by the Bankruptcy Court in connection with
the Chapter 11 cases; (iii) our ability to maintain adequate cash on
hand; (iv) our ability to generate cash from operations; (v) our
ability to obtain confirmation of and to consummate a plan of reorganization
under the Bankruptcy Code; and, (vi) the cost, duration and outcome of the
reorganization process. Uncertainty as to the outcome of these factors raises
substantial doubt about the Company's ability to continue as a going concern. We
are currently evaluating various courses of action to address the operational
and liquidity issues the Company is facing and are in the process of attempting
to secure debtor-in-possession financing, as described in Note 12, and
formulating plans for improving operations. There can be no assurance that any
of these efforts will be successful. The accompanying consolidated financial
statements do not include any adjustments that might result should we be unable
to continue as a going concern.
American
Institute of Certified Public Accountants Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code" (SOP 90-7),
which is applicable to companies in Chapter 11, generally does not change the
manner in which financial statements are prepared. However, it does require that
the financial statements for periods subsequent to the filing of the Chapter 11
petition distinguish transactions and events that are directly associated with
the reorganization from the ongoing operations of the business. Revenues,
expenses (including professional fees), realized gains and losses, and
provisions for losses that can be directly associated with the reorganization
and restructuring of the business must be reported separately as reorganization
items in the consolidated statements of operations beginning in the quarter
ending June 30, 2009.
1. Basis
of Presentation - continued
The
consolidated balance sheet must distinguish pre-petition liabilities subject to
compromise from both those pre-petition liabilities that are not subject to
compromise and from post-petition liabilities. Liabilities that may be affected
by the plan must be reported at the amounts expected to be allowed, even if they
may be settled for lesser amounts. In addition, cash provided by reorganization
items must be disclosed separately in the condensed consolidated statement of
cash flows. TXCO adopted SOP 90-7 effective on May 17, 2009 and will segregate
those items as outlined above for all reporting periods subsequent to such
date.
In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Certain reclassifications have been made to the prior period to conform to
current presentation. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2008.
2. Stock-based
Compensation
The
Company has stock-based employee compensation plans that are described more
fully in Note G, "Stockholders' Equity," to the audited consolidated financial
statements contained in the Company's Annual Report on Form 10-K for the year
ended December 31, 2008. Total stock-based compensation expense recognized was
$0.8 million and $1.0 million, in the first three months of 2009 and 2008,
respectively.
Stock
Options
: In prior years, the Company issued stock options as
compensation to its officers, directors and key employees under its 1995
Flexible Incentive Plan. During 2008, TXCO granted options under its 2005 Stock
Incentive Plan to purchase 300,000 shares of its common stock to its
non-employee directors. Generally, these options have a 10-year life and vest
over two years for employees and three years for directors. Upon exercise, newly
issued shares are utilized to fulfill the obligation.
As of
March 31, 2009, the Company had outstanding exercisable options to purchase
607,250 shares of common stock at prices ranging from $2.05 to $5.00 per share.
The options expire at various dates through September 2018.
Stock
Option Activity:
|
Number
Outstanding
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Term
|
Aggregate
Intrinsic
Value
|
1995
Flexible Incentive Plan
:*
|
(in
thousands)
|
|
(in
years)
|
(in
thousands)
|
Outstanding
at December 31, 2008
|
|
607
|
|
$3.03
|
6.95
|
*
|
Activity
|
|
-
|
|
|
|
|
Outstanding
at March 31, 2009
|
|
607
|
|
$3.03
|
6.70
|
*
|
Exercisable
at March 31, 2009
|
|
307
|
|
$3.99
|
3.78
|
*
|
* The
outstanding options had no intrinsic value since all were priced above the
market price at these dates.
Restricted
Stock
:
Beginning in
2006, the Company made annual restricted stock grants as compensation to
employees and non-employee directors under its 2005 Stock Incentive Plan.
Generally, grants to continuing non-employee directors vest one year from the
grant date, while those to new directors and employees vest over a three year
period. The grant date fair value is recognized as stock compensation expense
(included in general and administrative expense on the Consolidated Statements
of Operations) over the vesting periods.
Restricted Stock Activity:
(in
thousands)
|
Shares
|
2005 Stock
Incentive Plan
:
|
|
Unvested
restricted stock at December 31, 2008
|
|
639
|
|
Granted
|
|
10
|
|
Vested
|
|
(206
|
)
|
Forfeited
|
|
(15
|
)
|
Unvested
restricted stock at March 31, 2009
|
|
428
|
|
3. Earnings
Per Share
The
following is a reconciliation of the numerator and denominator of the basic and
diluted earnings per share ("EPS") computation:
|
Three
Months Ended
March
31,
|
|
(in
thousands, except per share data)
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Less:
Preferred dividends
|
|
|
|
|
|
(Loss)
income for basic earnings per share
|
|
|
|
|
|
Add:
Income impact of any assumed conversions
|
|
|
|
|
|
(Loss)
income for diluted earnings per share
|
|
|
|
|
|
Weighted-average
number of common shares:
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
Stock
options and warrants
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share:
|
|
|
|
|
|
|
$(1.26
|
|
|
|
|
|
$(1.26
|
|
|
|
|
* Not applicable due to net loss for
the period.
For the
quarter ended March 31, 2009, the calculation of weighted-average number of
common shares for diluted EPS does not include 3,615,569 and 889,657 of
potential common shares derived from Series D and Series E convertible preferred
stock, respectively, and 5,910,998 potential common shares derived from written
call options, respectively, because their effect would have been anti-dilutive.
For the prior year quarter the comparable potential common shares excluded from
the calculation were 3,925,011; 405,125 and 4,203,468,
respectively.
If there
had not been a net loss for the three month period ended March 31, 2009,
potential common shares would have been 510,275 from non-vested stock. All of
our outstanding stock options had exercise prices in excess of the average price
for TXCO's common stock during first-quarter 2009. No outstanding stock options
or warrants were anti-dilutive based on exercise price during the prior year
period.
4. Income
Taxes
The
Company follows Financial Accounting Standards Board ("FASB") Interpretation No.
48, "Accounting for Uncertainty in Income Taxes -- an interpretation of FASB
Statement No. 109" ("FIN 48"). The Company has not included any accruals for
unrecognized income tax benefits in its income tax calculation as of March 31,
2009 and March 31, 2008. The Company does not anticipate a significant change in
its unrecognized tax benefits in the next 12 months.
As of
March 31, 2009, the tax years ended December 31, 2004, through 2007 remained
subject to examination by tax authorities.
4. Income
Taxes -- continued
The
Company's effective tax rate was a 28.9% benefit and 2.9% expense for the
three-month period ended March 31, 2009, and March 31, 2008, respectively. The
Company's benefit for the current period was reduced from that which would be
expected due to a valuation of allowance of $2.9 million applied to its net
deferred tax asset position at March 31, 2009. For the prior year period, the
expense was not proportional to that which would be expected for income before
tax due to the exercise of stock options in first quarter 2008 with
substantially lower option price than the current market price. These exercises
resulted in a tax deduction to the Company of $4,275,000.
5. Derivative
Instruments and Hedging Activity
Due to
the volatility of oil and natural gas prices and interest rates, the Company,
from time to time, enters into risk management transactions (e.g., swaps,
collars and floors) for a portion of its oil and natural gas production and/or
interest payments on its long-term debt. This allows it to achieve a more
predictable cash flow, as well as to reduce exposure from price
fluctuations. On a quarterly basis, the Company's management sets all of
the Company's risk management policies, including quantity, types of instruments
and counterparties. None of these instruments are used for trading
purposes.
All of
these price-risk management transactions are considered derivative instruments
and accounted for in accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"). These
derivative instruments are intended to hedge the Company's price risk and could
be considered hedges for economic purposes, but certain of these transactions
may or may not qualify for hedge accounting. All derivative instrument contracts
are recorded on the Consolidated Balance Sheets at fair value. The change in
fair value for the effective portion of contracts designated as cash flow hedges
is reflected in Other Comprehensive Income (Loss) in the Stockholders' Equity
section of the Consolidated Balance Sheets. The realized gain or loss on
derivative contracts is reported on the Consolidated Statement of Operations as
the hedged transactions occur. The hedges are highly effective, and
therefore, no hedge ineffectiveness has been recorded.
Commodity Price
Risk
-
Related Hedging
Activities
:
The
Company had cash flow hedges in place during the periods shown, in accordance
with the terms of our term loan and revolving credit facilities. The Company
generally uses costless collars, based upon the same price indexes that are used
for the majority of TXCO's commodity sales contracts, for hedging commodity
price risk for approximately 50% of anticipated sales volumes. During
first-quarter 2009 the Company also utilized 50% participation swaps on a
portion of its production. When commodity derivatives are used, they apply to
only a portion of the Company's production, provide only partial price
protection against declines in oil and natural gas prices, and partially limit
the Company's potential gains from future increases in prices.
During first-quarter 2009, the Company
terminated all of its derivative positions for a net cash settlement. In
accordance with FAS 133 the $8.9 million net gain on commodity derivatives,
included in "Accumulated other comprehensive income" in the equity section of
the Consolidated Balance Sheet, will be applied against "Oil and natural gas
sales" in the Consolidated S
tatement
s of O
perations
over the remaining period covered by
these derivatives (April 2009 through December 2011).
The
following table reflects the realized gains and losses from derivatives included
in "Oil and natural gas sales" on the Consolidated Statements of
Operations:
|
|
Three Months Ended March 31,
|
|
|
|
2009
|
|
2008
|
|
(in thousands)
|
|
|
|
Crude
oil derivative realized settlement (gain) loss
|
|
$(1,691
|
)
|
$1,445
|
|
Natural
gas derivative realized settlement (gain)
|
|
(621
|
)
|
-
|
|
(Gain)
loss on derivative contracts
|
|
$(2,312
|
)
|
$1,445
|
|
5. Derivative
Instruments and Hedging Activity - continued
The fair value of outstanding
commodity
derivative contracts reflected on the
balance sheet was as follows:
Trans-
|
Trans-
|
|
|
Average
Floor
|
|
Average
Ceiling
|
|
Volumes
|
|
Fair Value of
Outstanding
Derivative
Contracts
(1)
, in thousands,
as of
|
|
action
|
action
|
|
|
Price
|
|
Price
|
|
Per
|
|
March 31,
|
|
March 31,
|
|
Date
|
Type
|
Beginning
|
Ending
|
Per
Unit
|
|
Per
Unit
|
|
Month
|
|
2009
|
|
2008
|
|
Crude Oil -
Bbl (2)
:
|
|
08/07-12/07
|
Collars
|
01/01/2008
|
12/31/2008
|
$67.31
|
|
$81.05
|
|
26,000
|
|
$-
|
|
$(5,293
|
)
|
08/07-12/07
|
Collars
|
01/01/2009
|
12/31/2009
|
$66.18
|
|
$76.05
|
|
17,000
|
|
-
|
|
(4,389
|
)
|
08/07-12/07
|
Collars
|
01/01/2010
|
06/30/2010
|
$66.43
|
|
$76.74
|
|
14,000
|
|
-
|
|
(1,653
|
)
|
12/07
|
Collars
|
07/01/2010
|
12/31/2010
|
$75.00
|
|
$99.00
|
|
12,500
|
|
-
|
|
(417
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural Gas -
mmBtu (3)
:
|
|
08/07-12/07
|
Collars
|
01/01/2008
|
12/31/2008
|
$6.50
|
|
$10.22
|
|
97,000
|
|
-
|
|
(711
|
)
|
08/07-12/07
|
Collars
|
01/01/2009
|
12/31/2009
|
$6.50
|
|
$11.58
|
|
80,000
|
|
-
|
|
(563
|
)
|
08/07-12/07
|
Collars
|
01/01/2010
|
06/30/2010
|
$6.50
|
|
$11.65
|
|
70,000
|
|
-
|
|
(158
|
)
|
12/07
|
Collars
|
07/01/2010
|
12/31/2010
|
$6.50
|
|
$11.13
|
|
67,000
|
|
-
|
|
(122
|
)
|
|
|
|
|
|
|
|
|
|
|
$-
|
|
$(13,306
|
)
|
(1)
The
fair value of the Company's outstanding derivative contracts is presented on the
balance sheet by counterparty. Amounts in parentheses indicate
liabilities. All were designated as cash flow hedges.
(2)
The
crude oil hedges were entered into on a per barrel delivered price basis, using
the West Texas Intermediate Index, with settlement for each calendar month
occurring following the expiration date, as determined by the
contracts.
(3)
The
natural gas hedges were entered into on a mmBtu delivered price basis, using the
Houston Ship Channel Index, with settlement for each calendar month occurring
following the expiration date, as determined by the contracts.
Interest Rate
Risks-Related Hedging Activities:
During most of first-quarter 2009,
a fixed-rate swap was in place on $100 million of borrowings under TXCO's Term
Loan Agreement (See
Note 7
for more information on
this agreement) which locked the LIBOR portion of the interest rate at 3.305%
until June 30, 2010. This equates to a total rate of 7.805% per annum on this
debt. This derivative instrument was terminated in March 2009. The swap was
designated as a cash flow hedge. No comparable derivative instrument was in
place during first quarter 2008. An immaterial amount of ineffectiveness is
expected on this derivative contract due to a difference in the rounding
conventions for the LIBOR rate between the two documents. In accordance with FAS
133, the $3.2 million loss on this derivative, included in Other Comprehensive
Income in the equity section of the Consolidated Balance Sheet, will be applied
against Interest Expense in the Consolidated Statements of Operations over the
remaining period covered by the derivative (April 2009 through June
2010).
The
following table reflects the realized losses from derivatives included in
"Interest expense" on the Consolidated Statements of Operations:
|
|
Three Months Ended March 31,
|
|
(in thousands)
|
|
2009
|
|
2008
|
|
Interest
rate swap realized settlement losses
|
|
$706
|
|
$-
|
|
Interest
rate swap ineffectiveness
|
|
7
|
|
-
|
|
Loss
on interest rate swap contracts
|
|
$713
|
|
$-
|
|
Comprehensive
income includes all changes in equity during a period except those resulting
from investments by owners and distributions to owners. The components of
comprehensive income are as follows for the three-month periods ended March 31,
2009 and 2008:
|
|
Three
Month Period
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
For
the three months ended March
3
1
:
|
|
|
|
|
|
|
Net
(loss) income
|
|
$(46,561
|
)
|
|
$4,252
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
Deferred
hedge loss
|
|
(1,474
|
)
|
|
(4,588
|
)
|
Income
tax benefit of cash flow hedges
|
|
587
|
|
|
1,560
|
|
Total
comprehensive (loss) income
|
|
$(47,448
|
)
|
|
$1,224
|
|
7.
Long-Term Debt
Bank Credit
Facilities:
TXCO has two credit facilities in place, which are described
below. As disclosed in the Company's Form 8-K filed with the SEC on February 27,
2009, TXCO is in violation of the current ratio covenant under these agreements.
As a result of that violation all outstanding balances under these agreements
have been classified as current liabilities on the Consolidated Balance Sheet as
of December 31, 2008, and March 31, 2009. Additionally, as disclosed
in our Form 8-K filed with the SEC on April 22, 2009, we have received Notice of
Acceleration documents from the lenders, on the Senior Credit Agreement and the
Term Loan Agreement, which demand immediate payment of the entire amounts due
under these facilities and terminate their commitments to make additional
revolving credit loans under the agreements. For details on the impact of the
Bankruptcy Filing, see Note 12 "Subsequent Events".
Senior Credit
Agreement
--
At
March 31, 2009, the Company had a $125 million senior revolving credit facility
with a group of lenders, with Bank of Montreal acting as administrative agent
(the "SCA"). The SCA was entered into in April 2007, amended in July 2007, and
expires in April 2011.
At March
31, 2009, the borrowing base was $55.0 million with $50.0 million outstanding at
a weighted average interest rate of 6.00% (which reflects the default interest
rate). The SCA is secured by a first-priority security interest in TXCO's and
certain of its subsidiaries' proved oil and natural gas reserves and in the
equity interests of such subsidiaries. In addition, TXCO's obligations under the
SCA are guaranteed by these certain subsidiaries. As of April 30, 2009, the
balance outstanding under the SCA remained $50.0 million, with a weighted
average interest rate of 6.00%, using the base rate option.
Loans
under the SCA are subject to floating rates of interest based on (1) the
total amount outstanding under the SCA in relation to the borrowing base and
(2) whether the loan is a LIBOR loan or a base rate loan. LIBOR loans bear
interest at the LIBOR rate (for the applicable 1-, 2-, 3- or 6-month maturity
chosen by the Company) plus the applicable margin, and base rate loans bear
interest at the base rate plus the applicable margin. The applicable margin
varies with the ratio of total outstanding to the borrowing base. For base rate
loans it ranges from zero to 100 basis points and for LIBOR rate loans it ranges
from 150 to 250 basis points. As a result of TXCO's violation of certain loan
covenants, an additional 200 basis points was added to the applicable interest
rate.
Under the
SCA, TXCO is required to pay a commitment fee on the difference between amounts
available under the borrowing base and amounts actually borrowed. The commitment
fee is (1) 0.375%, so long as the ratio of amounts outstanding under the SCA to
the borrowing base is less than 30%, and (2) 0.50%, in the event such ratio is
30% or greater. Prior to the default and Bankruptcy Filings, borrowings under
the SCA could be repaid and reborrowed from time to time without
penalty.
7. Long-Term
Debt - continued
Term Loan
Agreement
--
At
March 31, 2009, the Company had a $100 million five-year term loan facility with
Bank of Montreal (as administrative agent) (the "TLA") and certain other
financial institutions party thereto with an interest rate of 5.0625%. The TLA
is secured by a second-priority security interest in substantially all of TXCO's
and certain of its subsidiaries' assets, including proved oil and natural gas
reserves and in the equity interests of such subsidiaries. Loans under the TLA
are subject to floating rates of interest equal to, at TXCO’s option, the LIBOR
rate plus 4.50% or the base rate plus 3.50%. The "LIBOR rate" and the base rate
are calculated in the same manner as under the SCA. As a result of TXCO's
violation of certain loan covenants and the ensuing Notices of Acceleration, an
additional 200 basis points was added to the applicable interest rate.
Therefore, at April 30, 2009, the interest rate was 7.0625%. See additional
discussion regarding the interest rate swap in Note 5.
Borrowings
under the TLA may be repaid (but not reborrowed). Additionally, no prepayments
are permitted if the ratio of the total amount outstanding under the SCA to the
borrowing base thereunder exceeds 75% or if any default exists under the
SCA.
Both the
SCA and the TLA contain certain restrictive covenants, as defined in the
agreements, which, among other things, limit the incurrence of additional debt,
investments, liens, dividends, redemptions of capital stock, prepayments of
indebtedness, asset dispositions, mergers and consolidations, transactions with
affiliates, derivative contracts, sale leasebacks and other matters customarily
restricted in such agreements. The amended SCA and TLA require TXCO and its
subsidiaries to meet a maximum consolidated leverage ratio of 3.00 to 1.00, a
minimum current assets to current liabilities ratio of 1.00 to 1.00, a minimum
interest coverage ratio of 2.00 to 1.00 and a minimum net present value to
consolidated total debt ratio of 1.50 to 1.00. The ratios are calculated on a
quarterly basis. The Company was not in compliance with the Current Ratio
covenant at March 31, 2009. Both agreements also contain customary events of
default, including the receipt of a "going concern" qualification to the audit
opinion. The audit report for TXCO's year-end 2008 financial statements
contained a going concern qualification. As a result of the events of default,
the lenders have declared all amounts outstanding under the SCA and TLA to be
immediately due and payable. As a result of the covenant violation and going
concern opinion, all borrowings under the SCA and TLA have been classified as
current liabilities in our Consolidated Balance Sheet as of December 31, 2008,
and March 31, 2009.
Drilling Rig Financing:
At
March 31, 2009, the Company had a $4.0 million senior revolving credit facility
with Western National Bank (the "Rig Loan"). The Rig Loan was entered into in
December 2008. At March 31, 2009, the borrowing base was $3.7 million, of which
$0.4 million was outstanding at a weighted average interest rate of 5.00%. The
Rig Loan is secured by a first-priority security interest in TXCO subsidiary's
drilling rigs. The Rig Loan bears interest at the prime rate as published in The
Wall Street Journal plus 1.00% with a floor of 5.00%. Under the rig loan, TXCO's
subsidiary, TXCO Drilling Corp. is required to pay interest monthly. In
addition, the borrowing base declines by $83,333 per month, and may require a
cash payment of the same if the line of credit is funded above the borrowing
base after this monthly reduction.
The Rig
Loan also contains certain restrictive covenants, as defined in the agreement,
which, among other things, limit the incurrence of additional debt, investments,
liens, dividends, redemptions of capital stock, prepayments of indebtedness,
asset dispositions, mergers and consolidations, transactions with affiliates,
derivative contracts, sale leasebacks and other matters customarily restricted
in such agreements. The Rig Loan agreements require TXCO Drilling Corp. to meet
a maximum debt service coverage ratio of 1.50 to 1.00, a minimum current assets
to current liabilities ratio of 3.00 to 1.00, a minimum tangible net worth of
$8,500,000 and a maximum debt to tangible net worth ratio of 1.00 to 1.00. The
ratios are calculated on a quarterly basis. The Company was in compliance with
all such financial covenants at March 31, 2009. The agreements also contain
customary events of default. The outstanding balance due under this note is
classified as current, as a result of the occurrence of events of default under
the SCA and TLA, due to a cross-default provision. TXCO has received
a Notice of Acceleration from Western National Bank demanding immediate payment
of the outstanding balance and accrued interest.
8. Commitments
and Contingencies
The
Convertible Preferred Stock Series D and Series E (the "Preferred") each contain
make-whole provisions that provide for payments in the event that shares of the
Preferred are converted into common stock within three years of their issuance.
The make-whole provision is calculated as the present value of three years of
dividends on the converted shares less any dividends already paid. The premium
recorded in first-quarter 2009 includes an amount related to the make-whole
provision.
9.
Redeemable Preferred
Stock
|
Preferred Stock
Conversions:
In January 2009, holders of 5,000 shares of TXCO Series D
Preferred Stock (with a conversion price of $14.48) and 5,000 shares of TXCO
Series E Preferred Stock (with a conversion price of $17.36), with an aggregate
stated value of $10.0 million converted those shares into a total of
approximately 633,300 shares of TXCO's common stock. An additional 836,600
shares of TXCO common stock were issued for the make-whole provision related to
preferred dividends.
Reclassification
to Liability:
In February 2009, it was determined that the Company
had violated the Current Ratio covenant under its bank credit facilities. As a
result of this covenant violation, holders of the convertible preferred stock
have the right to request that the Company redeem their shares; however, the
Company's obligation to redeem is suspended until the earlier of October 31,
2012 or satisfaction in full of all of the Company's obligations under its bank
credit facilities. As a result of this right, though repayment is specifically
suspended until the senior debt is paid, the stated value of the outstanding
convertible preferred stock has been reclassified to current liabilities in the
Consolidated Balance Sheets for December 31, 2008, and March 31, 2009. Shares
related to the January conversion of convertible preferred stock, described
above, were not reclassified in the December 31, 2008 Consolidated Balance Sheet
since they were retired in January 2009 without the use of current assets. Under
the terms of the Certificates of Designations, the Company is obligated to pay
interest at a rate of 1.5% per month in respect of each preferred share for
which redemption has been demanded until paid in full.
As the
shares now qualify as "mandatorily redeemable," the related dividends are
included in "Interest expense" on the Consolidated Statement of Operations for
the three months ended March 31, 2009, except for the dividends paid in
conjunction with the conversion of certain shares as described above. An
additional result was the necessity to record the full redemption premium as a
liability. The recognition of the redemption premium resulted in a
charge to expense for the quarter ended March 31, 2009, and is included in the
"Other Income (Expense)" section of our Consolidated Statement of Operations.
During March 2009, TXCO received redemption demand from holders of the majority
of its Series D and Series E Preferred Stock.
10.
Recent Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141(R), "Business
Combinations" ("SFAS 141(R)"), which replaces SFAS 141.
SFAS 141(R) establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any non-controlling interest in the acquiree
and the goodwill acquired. The Statement also establishes disclosure
requirements, which will enable users to evaluate the nature and financial
effects of the business combination. SFAS 141(R) is effective for fiscal
years beginning after December 15, 2008. The adoption of SFAS 141(R)
will have an impact on accounting for any future business combinations, but the
effect is dependent upon acquisitions at that time.
In December 2007,
the
FASB issued SFAS No. 160,
"Noncontrolling Interests in Consolidated Financial Statements -- an
amendment of Accounting Research Bulletin No. 51" ("SFAS 160"),
which establishes accounting and reporting standards for ownership interests in
subsidiaries held by parties other than the parent, the amount of consolidated
net income attributable to the parent and to the non-controlling interest,
changes in a parent's ownership interest and the valuation of retained
non-controlling equity investments when a subsidiary is deconsolidated. The
Statement also establishes reporting requirements that provide sufficient
disclosures that clearly identify and distinguish between the interests of the
parent and the interests of the non-controlling owners. SFAS 160 is
effective for fiscal years beginning after December 15, 2008. The Company
does not currently have non-controlling interests in any of its
subsidiaries
and,
therefore, the adoption of SFAS 160 had no impact on its consolidated financial
statements
.
10.
Recent Accounting Pronouncements -
continued
In
March 2008, the FASB issued SFAS No. 161, "Disclosures about
Derivative Instruments and Hedging Activities -- an amendment of FASB Statement
No. 133." This Statement requires that objectives for using derivative
instruments be disclosed in terms of underlying risk and accounting designation,
in order to better convey the purpose of derivative use in terms of the risks
that we are intending to manage. This Statement is effective for financial
statements issued for fiscal years and interim periods beginning after
November 15, 2008. The adoption of this Statement effective January, 1,
2009, did not have a material impact on the Company's Consolidated Financial
Statements.
In May
2008, the FASB issued FASB Staff Position (FSP) Financial Accounting Standard
142-3, Determination of the Useful Life of Intangible Assets, which is effective
for us in the interim period ending March 31, 2009. FSP FAS 142-3 provides
guidance on the renewal or extension assumptions used in the determination of
the useful life of a recognized intangible asset. The intent of FSP
FAS 142-3 is to better match the useful life of the recognized intangible
asset to the period of the expected cash flows used to measure its fair value.
The Company's adoption of FSP FAS 142-3 did not have a material effect on
its consolidated financial statements.
In
December 2008, the SEC published a final rule entitled "Modernization of
Oil and Gas Reporting". The new rule permits the use of new technologies to
determine proved reserves if those technologies have been demonstrated to lead
to reliable conclusions about reserves volumes. The new requirements also will
allow companies to disclose their probable and possible reserves to investors.
In addition, the new disclosure requirements require companies to: (a) report
the independence and qualifications of its reserves preparer or auditor; (b)
file reports when a third party is relied upon to prepare reserves estimates or
conducts a reserves audit; and (c) report oil and natural gas reserves using an
average price based upon the prior 12-month period rather than year-end prices.
The use of average prices will affect future impairment and depletion
calculations. The new disclosure requirements are effective for annual
reports on Forms 10-K for fiscal years ending on or after December 31,
2009. A company may not apply the new rules to disclosures in quarterly reports
prior to the first annual report in which the revised disclosures are required.
The impact of this Final Rule on the Company's disclosures, financial position
or results of operations, will vary depending on changes in commodity
prices.
11. Fair
Value Measurements
Effective
January 1, 2008, the Company adopted SFAS No. 157, "Fair Value
Measurements," which defines fair value, establishes a framework for using fair
value to measure assets and liabilities, and expands disclosures about fair
value measurements. The Statement establishes a hierarchy for inputs used in
measuring fair value that maximizes the use of observable inputs and minimizes
the use of unobservable inputs by requiring that the most observable inputs be
used when available. Observable inputs are inputs that market participants would
use in pricing the asset or liability developed based on market data obtained
from sources independent of the Company. Unobservable inputs are inputs that
reflect the Company’s assumptions of what market participants would use in
pricing the asset or liability developed based on the best information available
in the circumstances. The hierarchy is broken down into three levels based on
the reliability of the inputs as follows:
Level
1:
|
Quoted
prices are available in active markets for identical assets or
liabilities;
|
Level
2:
|
Quoted
prices in active markets for similar assets and liabilities that are
observable for the asset or liability; or
|
Level
3:
|
Unobservable
pricing inputs that are generally less observable from objective sources,
such as discounted cash flow models or
valuations.
|
11. Fair
Value Measurements
SFAS No. 157 requires financial
assets and liabilities to be classified based on the lowest level of input that
is significant to
the fair
value measurement. The Company's
assessment of the significance of a
particular input to the fair value measurement requires judgment, and may affect
the valuation of the fair value of assets and liabilities and their placement
within the fair value hierarchy levels.
The following table presents
TXCO's
financial assets
and liabilities that were accounted for at fair value on a recurring basis as of
March 31
, 200
9,
by level within the fair value
hierarchy:
|
|
Fair
Value Measurements Using
|
(in
thousands)
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
Assets
- Derivative instruments
|
|
$ -
|
|
$ -
|
|
$-
|
Liabilities
- Derivative instruments
|
|
$ -
|
|
$ -
|
|
$-
|
TXCO's
derivative financial instruments were comprised of costless collar agreements
and 50% participation swaps. The fair values of these agreements are determined
based on both observable and unobservable pricing inputs and therefore, the data
sources utilized in these valuation models are considered level 3 inputs in the
fair value hierarchy. However, all of the Company's derivative positions were
terminated during first-quarter 2009 for a net cash settlement. The termination
values will be taken against income as the hedged transactions
occur.
The
following table sets forth a reconciliation of changes in the fair value of
financial liabilities classified as level 3 in the fair value
hierarchy:
(in
thousands)
|
|
Derivatives
|
|
|
Total
|
|
Balance
as of January 1, 2009
|
|
|
$7,211
|
|
|
|
$7,211
|
|
Total
(gains) losses (realized or unrealized):
|
|
|
|
|
|
|
|
|
Included
in earnings *
|
|
|
(1,599
|
)
|
|
|
(1,599
|
)
|
Included
in other comprehensive income *
|
|
|
-
|
|
|
|
-
|
|
Purchases,
issuances and settlements
|
|
|
(5,612
|
)
|
|
|
(5,612
|
)
|
Transfers
in and out of level 3
|
|
|
-
|
|
|
|
-
|
|
Balance
as of March 31, 2009
|
|
|
$-
|
|
|
|
$-
|
|
Change
in unrealized gains or losses included in earnings (or
changes
|
|
|
|
|
|
|
|
|
in
net assets) relating to derivatives held during the period
|
|
|
$(7,211
|
)
|
|
|
$(7,211
|
)
|
* On the
Consolidated Income Statements, realized gains or losses from commodity
derivatives are included as adjustments to the "Oil and natural gas sales"
revenues, while those from interest rate hedges are included in "Interest
Expense." Unrealized losses or gains are included in "Accumulated other
comprehensive income" in "Stockholders' Equity" on the Consolidated Balance
Sheets, since these derivatives have been designated as cash flow
hedges.
12. Subsequent
Events
Reduction in
Force:
On May 4,
2009, the Company reduced its staff by 25 employees, approximately 30% of its
workforce including Roberto Thomae, Vice President Capital Markets, and
nine consultants. Additionally, on May 7, 2009, P. Mark Stark the Chief
Financial Officer and James J. Bookout the Chief Operating Officer were
terminated. TXCO will incur one-time termination costs of approximately $380,000
during second-quarter 2009.
12. Subsequent
Events - continued
Chapter 11 Bankruptcy
Filing:
During
2008, the Company engaged in its largest capital expenditure program in its
history. Our costs incurred in the development and purchase of oil and natural
gas properties increased beyond planned 2008 levels to $182 million. The
expansion in the capital program was due to escalating capital costs caused by
tight service availability during the extremely active industry period in
mid-2008 and, specifically, cost overruns on certain significant wells that
encountered severe problems in the drilling process and exceeded their original
budget. The capital cost escalations throughout 2008 have been followed by an
unprecedented commodity price collapse. As a result of the time lag between
incurring drilling costs and the resulting increase in revenues from new
production, and deteriorating economic conditions, we have experienced severe
cash flow constraints. Faced with these constraints, on May 17, 2009 (the
"Petition Date"), the Company and its subsidiaries filed voluntary petitions for
relief under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy
Court for the Western District of Texas. The Company's Chapter 11 cases are
being jointly administered by the Bankruptcy Court as Case No. 09-51807
through Case No. 09-81817 (BLS) (collectively, the "Bankruptcy Cases"). The
petitions were filed in order to enable the Company to pursue reorganization
efforts under Chapter 11 of the Bankruptcy Code. The Company intends to continue
to operate its business as debtor-in-possession under the jurisdiction of the
Bankruptcy Court and in accordance with the applicable provisions of the
Bankruptcy Code and orders of the Bankruptcy Court. In general, as
debtors-in-possession, the Company and its subsidiaries that are part of the
Bankruptcy Filing (collectively, the "Debtors") are authorized under Chapter 11
to continue to operate as an ongoing business, but may not engage in
transactions outside of the ordinary course of business without the prior
approval of the Bankruptcy Court. In addition to the Company, the Debtors
comprise TXCO Energy Corp., a Texas corporation, 4 Eagle Pass Well Service,
L.L.C., a Texas limited liability company, TXCO Drilling Corp., a Texas
corporation, Texas Tar Sands, Inc., a Texas corporation, Charro Energy, Inc., a
Texas corporation, Output Acquisition Corp., a Texas corporation, OPEX Energy,
LLC., a Texas limited liability company, PPL Operating, Inc., a Texas
corporation, Maverick Gas Marketing, Ltd., a Texas limited partnership, and
Maverick Dimmit Pipeline, Ltd., a Texas limited partnership.
No
assurance can be provided as to what values, if any, will be ascribed in the
Debtors' bankruptcy proceedings to the Debtors' pre-petition liabilities, common
stock and other securities. Accordingly, caution should be exercised with
respect to existing and future investments in any of these liabilities or
securities.
The
Company has filed "first day" motions for various relief designed to stabilize
the Company's operations and business relationships with vendors, lenders,
employees and others. These motions request authority to, among other things:
(a) pay pre-petition and post-petition employee wages, salaries, benefits
and other employee obligations; (b) pay vendors and other providers in the
ordinary course for goods and services received from and after the Petition
Date; (c) pay suppliers delivering goods on or after the Petition Date and
(d) use the Company's cash on hand in the operation of its business. There can
be no assurance that the motions will be approved by the court.
The
Bankruptcy Filing resulted in the automatic acceleration of substantially all
debt of the Company (see Note 7 to the unaudited condensed consolidated
financial statements). Subject to certain exceptions under the Bankruptcy Code,
the Bankruptcy Filing will automatically enjoin, or stay, the continuation of
any judicial or administrative proceedings or other actions against TXCO or its
property to recover on, collect or secure a claim arising prior to the Petition
Date. Thus, for example, creditor actions to obtain possession of property from
TXCO, or to create, perfect or enforce any lien against the property of TXCO, or
to collect on or otherwise exercise rights or remedies with respect to a
pre-petition claim will be enjoined unless and until the Bankruptcy Court lifts
the automatic stay.
12. Subsequent
Events - continued
In order
to successfully exit Chapter 11 bankruptcy, the Company will need to propose,
and obtain confirmation by the Bankruptcy Court of, a plan of reorganization
that satisfies the requirements of the Bankruptcy Code. A plan of reorganization
would, among other things, resolve the Debtors' pre-petition obligations, set
forth the revised capital structure of the newly reorganized entity and provide
for corporate governance subsequent to exit from bankruptcy. The Company has the
exclusive right for 120 days after the Petition Date to file a plan of
reorganization and 60 additional days to obtain necessary acceptances. Such
periods may be extended by the Bankruptcy Court for cause to up to 18 months and
20 months, respectively, after the Petition Date. If the Company's exclusivity
period lapses, any party in interest may file a plan of reorganization for the
Company. In addition to the need for Bankruptcy Court confirmation and
satisfaction of Bankruptcy Code requirements, a plan of reorganization must be
accepted as described below by holders of impaired claims and equity interests
in order to become effective. A Company Chapter 11 plan of reorganization will
have been accepted by holders of claims against and equity interests in the
Company if (i) at least one-half in number and two-thirds in dollar amount
of claims actually voting in each impaired class of claims have voted to accept
the plan and (ii) at least two-thirds in amount of equity interests
actually voting in each impaired class of equity interests has voted to accept
the plan. Under circumstances specified in the so-called "cramdown" provisions
of section 1129(b) of the Bankruptcy Code, the Bankruptcy Court may confirm a
plan even if such plan has not been accepted by all impaired classes of claims
and equity interests. A class of claims or equity interests that does not
receive or retain any property under the plan on account of such claims or
interests is deemed to have voted to reject the plan. The precise requirements
and evidentiary showing for confirming a plan notwithstanding its rejection by
one or more impaired classes of claims or equity interests depends upon a number
of factors, including the status and seniority of the claims or equity interests
in the rejecting class --
i.e.
, secured claims or
unsecured claims, subordinated or senior claims, preferred or common
stock.
Under
section 365 of the Bankruptcy Code, the Company may assume, assume and assign,
or reject executory contracts and unexpired leases, including real property and
equipment leases, subject to the approval of the Bankruptcy Court and certain
other conditions. Rejection constitutes a court-authorized breach of the lease
or contract in question and, subject to certain exceptions, relieves the Company
of its future obligations under such lease or contract but creates a deemed
pre-petition claim for damages caused by such breach or rejection. Parties whose
contracts or leases are rejected may file claims against the Company for
damages. Generally, the assumption of an executory contract or unexpired lease
requires the Company to cure all prior defaults under such executory contract or
unexpired lease, including all pre-petition arrearages, and to provide adequate
assurance of future performance. In this regard, the Company expects that
liabilities subject to compromise and resolution in the Bankruptcy Cases will
arise in the future as a result of damage claims created by the Company's
rejection of various executory contracts and unexpired leases. Conversely, the
Company would expect that the assumption of certain executory contracts and
unexpired leases may convert liabilities shown in future financial statements as
subject to compromise to post-petition liabilities. Due to the uncertain nature
of many of the potential claims, the Company is unable to project the magnitude
of such claims with any degree of certainty.
The
Bankruptcy Court will establish a deadline for the filing of proofs of claim
under the Bankruptcy Code, requiring the Company's creditors to submit claims
for liabilities not paid and for damages incurred. There may be differences
between the amounts at which any such liabilities are recorded in the Company's
financial statements and the amount claimed by the Company's creditors.
Significant litigation may be required to resolve any such disputes or
discrepancies.
There can
be no assurance that a reorganization plan will be proposed by the Company or
confirmed by the Bankruptcy Court, or that any such plan will be
consummated.
The
Company has incurred and will continue to incur significant costs associated
with the reorganization. The amount of these costs, which are being expensed as
incurred, are expected to significantly affect the Company's results of
operations.
12. Subsequent
Events - continued
As of the
Petition Date, the Company had approximately $1.1 million
in cash and cash
equivalents. The ability of the Company to continue as a going concern is
dependent upon, among other things, (i) the Company's ability to secure
adequate DIP financing; (ii)
the Company's ability to
comply with the terms and conditions of any DIP financing and any cash
collateral order entered by the Bankruptcy Court in connection with the
Bankruptcy Cases; (iii) ) the ability of the Company to generate cash
from operations; (iv) the ability of the Company to maintain adequate cash on
hand; (v) the ability of the Company to obtain confirmation of and to
consummate a plan of reorganization under the Bankruptcy Code; and,
(vi) the cost, duration and outcome of the reorganization process.
Uncertainty as to the outcome of these factors raises substantial doubt about
the Company's ability to continue as a going concern. We are currently
evaluating various courses of action to address the operational and liquidity
issues the Company is facing and are in the process of attempting to secure DIP
financing, as described below. There can be no assurance that any of these
efforts will be successful. The accompanying unaudited condensed consolidated
financial statements do not include any adjustments that might result should the
Company be unable to continue as a going concern. Preparing the accompanying
unaudited condensed consolidated financial statements on a going concern basis
contemplates the realization of assets and the discharge of liabilities in the
normal course of business for the foreseeable future.
As a
result of the Bankruptcy Filing, realization of assets and liquidation of
liabilities are subject to uncertainty. While operating as a
debtor-in-possession under the protection of Chapter 11, and subject to
Bankruptcy Court approval or otherwise as permitted in the normal course of
business, the Company may sell or otherwise dispose of assets and liquidate or
settle liabilities for amounts other than those reflected in the condensed
consolidated financial statements. Further, a plan of reorganization could
materially change the amounts and classifications reported in our consolidated
financial statements. Our historical consolidated financial statements do not
give effect to any adjustments to the carrying value of assets or amounts of
liabilities that might be necessary as a consequence of confirmation of a plan
of reorganization.
The
potential adverse publicity associated with the Bankruptcy Filing and the
resulting uncertainty regarding the Company's future prospects may hinder the
Company's ongoing business activities and its ability to operate, fund and
execute its business plan by impairing relations with existing and potential
customers, vendors and service providers; negatively impacting the ability of
the Company to attract, retain and compensate key executives and employees and
to retain employees generally; limiting the Company's ability to obtain trade
credit; and limiting the Company's ability to maintain and exploit existing
properties and acquire and develop new properties.
Under the
priority scheme established by the Bankruptcy Code, unless creditors agree
otherwise, post-petition liabilities and pre-petition liabilities must be
satisfied in full before shareholders of the Company are entitled to receive any
distribution or retain any property under a plan of reorganization. The ultimate
recovery, if any, to creditors and shareholders of the Company will not be
determined until confirmation and consummation of a plan of reorganization. No
assurance can be given as to what values, if any, will be ascribed in the
Bankruptcy Cases to each of these constituencies or what types or amounts of
distributions, if any, they would receive. Accordingly, the Company urges that
appropriate caution be exercised with respect to existing and future investments
in any of the Company's liabilities.
12. Subsequent
Events - continued
Debtor-In-Possession
Financing
On May
17, 2009, TXCO filed a motion with the Bankruptcy Court for an interim order
(the "Interim Order") seeking approval of an anticipated debtor-in-possession
financing on the terms and conditions provided in the Summary of Terms and
Conditions (attached hereto) (the "DIP Term Sheet"). The DIP Term
Sheet contemplates that certain lenders under the TLA shall provide to TXCO and
certain of its subsidiaries (the "Debtors") debtor-in-possession financing (the
"DIP Facility") composed of a multiple draw term loan facility (the "DIP Loans")
in an aggregate principal amount of up to $32,000,000 (the "Total Commitment"),
with an initial $12,500,000 anticipated to be made available on an interim basis
(the "Interim Facility") subject to the fulfillment by the Debtors of specified
conditions precedent including entry by the Bankruptcy Court of the Interim
Order. Letters of credit may also be available for issuance under the
DIP Facility, with the issuance of any such letters of credit resulting in a
reduction of availability under the DIP Facility on a dollar-for-dollar
basis. Double Black Diamond Offshore, Ltd. and one or more financial
institutions that are currently lenders under the TLA are anticipated to
comprise the lenders under the DIP Facility (in such capacity, the "DIP
Lenders"). Pursuant to the DIP Term Sheet, the DIP Loans are to be
used to fund disbursements in accordance with a budget provided by TXCO to the
DIP Lenders.
The DIP
Loans are anticipated to accrue interest at a floating rate of interest per
annum equal to (i) LIBOR plus 4.00% with regard to extensions of credit up to
$7,500,000 and (ii) LIBOR plus 10.00% with regard to extensions of credit in
excess of $7,500,000, with LIBOR being subject to a 3.00% floor. An
origination fee in an amount equal to 1.00% of the Total Commitment will be due
and payable upon closing of the Interim Facility or at the time of any increase
in the commitments, with an additional fee of 2.00% of the Total Commitment
being due and payable upon repayment of the DIP Loans at
maturity. Additionally, an unused line fee equal to 0.50% shall be
payable monthly.
The DIP
Loans are to mature on the earliest to occur of: (i) 30 days after the entry of
the Interim Order, if the final DIP order approving the transactions outlined in
the DIP Term Sheet and granting the priority liens and administrative expense
claims referred to in the DIP Term Sheet (the "Final Order") has not been
approved, in form and substance acceptable to the DIP Lenders; (ii) if the Final
Order has been entered on or prior to 30 days following the date of entry of the
Interim Order, six months after the Bankruptcy Filing; (iii) the effective date
on which substantial consummation of a plan of reorganization has been confirmed
by an order of the Bankruptcy Court; and (iv) such earlier date on which all of
the obligations under the DIP Facility shall become due and payable in
accordance with the terms of the credit agreement documenting the DIP
Facility.
The anticipated commitment of the DIP
Lenders to provide DIP Loans under the DIP Facility is subject to a number of
conditions, including entry by the Bankruptcy Court of the Interim Order and
completion of final loan documentation satisfactory in form and substance to the
DIP Lenders. There can be no assurance that TXCO will be able to
obtain financing on the terms proposed in the DIP Term Sheet or at
all.
The DIP
Loans are to be secured by valid, enforceable and perfected first-priority
priming liens and security interests on all of the Debtors' assets, with such
liens and security interests having priority over any and all prepetition or
postpetition liens and security interests, subject only to a carve-out for
professional fees and expenses.
The DIP
Loans are to be subject to provisions regarding mandatory prepayments upon
certain events, affirmative and negative covenants, financial covenants, certain
budgeting requirements, events of default and other customary terms and
conditions.
ITEM
2.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Unless
the context requires otherwise, when we refer to "TXCO", "the Company", "we",
"us" or "our", we are describing TXCO Resources Inc. The following discussion
should be read in conjunction with the unaudited consolidated financial
statements and notes thereto included in this Form 10-Q, and with the Company's
latest audited consolidated financial statements and notes thereto, and
Management's Discussion and Analysis, as reported in its Annual Report on Form
10-K for the year ended December 31, 2008.
Disclosure
Regarding Forward Looking Statements
Statements
in this Form 10-Q which are not historical, including statements regarding
TXCO's or management's intentions, hopes, beliefs, expectations,
representations, projections, estimations, plans or predictions of the future,
are forwarding-looking statements and are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements in some cases can be identified by their being
preceded by, followed by or containing words such as “estimate,” “plan,”
“project,” “forecast,” “intend,” “expect,” “anticipate,” “believe,” “seek,”
“target” and other similar expressions. Forward-looking statements are based on
assumptions and assessments made by the Company’s management in light of their
experience and their perception of historical trends, current conditions,
expected future developments and other factors they believe to be appropriate.
Such statements include those relating to
·
|
forecasts
of our ability to successfully reorganize and emerge from
bankruptcy;
|
·
|
estimated
financial results;
|
·
|
our
ability to finance our working capital
requirements;
|
·
|
expected
oil and gas prices;
|
·
|
number
of drilling locations;
|
·
|
expected
drilling plans, including the timing, category, number, depth, cost and/or
success of wells to be drilled;
|
·
|
expected
geological formations; or
|
·
|
the
availability of specific services, equipment or
technologies.
|
It is
important to note that actual results may differ materially from the results
predicted in any such forward-looking statements. Investors are cautioned that
all forward-looking statements involve risks and uncertainties including without
limitation
·
|
our
ability to continue as a going
concern;
|
·
|
our
ability to obtain debtor-in-possession (DIP) financing on an interim or
final basis;
|
·
|
our
ability to operate pursuant to the terms and conditions of any DIP
financing and any cash collateral order entered by the Bankruptcy Court in
connection with the Bankruptcy
Cases;
|
·
|
our
ability to obtain Court approval with respect to motions in the Chapter 11
cases prosecuted by us from time to
time;
|
·
|
our
ability to develop, prosecute, confirm and consummate a plan of
reorganization with respect to the Bankruptcy
Cases;
|
·
|
risks
associated with third parties seeking and obtaining court approval to
terminate or shorten the exclusivity period that we have to propose and
confirm a plan of reorganization, for the appointment of a Chapter 11
trustee or examiner with expanded powers or to convert the Bankruptcy
Cases to cases under Chapter 7 of the Bankruptcy
Code;
|
·
|
our
ability to obtain and maintain normal terms with vendors and service
providers;
|
·
|
our
ability to maintain our leased properties and acreage and other contracts
that are critical to our
operations;
|
·
|
the
potential adverse impact of the Bankruptcy Cases on our liquidity or
results of operations;
|
·
|
our
ability to fund and execute our business
plan;
|
·
|
our
ability to attract, motivate and retain key executives and
employees;
|
·
|
our
ability to attract and retain
customers;
|
·
|
our
ability to obtain capital to fund our working capital or other
needs;
|
·
|
the
adequacy of our liquidity and our ability to meet our cash commitments,
working capital needs, lender and vendor
obligations;
|
·
|
general
market conditions;
|
·
|
adverse
capital and credit market conditions;
|
·
|
the
costs and accidental risks inherent in exploring and developing new oil
and natural gas reserves;
|
·
|
the
price for which such reserves and production can be
sold;
|
·
|
fluctuation
in prices of oil and natural gas;
|
·
|
the
uncertainties inherent in estimating quantities of proved reserves and
cash flows;
|
·
|
actions
by third party co-owners in properties in which we also own an
interest;
|
·
|
acquisitions
of properties and businesses;
|
·
|
environmental
concerns affecting the drilling of oil and natural gas
wells;
|
·
|
impairment
of oil and natural gas properties due to depletion or other causes;
and
|
·
|
hedging
decisions, including whether or not to
hedge.
|
TXCO
undertakes no obligation to revise or update any forward-looking statements, or
to make any other forward-looking statements, whether as a result of new
information, future events or otherwise. Please refer to the "Risk Factors"
discussion in Part II, Item 1A below and in
Part I, Item 1A of our
Annual Report on Form 10-K for the year ended December 31, 2008, for additional
information. This and all our previously filed documents are on file at the
Securities and Exchange Commission and can be viewed on our website at
www.txco.com. Copies of the filings are available from our Corporate Secretary
without charge.
Overview
We are an
independent oil and natural gas enterprise with interests in the Maverick Basin
of Southwest Texas, the Fort Trinidad area of East Texas, the onshore Gulf Coast
region and the Marfa Basin of Texas, the Midcontinent region of Western Oklahoma
and shallow Gulf of Mexico waters. Our primary business operation is
exploration, exploitation, development, production and acquisition of
predominately onshore domestic oil and natural gas reserves.
Our
business strategy is to acquire undeveloped mineral interests and internally
develop a multi-year drilling inventory through the use of advanced
technologies, such as 3-D seismic and horizontal drilling. We account for our
oil and natural gas operations under the successful efforts method of accounting
and trade our common stock on Nasdaq's Global Select Market under the symbol
"TXCO."
As of
early May, we have one drilling rig under contract and in operation on our
Maverick Basin acreage. Our emphasis thus far this year has been on the
Georgetown formation. We participated in three new wells and three re-entries
through April 30, 2009, with five of the six total wells in the Maverick Basin.
Four of the wells targeted the Georgetown formation, of which two wells are
producing oil and one well is producing gas, while one re-entry continues
drilling. One well awaits completion in the Olmos formation and one re-entry to
a shallow offshore well is producing gas. Two of the new Georgetown wells were
drilled with funds from our partner in this project. We have reviewed our
remaining 2009 capital expenditures budget ("CAPEX") and drilling program and
plan to operate within expected cash flow, focusing on retaining leases and
earning additional interests through drilling.
Due to
the number of promising prospects on our Maverick Basin acreage, as well as high
oil and natural gas prices, drilling activity remained high during the last
several years through September of 2008. For further discussion of this activity
and the related plays, see "Principal Areas of Activity" and "Drilling Activity"
in Part I, Item 1 of our Annual Report on Form 10-K for the year ended December
31, 2008. However, the significant decline in commodity prices during
fourth-quarter 2008 resulted in reduced activity for that period, as well as the
first quarter of 2009. Recognition of additional reserves on newly drilled wells
requires a period of sustained production, causing a delay between the
expenditures and the recording of reserves. The low commodity prices at year-end
2008, which continue in first-quarter 2009, caused some oil and natural gas
deposits to become less than economic and, therefore, not recognized as proved
reserves under the applicable rules at this time.
Recent
Events/Chapter 11 Bankruptcy
During
2008, the Company engaged in its largest capital expenditure program in its
history. Our costs incurred in the development and purchase of oil and natural
gas properties increased beyond planned 2008 levels to $182 million. The
expansion in the capital program was due to escalating capital costs caused by
tight service availability during the extremely active industry period in
mid-2008 and, specifically, cost overruns on certain significant wells that
encountered severe problems in the drilling process and exceeded their original
budget. The capital cost escalations throughout 2008 have been followed by an
unprecedented commodity price collapse. As a result of the time lag between
incurring drilling costs and the resulting increase in revenues from new
production, and deteriorating economic conditions, we have experienced severe
cash flow constraints. Faced with these constraints, on May 17, 2009 (the
"Petition Date"), the Company and its subsidiaries filed voluntary petitions for
relief under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy
Court for the Western District of Texas. The Company's Chapter 11 cases are
being jointly administered by the Bankruptcy Court as Case No. 09-51807
through Case No. 09-51817 (BLS) (collectively, the "Bankruptcy Cases"). The
petitions were filed in order to enable the Company to pursue reorganization
efforts under Chapter 11 of the Bankruptcy Code. The Company intends to continue
to operate its business as debtor-in-possession under the jurisdiction of the
Bankruptcy Court and in accordance with the applicable provisions of the
Bankruptcy Code and orders of the Bankruptcy Court. In general, as
debtors-in-possession, the Company and its subsidiaries that are part of the
Bankruptcy Filing (collectively, the "Debtors") are authorized under Chapter 11
to continue to operate as an ongoing business, but may not engage in
transactions outside of the ordinary course of business without the prior
approval of the Bankruptcy Court. In addition to the Company, the Debtors
comprise TXCO Energy Corp., a Texas corporation, Eagle Pass Well Service,
L.L.C., a Texas limited liability company, TXCO Drilling Corp., a Texas
corporation, Texas Tar Sands, Inc., a Texas corporation, Charro Energy, Inc., a
Texas corporation, Output Acquisition Corp., a Texas corporation, OPEX Energy,
LLC., a Texas limited liability company, PPL Operating, Inc., a Texas
corporation, Maverick Gas Marketing, Ltd., a Texas limited partnership, and
Maverick Dimmit Pipeline, Ltd., a Texas limited partnership.
As a
result of the Bankruptcy Filing, the Debtors are periodically required to file
various documents with, and provide certain information to, the Bankruptcy
Court, including statements of financial affairs, schedules of assets and
liabilities, monthly operating reports and other financial information. Such
materials will be prepared according to requirements of federal bankruptcy law
and may in some cases present information on an unconsolidated basis. While they
would accurately provide then-current information required under federal
bankruptcy law, such materials will contain information that may be
unconsolidated and will generally be unaudited and prepared in a format
different from that used in the Company's consolidated financial statements
filed under the securities laws. Accordingly, the Company believes that the
substance and format of such materials do not allow meaningful comparison with
its regular publicly-disclosed consolidated financial statements. Moreover, the
materials filed with the Bankruptcy Court are not prepared for the purpose of
providing a basis for an investment decision relating to the Company's or other
Debtors' stock or debt or for comparison with other financial information filed
with the Securities and Exchange Commission.
Most of
the Debtors' filings with the Bankruptcy Court are available to the public at
the offices of the Clerk of the Bankruptcy Court or the Bankruptcy Court's web
site (http://www.txwb.uscourts.gov/) or may be obtained through private document
retrieval services, or on the web site established by the Debtors' claims and
noticing agent (http://cases.administarllc.com/txco). Information contained
on, or that can be accessed through, such web sites or the Bankruptcy Court's
web site is not part of this report.
The
Company has filed "first day" motions for various relief designed to stabilize
the Company's operations and business relationships with vendors, lenders,
employees and others. These motions request authority to, among other things:
(a) pay pre-petition and post-petition employee wages, salaries, benefits
and other employee obligations; (b) pay vendors and other providers in the
ordinary course for goods and services received from and after the Petition
Date; (c) pay suppliers delivering goods on or after the Petition Date and
(d) use the Company's cash on hand in the operation of its business. There can
be no assurance that the motions will be approved by the court.
The
Bankruptcy Filing resulted in the automatic acceleration of substantially all
debt of the Company (see Note 7 to the unaudited condensed consolidated
financial statements). Subject to certain exceptions under the Bankruptcy Code,
the Bankruptcy Filing will automatically enjoin, or stay, the continuation of
any judicial or administrative proceedings or other actions against TXCO or its
property to recover on, collect or secure a claim arising prior to the Petition
Date. Thus, for example, creditor actions to obtain possession of property from
TXCO, or to create, perfect or enforce any lien against the property of TXCO, or
to collect on or otherwise exercise rights or remedies with respect to a
pre-petition claim will be enjoined unless and until the Bankruptcy Court lifts
the automatic stay.
In order
to successfully exit Chapter 11 bankruptcy, the Company will need to propose,
and obtain confirmation by the Bankruptcy Court of, a plan of reorganization
that satisfies the requirements of the Bankruptcy Code. A plan of reorganization
would, among other things, resolve the Debtors' pre-petition obligations, set
forth the revised capital structure of the newly reorganized entity and provide
for corporate governance subsequent to exit from bankruptcy. The Company has the
exclusive right for 120 days after the Petition Date to file a plan of
reorganization and 60 additional days to obtain necessary acceptances. Such
periods may be extended by the Bankruptcy Court for cause to up to 18 months and
20 months, respectively, after the Petition Date. If the Company's exclusivity
period lapses, any party in interest may file a plan of reorganization for the
Company. In addition to the need for Bankruptcy Court confirmation and
satisfaction of Bankruptcy Code requirements, a plan of reorganization must be
accepted as described below by holders of impaired claims and equity interests
in order to become effective. A Company Chapter 11 plan of reorganization will
have been accepted by holders of claims against and equity interests in the
Company if (i) at least one-half in number and two-thirds in dollar amount
of claims actually voting in each impaired class of claims have voted to accept
the plan and (ii) at least two-thirds in amount of equity interests
actually voting in each impaired class of equity interests has voted to accept
the plan. Under circumstances specified in the so-called "cramdown" provisions
of section 1129(b) of the Bankruptcy Code, the Bankruptcy Court may confirm a
plan even if such plan has not been accepted by all impaired classes of claims
and equity interests. A class of claims or equity interests that does not
receive or retain any property under the plan on account of such claims or
interests is deemed to have voted to reject the plan. The precise requirements
and evidentiary showing for confirming a plan notwithstanding its rejection by
one or more impaired classes of claims or equity interests depends upon a number
of factors, including the status and seniority of the claims or equity interests
in the rejecting class --
i.e.
, secured claims or
unsecured claims, subordinated or senior claims, preferred or common
stock.
Under
section 365 of the Bankruptcy Code, the Company may assume, assume and assign,
or reject executory contracts and unexpired leases, including real property and
equipment leases, subject to the approval of the Bankruptcy Court and certain
other conditions. Rejection constitutes a court-authorized breach of the lease
or contract in question and, subject to certain exceptions, relieves the Company
of its future obligations under such lease or contract but creates a deemed
pre-petition claim for damages caused by such breach or rejection. Parties whose
contracts or leases are rejected may file claims against the Company for
damages. Generally, the assumption of an executory contract or unexpired lease
requires the Company to cure all prior defaults under such executory contract or
unexpired lease, including all pre-petition arrearages, and to provide adequate
assurance of future performance. In this regard, the Company expects that
liabilities subject to compromise and resolution in the Bankruptcy Cases will
arise in the future as a result of damage claims created by the Company's
rejection of various executory contracts and unexpired leases. Conversely, the
Company would expect that the assumption of certain executory contracts and
unexpired leases may convert liabilities shown in future financial statements as
subject to compromise to post-petition liabilities. Due to the uncertain nature
of many of the potential claims, the Company is unable to project the magnitude
of such claims with any degree of certainty.
The
Bankruptcy Court will establish a deadline for the filing of proofs of claim
under the Bankruptcy Code, requiring the Company's creditors to submit claims
for liabilities not paid and for damages incurred. There may be differences
between the amounts at which any such liabilities are recorded in the Company's
financial statements and the amount claimed by the Company's creditors.
Significant litigation may be required to resolve any such disputes or
discrepancies.
There can
be no assurance that a reorganization plan will be proposed by the Company or
confirmed by the Bankruptcy Court, or that any such plan will be
consummated.
The
Company has incurred and will continue to incur significant costs associated
with the reorganization. The amount of these costs, which are being expensed as
incurred, are expected to significantly affect the Company's results of
operations.
As of the
Petition Date, the Company had approximately $1.1 million
in cash and cash
equivalents. The ability of the Company to continue as a going concern is
dependent upon, among other things, (i) the Company's ability to secure
adequate DIP financing; (ii) the Company's ability to comply with the terms
and conditions of any DIP financing and any cash collateral order entered by the
Bankruptcy Court in connection with the Bankruptcy Cases; (iii) the ability
of the Company to maintain adequate cash on hand; (iv) the ability of the
Company to generate cash from operations; (v) the ability of the Company to
obtain confirmation of and to consummate a plan of reorganization under the
Bankruptcy Code; and (vi) the cost, duration and outcome of the
reorganization process. Uncertainty as to the outcome of these factors raises
substantial doubt about the Company's ability to continue as a going concern. We
are currently evaluating various courses of action to address the operational
and liquidity issues the Company is facing and are in the process of attempting
to secure DIP financing, as described below under "Liquidity and Capital
Resources." There can be no assurance that any of these efforts will be
successful. The accompanying unaudited condensed consolidated financial
statements do not include any adjustments that might result should the Company
be unable to continue as a going concern. Preparing the accompanying unaudited
condensed consolidated financial statements on a going concern basis
contemplates the realization of assets and the discharge of liabilities in the
normal course of business for the foreseeable future.
As a
result of the Bankruptcy Filing, realization of assets and liquidation of
liabilities are subject to uncertainty. While operating as a
debtor-in-possession under the protection of Chapter 11, and subject to
Bankruptcy Court approval or otherwise as permitted in the normal course of
business, the Company may sell or otherwise dispose of assets and liquidate or
settle liabilities for amounts other than those reflected in the condensed
consolidated financial statements. Further, a plan of reorganization could
materially change the amounts and classifications reported in our consolidated
financial statements. Our historical consolidated financial statements do not
give effect to any adjustments to the carrying value of assets or amounts of
liabilities that might be necessary as a consequence of confirmation of a plan
of reorganization.
The
potential adverse publicity associated with the Bankruptcy Filing and the
resulting uncertainty regarding the Company's future prospects may hinder the
Company's ongoing business activities and its ability to operate, fund and
execute its business plan by impairing relations with existing and potential
customers, vendors and service providers; negatively impacting the ability of
the Company to attract, retain and compensate key executives and employees and
to retain employees generally; limiting the Company's ability to obtain trade
credit; and limiting the Company's ability to maintain and exploit existing
properties and acquire and develop new properties.
Under the
priority scheme established by the Bankruptcy Code, unless creditors agree
otherwise, post-petition liabilities and pre-petition liabilities must be
satisfied in full before shareholders of the Company are entitled to receive any
distribution or retain any property under a plan of reorganization. The ultimate
recovery, if any, to creditors and shareholders of the Company will not be
determined until confirmation and consummation of a plan of reorganization. No
assurance can be given as to what values, if any, will be ascribed in the
Bankruptcy Cases to each of these constituencies or what types or amounts of
distributions, if any, they would receive.
A plan of
reorganization could result in holders of the Company's common stock (the
"Common Stock") and preferred stock receiving no distribution on account of
their interests and cancellation of their existing stock. As discussed above, if
the requirements of section 1129(b) of the Bankruptcy Code are met, a plan of
reorganization can be confirmed notwithstanding its rejection by the Company's
equity security holders and notwithstanding the fact that such equity security
holders do not receive or retain any property on account of their equity
interests under the plan.
The value
of the Common Stock and preferred stock is highly speculative. The Company urges
that appropriate caution be exercised with respect to existing and future
investments in any of the Common Stock or preferred stock or any of the
liabilities and/or other securities of the Company or other
Debtors.
Liquidity
Issues/Going Concern:
As previously discussed, we have
experienced severe cash flow constraints and substantial difficulties in meeting
our short-term cash needs, particularly in relation to our vendor commitments.
Substantially all of our assets are pledged, and extreme volatility in energy
prices and a deteriorating global economy are creating great difficulties in the
capital markets and have greatly hindered our ability to raise debt and/or
equity capital.
At March
31, 2009, we had a working capital deficiency of $290.7 million, including
$150.4 million reclassified from long-term debt and $94.5 million reclassified
to current liabilities from preferred stock due to defaults under those
instruments, which allowed the lenders to demand immediate repayment under our
bank credit facilities and the holders of our preferred stock to demand
redemption. However, under the terms of the Certificates of Designations our
obligation to pay the redemption price of any preferred stock demanded to be
redeemed is suspended until the earlier of (i) October 31, 2012 or (ii) the date
that all of our obligations under the bank credit facilities have been
satisfied. We had $49.8 million in trade payables at March 31, 2009, of which
approximately $27.2 million was 60 days or more past due. Our inability to reach
accommodations with our vendors regarding the timing of payment in light of our
limited liquidity has resulted in liens filed against our properties and
withdrawal of trade credit by certain vendors, which in turn limits our ability
to conduct operations on properties. While we have examined alternatives to
improve our liquidity and cash resources, including seeking additional short and
long-term capital through bank borrowings, the issuance of debt instruments, the
sale of common stock and preferred stock, the sale of non-strategic assets,
joint-venture financing, and restructuring our existing obligations, our
inability to improve our liquidity and cash resources has caused us to
experience continued material adverse business consequences and resulted in the
bankruptcy filing.
Our
accompanying financial statements have been prepared assuming we will continue
as a going concern. However, due to our deficiency in short-term and long-term
liquidity, our ability to continue as a going concern is dependent on our
success in obtaining DIP financing and
generating additional
sources of capital in the near future. We received a report from our independent
registered public accounting firm on our consolidated financial statements for
the year ended December 31, 2008, in which they have included an explanatory
paragraph indicating that our working capital deficiency, non-compliance with
our current ratio covenant under our bank credit facilities and violation of a
provision of the certificate of designation of the Series D and Series E
Convertible Preferred Stock, are factors which raise substantial doubt about our
ability to continue as a going concern. See "Liquidity and Capital Resources"
later in this section for further discussion of liquidity issues.
Market
Conditions:
Beginning in October 2008 and continuing through
first-quarter 2009, oil and natural gas prices declined significantly, and
remain volatile. The decline in commodity prices resulted in significantly
reduced revenues, net income and cash flows for fourth-quarter 2008 and
first-quarter 2009. As a result, our financial condition, operating results and
cash flows, as well as access to debt and equity capital, has been materially
adversely effected. Additionally, perceptions by oil and natural gas companies
that oil and natural gas prices will be lower long-term has similarly reduced or
deferred major expenditures, which has impacted our ability to attract partners
for certain of our activities. Difficult conditions in the global capital
markets and the economy generally have materially adversely effected our
business and results of operations and we do not expect these conditions to
improve in the near future.
Impairment of Oil
and Natural Gas Properties:
We review our oil and natural gas
properties for impairment at least annually, and whenever events and
circumstances indicate a decline in the recoverability of their carrying value.
We estimate the expected future cash flows of our oil and natural gas properties
and compare such future cash flows to the carrying amount of the properties to
determine if the carrying amounts are recoverable. If the carrying amount
exceeds the estimated undiscounted future cash flows, we will adjust the
carrying amount of the oil and natural gas properties to their fair value. The
factors used to determine fair value include, but are not limited to, estimates
of proved reserves, future commodity pricing, future production estimates,
anticipated capital expenditures, and a discount rate commensurate with the risk
associated with realizing the expected cash flows projected.
Given the
complexities associated with oil and natural gas reserve estimates and the
history of price volatility in the oil and natural gas markets, events may arise
that would require us to record an impairment of the recorded book values
associated with oil and natural properties. For the quarter ended March 31,
2009, we recognized impairments of $19.9 million, compared to $.3 million in the
prior comparative quarter. The increase in impairment is due to the significant
decrease in commodity prices from the comparative prior quarter, combined with
the severe restriction in our capital expenditures which as caused us to
reevaluate our various drilling projects. There can be no assurance that
additional impairments will not be recognized either in the next quarter or
future quarters, as of result of the Chapter 11 filing, which will require us to
further evaluate our oil and natural gas properties.
TXCO Response to
Liquidity Issues and Market Conditions:
We initiated a number of actions
beginning in the fourth quarter of 2008 to mitigate the impact on TXCO of
the unprecedented deterioration of market conditions. These actions
included:
|
·
|
reduced
drilling activity in light of projected reductions in cash
flows;
|
|
·
|
assessed
the prospect of selling our pipeline assets and certain non-core leasehold
interests;
|
|
·
|
evaluated
our derivative positions;
|
|
·
|
discontinued
our FAST oil sands pilot project,
|
|
·
|
temporarily
stacked one of our drilling rigs,
|
|
·
|
laid-off
approximately 20% of our work
force,
|
|
·
|
entered
into a $4 million credit facility secured by our drilling
rigs,
|
|
·
|
initiated
discussions with the agent for our revolving credit agreement to discuss
our financial condition, and
|
|
·
|
initiated
talks with prospective buyers regarding the sale of our pipeline
system.
|
During
first-quarter 2009, we:
|
·
|
closed
out all of our derivative positions for
cash,
|
|
·
|
closed
the sale of our pipeline assets effective February 1, 2009, to Clear
Springs Energy Company, LLC, a San Antonio based
company,
|
|
·
|
initiated
a strategic alternatives review (discussed
below),
|
|
·
|
discontinued
our SAGD oil sands pilot project,
and
|
|
·
|
hired
FTI Consulting, Inc. as restructuring advisor and appointed its Senior
Managing Director, Albert S. Conly, as Chief Restructuring
Officer.
|
We also
reviewed the creditworthiness of the banks and financial institutions with which
we maintain our bank credit facilities, and which were counter-parties to our
derivative arrangements.
Additionally,
on May 4, 2009, we reduced our staff by 25 employees, approximately 30% of our
workforce including Roberto Thomae, Vice President Capital Markets, and
nine consultants. Additionally, on May 7, 2009, P. Mark Stark the Chief
Financial Officer and James J. Bookout the Chief Operating Officer were
terminated as employees. TXCO will incur one-time termination costs of
approximately $380,000 during second-quarter 2009.
Strategic
Alternatives Review:
In February 2009, we retained Goldman, Sachs &
Co. as a financial advisor for a strategic alternatives review designed to
enhance stockholder value. We expect that during the Bankruptcy Cases, all
options will continue to be under consideration, including the potential sale of
leasehold interests or other assets or sale of the Company.
Liquidity and Capital Resources
General
Liquidity
is a measure of ability to access cash. We primarily need cash for exploration,
development and acquisitions of oil and natural gas properties, payment of
contractual obligations, redemption of preferred stock, payment of preferred
stock dividends and working capital funding. At March 31, 2009, we had a working
capital deficiency of $290.7 million, including $150.4 million reclassified from
long-term debt and $94.5 million reclassified from preferred stock. We had $49.8
million in trade payables at March 31, 2009. Our inability to reach
accommodations with our vendors regarding the timing of payment in light of our
limited liquidity has resulted in liens filed against our properties and
withdrawal of trade credit by certain vendors, which in turn limits our ability
to conduct operations on properties.
We
received a report from our independent registered public accounting firm on our
consolidated financial statements for the year ended December 31, 2008, in which
they included an explanatory paragraph indicating that our working capital
deficiency, non-compliance with our current ratio covenant under our bank credit
facilities and violation of a provision of the certificate of designation of the
Series D and Series E Convertible Preferred Stock raise substantial doubt about
our ability to continue as a going concern. As such, our accompanying financial
statements have been prepared assuming we will continue as a going
concern
The
prices for future oil and natural gas production and the level of production
have significant impacts on our operating cash flows and can not be predicted
with any degree of certainty.
As a
result of the Bankruptcy Filing and the circumstances leading to the Bankruptcy
Filing, described elsewhere in this report, we face uncertainty regarding the
adequacy of our liquidity and capital resources and have limited access to
financing. During the pendency of the Bankruptcy Cases, we expect that our
primary sources of liquidity will be cash flows from operations and borrowings
under such DIP financing as we may be able to obtain. In addition to the cash
requirements necessary to fund ongoing operations, we have incurred significant
professional fees and other costs in connection with the Bankruptcy Cases and
expect that we will continue to incur significant professional fees and costs.
We cannot assure you that the amounts of cash available from operations,
together with any DIP financing, will be sufficient to fund our operations,
including operations during the period until such time as we are able to propose
a plan of reorganization that will receive the requisite acceptance by creditors
and be confirmed by the Bankruptcy Court. Our long-term liquidity requirements
and the adequacy of our capital resources are difficult to predict at this time
and ultimately cannot be determined until a plan of reorganization has been
developed and is confirmed by the Bankruptcy Court.
Debtor-in-Possession
Financing
On May
17, 2009, TXCO filed a motion with the Bankruptcy Court for an interim order
(the "Interim Order") seeking approval of an anticipated debtor-in-possession
financing on the terms and conditions provided in the Summary of Terms and
Conditions (attached hereto) (the "DIP Term Sheet"). The DIP Term
Sheet contemplates that certain lenders under the TLA shall provide to TXCO and
its subsidiaries (the "Debtors") debtor-in-possession financing (the "DIP
Facility") composed of a multiple draw term loan facility (the "DIP Loans") in
an aggregate principal amount of up to $32,000,000 (the "Total Commitment"),
with an initial $12,500,000 anticipated to be made available on an interim basis
(the "Interim Facility") subject to the fulfillment by the Debtors of specified
conditions precedent including entry by the Bankruptcy Court of the Interim
Order. Letters of credit may also be available for issuance under the
DIP Facility, with the issuance of any such letters of credit resulting in a
reduction of availability under the DIP Facility on a dollar-for-dollar
basis. Double Black Diamond Offshore, Ltd. and one or more financial
institutions that are currently lenders under the TLA are anticipated to
comprise the lenders under the DIP Facility (in such capacity, the "DIP
Lenders"). Pursuant to the DIP Term Sheet, the DIP Loans are to be
used to fund disbursements in accordance with a budget provided by TXCO to the
DIP Lenders.
The DIP
Loans are anticipated to accrue interest at a floating rate of interest per
annum equal to (i) LIBOR plus 4.00% with regard to extensions of credit up to
$7,500,000 and (ii) LIBOR plus 10.00% with regard to extensions of credit in
excess of $7,500,000, with LIBOR being subject to a 3.00% floor. An
origination fee in an amount equal to 1.00% of the Total Commitment will be due
and payable upon closing of the Interim Facility or at the time of any increase
in the commitments, with an additional fee of 2.00% of the Total Commitment
being due and payable upon repayment of the DIP Loans at
maturity. Additionally, an unused line fee equal to 0.50% shall be
payable monthly.
The DIP
Loans are to mature on the earliest to occur of: (i) 30 days after the entry of
the Interim Order, if the final DIP order approving the transactions outlined in
the DIP Term Sheet and granting the priority liens and administrative expense
claims referred to in the DIP Term Sheet (the "Final Order") has not been
approved, in form and substance acceptable to the DIP Lenders; (ii) if the Final
Order has been entered on or prior to 30 days following the date of entry of the
Interim Order, six months after the Bankruptcy Filing; (iii) the effective date
on which substantial consummation of a plan of reorganization has been confirmed
by an order of the Bankruptcy Court; and (iv) such earlier date on which all of
the obligations under the DIP Facility shall become due and payable in
accordance with the terms of the credit agreement documenting the DIP
Facility.
The anticipated commitment of the DIP
Lenders to provide DIP Loans under the DIP Facility is subject to a number of
conditions, including entry by the Bankruptcy Court of the Interim Order and
completion of final loan documentation satisfactory in form and substance to the
DIP Lenders. There can be no assurance that TXCO will be able to
obtain financing on the terms proposed in the DIP Term Sheet or at
all.
The DIP
Loans are to be secured by valid, enforceable and perfected first-priority
priming liens and security interests on all of the Debtors' assets, with such
liens and security interests having priority over any and all prepetition or
postpetition liens and security interests, subject only to a carve-out for
professional fees and expenses.
The DIP Loans are to be subject to
provisions regarding mandatory prepayments upon certain events, affirmative and
negative covenants, financial covenants, certain budgeting requirements, events
of default and other customary terms and conditions.
The
ability of the Company to continue as a going concern is dependent upon, among
other things, (i) the Company's ability to secure adequate DIP financing;
(ii) the Company's ability to comply with the terms and conditions of any
DIP financing and any cash collateral order entered by the Bankruptcy Court in
connection with the Bankruptcy Cases; (iii) the ability of the Company to
maintain adequate cash on hand; (iv) the ability of the Company to generate
cash from operations; (v) the ability of the Company to obtain confirmation
of and to consummate a plan of reorganization under the Bankruptcy Code; and
(vi) the cost, duration and outcome of the reorganization process.
Uncertainty as to the outcome of these factors raises substantial doubt about
the Company's ability to continue as a going concern. We are currently
evaluating various courses of action to address the operational and liquidity
issues the Company is facing and are in the process of attempting to secure DIP
financing, as described below. There can be no assurance that any of these
efforts will be successful.
Existing Credit Facilities
and Preferred Stock
Bank Credit
Facilities:
We have two credit
facilities in place, which are described below. As disclosed in our Form 8-K
filed with the SEC on February 27, 2009, we are in violation of the current
ratio covenant under these agreements. As a result of that violation all
outstanding balances under these agreements have been classified as current
liabilities on the Consolidated Balance Sheet as of December 31, 2008, and March
31, 2009. Additionally, as disclosed in our Form 8-K filed with the SEC on April
22, 2009, we have received Notice of Acceleration documents from the lenders, on
the Senior Credit Agreement and the Term Loan Agreement, which demands immediate
payment of the entire amounts due under these facilities and terminates their
commitments to make additional revolving credit loans under the
agreements.
Senior Credit
Agreement
--
At
March 31, 2009, we had a $125 million senior revolving credit facility with a
group of lenders, with Bank of Montreal acting as administrative agent (the
"SCA"). The SCA was entered into in April 2007, amended in July 2007, and was
scheduled to expire in April 2011.
At March
31, 2009, the borrowing base was $55.0 million with $50.0 million outstanding at
a weighted average interest rate of 4.00%. The SCA is secured by a
first-priority security interest in TXCO's and certain of its subsidiaries'
proved oil and natural gas reserves and in the equity interests of such
subsidiaries. In addition, TXCO's obligations under the SCA are guaranteed by
these certain subsidiaries. As of April 30, 2009, the balance outstanding under
the SCA remained $50.0 million, with a weighted average interest rate of 6.00%,
using the base rate option.
Loans
under the SCA are subject to floating rates of interest based on (1) the
total amount outstanding under the SCA in relation to the borrowing base and
(2) whether the loan is a LIBOR loan or a base rate loan. LIBOR loans bear
interest at the LIBOR rate (for the applicable 1-, 2-, 3- or 6-month maturity
chosen by the Company) plus the applicable margin, and base rate loans bear
interest at the base rate plus the applicable margin. The applicable margin
varies with the ratio of total outstanding to the borrowing base. For base rate
loans it ranges from zero to 100 basis points and for LIBOR rate loans it ranges
from 150 to 250 basis points. As a result of our violation of certain loan
covenants, an additional 200 basis points was added to the applicable interest
rate.
Under the
SCA, TXCO is required to pay a commitment fee on the difference between amounts
available under the borrowing base and amounts actually borrowed. The commitment
fee is (1) 0.375%, so long as the ratio of amounts outstanding under the SCA to
the borrowing base is less than 30%, and (2) 0.50%, in the event such ratio is
30% or greater. Prior to the default and Bankruptcy Filings, borrowings under
the SCA could be repaid and reborrowed from time to time without
penalty.
Term Loan
Agreement
--
At
March 31, 2009, we had a $100 million five-year term loan facility with Bank of
Montreal (as administrative agent) (the "TLA") and certain other financial
institutions party thereto with an interest rate of 5.0625%. The TLA is secured
by a second-priority security interest in substantially all of TXCO's and
certain of its subsidiaries' assets, including proved oil and natural gas
reserves and in the equity interests of such subsidiaries. Loans under the TLA
are subject to floating rates of interest equal to, at our option, the LIBOR
rate plus 4.50% or the base rate plus 3.50%. The LIBOR rate and the base rate
are calculated in the same manner as under the SCA. As a result of our violation
of certain loan covenants, an additional 200 basis points was added to the
applicable interest rate. See additional discussion regarding the interest rate
swap in Note 5. Therefore, at April 30, 2009, the interest rate was
7.0625%.
Borrowings
under the TLA may be repaid (but not reborrowed). Additionally, no prepayments
are permitted if the ratio of the total amount outstanding under the SCA to the
borrowing base thereunder exceeds 75% or if any default exists under the
SCA.
Both the
SCA and the TLA contain certain restrictive covenants, as defined in the
agreements, which, among other things, limit the incurrence of additional debt,
investments, liens, dividends, redemptions of capital stock, prepayments of
indebtedness, asset dispositions, mergers and consolidations, transactions with
affiliates, derivative contracts, sale leasebacks and other matters customarily
restricted in such agreements. The amended SCA and TLA require TXCO and its
subsidiaries to meet a maximum consolidated leverage ratio of 3.00 to 1.00, a
minimum current assets to current liabilities ratio of 1.00 to 1.00, a minimum
interest coverage ratio of 2.00 to 1.00 and a minimum net present value to
consolidated total debt ratio of 1.50 to 1.00. The ratios are calculated on a
quarterly basis. The Company was not in compliance with the Current Ratio
covenant at March 31, 2009. Both agreements also contain customary events of
default, including the receipt of a "going concern" qualification to the audit
opinion. The audit report for TXCO's year-end 2008 financial statements
contained a going concern qualification. As a result of the events of default,
the lenders have declared all amounts outstanding under the SCA and TLA to be
immediately due and payable. As a result of the covenant violation and going
concern opinion, all borrowings under the SCA and TLA have been classified as
current liabilities in our Consolidated Balance Sheet as of December 31, 2008,
and March 31, 2009.
Drilling Rig Financing:
At
March 31, 2009, we had a $4.0 million senior revolving credit facility with
Western National Bank (the "Rig Loan"). The Rig Loan was entered into in
December 2008. At March 31, 2009, the borrowing base was $3.7 million, of which
$0.4 million was outstanding at a weighted average interest rate of 5.00%. The
Rig Loan is secured by a first-priority security interest in our subsidiary's
drilling rigs. The Rig Loan bears interest at the prime rate as published in The
Wall Street Journal plus 1.00%, with a floor of 5.00%. Under the rig loan, we
are required to pay interest monthly. In addition, the borrowing base declines
by $83,333 per month, and may require a cash payment of the same if the line of
credit is funded above the borrowing base after this monthly
reduction.
The Rig
Loan also contains certain restrictive covenants, as defined in the agreements,
which, among other things, limit the incurrence of additional debt, investments,
liens, dividends, redemptions of capital stock, prepayments of indebtedness,
asset dispositions, mergers and consolidations, transactions with affiliates,
derivative contracts, sale leasebacks and other matters customarily restricted
in such agreements. The Rig Loan agreements require TXCO's subsidiary, TXCO
Drilling Corp., to meet a maximum debt service coverage ratio of 1.50 to 1.00, a
minimum current assets to current liabilities ratio of 3.00 to 1.00, a minimum
tangible net worth of $8,500,000 and a maximum debt to tangible net worth ratio
of 1.00 to 1.00. The ratios are calculated on a quarterly basis. We were in
compliance with all such financial covenants at March 31, 2009. The agreements
also contain customary events of default. The outstanding balance due under this
note is classified as current, as a result of the occurrence of events of
default under our SCA and TLA, due to a cross-default provision. TXCO has
received a Notice of Acceleration from Western National Bank demanding immediate
payment of the outstanding balance and accrued interest.
Redeemable
Preferred Stock:
In January 2009, holders of 5,000 shares of TXCO Series
D Preferred Stock (with a conversion price of $14.48) and 5,000 shares of TXCO
Series E Preferred Stock (with a conversion price of $17.36), with an aggregate
stated value of $10.0 million, converted those shares into a total of
approximately 633,300 shares of TXCO's common stock. An additional 836,600
shares of TXCO common stock were issued for the make-whole provision related to
preferred dividends.
In
February 2009, it was determined that TXCO had violated the Current Ratio
covenant under its bank credit facilities. As a result of this covenant
violation, holders of the convertible preferred stock have the right to request
that we redeem their shares; however, our obligation to redeem is suspended
until the earlier of October 31, 2012 or satisfaction in full of all of our
obligations under the bank credit facilities. As a result of this right, though
repayment is specifically suspended until the senior debt is paid, the stated
value of the outstanding convertible preferred stock has been reclassified to
current liabilities in the Consolidated Balance Sheets for December 31, 2008,
and March 31, 2009. Shares related to the January conversion of convertible
preferred stock, described above, were not reclassified in the December 31, 2008
Consolidated Balance Sheet since they were retired in January 2009 without the
use of current assets. Under the terms of the Certificates of Designations, the
Company is obligated to pay interest at a rate of 1.5% per month in respect of
each preferred share for which redemption has been demanded until paid in full.
As the
shares now qualify as "mandatorily redeemable," the related dividends are
included in "Interest expense" on the Consolidated Statement of Operations for
the three months ended March 31, 2009, except for the dividends paid in
conjunction with the conversion of certain shares as described above. An
additional result was the necessity to record the full redemption premium as a
liability. The recognition of the redemption premium resulted in a charge to
expense for the quarter ended March 31, 2009, and is included in the "Other
Income (Expense)" section of our Consolidated Statement of Operations. During
March 2009, we received redemption demand from holders of the majority of our
Series D and Series E Preferred Stock.
Other
Risk Management
Activities -- Hedging Contracts:
Due to the volatility
of oil and natural gas prices and requirements under our Bank Credit Facilities,
we periodically enter into price-risk management transactions (e.g., swaps,
collars and floors) for a portion of our oil and natural gas production. We also
have used interest rate swaps on our long-term debt. In certain cases, this
allows us to achieve a more predictable cash flow, as well as to reduce exposure
from price fluctuations. The commodity hedges applied to only a portion of
our production, and provided only partial price protection against declines in
oil and natural gas prices, and partially limited our potential gains from
future increases in prices. None of these instruments are used for trading
purposes.
On a
quarterly basis, management sets all of our risk management policies, including
quantities, types of instruments and counterparties. These policies are
implemented by management through the execution of trades by the Chief Financial
Officer after consultation with and concurrence by the Chief Executive Officer
and the Board of Directors. Our Board of Directors monitors our risk
management policies and trades.
All of
our risk management instruments were considered derivatives and accounted for in
accordance with SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." When used, these derivative instruments are intended to
hedge our price risk and may be considered hedges for economic purposes, but
certain of these transactions may or may not qualify for cash flow hedge
accounting. All derivative instrument contracts are recorded on the balance
sheet at fair value. The change in fair value for the effective portion of
contracts designated as cash flow hedges is recognized as Other Comprehensive
Income (Loss) as a component in the Stockholders' Equity section of the
Consolidated Balance Sheets, and is reclassified to income as the hedged
transactions occur unless the forecasted transactions become less than probable.
The hedges are highly effective, and therefore, no hedge ineffectiveness has
been recorded.
In
accordance with the terms of our Bank Credit Facilities, we entered into
commodity derivative agreements. At December 31, 2008, collars were in place
covering approximately 50% of our projected crude oil and natural gas sales over
the next 3 years. Additionally, interest rate swaps locked in the interest rate
on our $100 million TLA through June 30, 2010. During first-quarter 2009 we
terminated all of our outstanding derivative agreements for a net cash
settlement. See
Note 5
to our consolidated
financial statements for further information.
Sale of
Assets:
During first-quarter 2009, we closed on the sale of our pipeline
system to Clear Springs Energy Company LLC, a Texas limited liability company,
effective February 1, 2009, with a book value of approximately $4.0 million.
Additionally, working interests in certain of our properties were sold in
transactions that were not material, either individually or in the
aggregate.
Sources and Uses
of Cash:
At December 31, 2008, our cash reserves were $12.2 million.
During first-quarter 2009, cash used by operating activities was $3.8
million. We received approximately $9.7 million from the termination of our
commodity cash flow hedges, $5.9 million from the sale of assets, and borrowed
$3.0 million under bank credit facilities, resulting in total cash available of
$27.0 million for use in meeting our ongoing operational and development
needs.
Principal
payments of $6.6 million were made on bank credit facilities during the first
three months of 2009. Interest payments on debt were $2.1 million. There were no
federal income taxes paid during 2009. We used $14.0 million to fund the ongoing
development of our oil and natural gas producing properties, $0.1 million for
the purchase of other equipment, and $3.2 million for the termination of our
interest rate swap.
We ended
the first three months of 2009 with a working capital deficit of $290.7 million,
including $150.4 million reclassified from long-term debt and $94.5 million
reclassified from preferred stock. This compares to a working capital
deficit of $256.9 million at December 31, 2008, including $153.0 million
reclassified from long-term debt and $66.9 million reclassified from preferred
stock. At March 31, 2009, our current ratio was 0.07 to 1 compared to 0.15
to 1 at year-end 2008, including the debt and preferred stock reclassified to
current liabilities.
Net cash
used by operating activities ("operating cash flow") for the first three months
of 2009 was $3.8 million, compared to $9.9 million in the same period of 2008.
Operating cash flow is comprised of three main items: net income, adjustments to
reconcile net income to net cash provided by operating activities ("CF
Adjustments"), and changes in operating assets and liabilities. For the three
months ended March 31, 2009, we recorded a net loss of $46.6 million, as
compared to a net income of $4.3 million in the comparable prior year period. CF
Adjustments (primarily non-cash items such as depreciation, depletion,
amortization, impairment, share-based compensation and deferred taxes) were
$46.5 million for the year-to-date period of 2009, as compared to $11.3 million
in the same period of 2008. The increase CF Adjustments from the prior year
period primarily reflects the accrual of the redemption premium on the
convertible preferred stock due to its becoming mandatorily redeemable as a
result of an event of default on the bank credit facilities. Changes in working
capital were a net use of funds of $3.7 million in the three-month period of
2009, compared to a net use of $25.4 million in the comparable prior year
period.
Results of Operations
Comparing
the three-month period ended March 31, 2009 with the same period of
2008:
·
|
Oil
and natural gas sales revenues decreased
51.3%;
|
·
|
Sales
volumes were down 2.8% on a thousand cubic feet equivalent per day basis
("mcfed");
|
·
|
Average
realized prices were down $62.03 to $35.30 per barrel of oil ("bo"), and
$4.18 to $4.89 per thousand cubic feet of natural gas ("mcf"),
excluding the impact of hedges; or down $49.63 to $41.86 per bo, and $2.98
to $6.09 per mcf, including the impact of
hedges;
|
·
|
Lease
operating expenses increased by
27.2%;
|
·
|
Impairment
expense increased by $19.6 million;
|
·
|
Interest
expense increased by 111.2%;
|
·
|
a
$27.6 million non-cash expense was accrued for the redemption premium on
preferred stock;
|
·
|
Depreciation,
depletion and amortization increased by 55.1%;
and
|
·
|
Preferred
dividends increased by 24.2%.
|
These
factors, which are discussed further below, resulted in net loss to common
stockholders of $47.8 million for the three-month period ended March 31,
2009.
Operational
Data
|
|
|
Three
Months
|
for
the periods ending March 31
|
|
|
2009
|
2008
|
%
Change
|
Oil
sales volumes (mbbls)
|
|
|
258.0
|
247.2
|
|
+4.3
|
Natural
gas sales volumes (mmcf)
|
|
|
517.2
|
664.8
|
|
-22.2
|
Combined
sales volumes (mboe)
|
|
|
344.2
|
358.1
|
|
-3.9
|
Combined
sales volumes (mmcfe)
|
|
|
2,065.0
|
2,148.3
|
|
-3.9
|
Oil average
realized sales price bbl,
excluding
hedging impact of
|
|
|
$35.30
+6.56
|
$97.33
-5.84
|
|
-63.7
|
Natural
gas average realized sales price per mcf,
excluding
hedging impact of
|
|
|
$4.89
+1.20
|
$9.07
-0-
|
|
-46.1
|
Oil
- average daily sales (bopd)
|
|
|
2,866
|
2,717
|
|
+5.5
|
Natural
gas - average daily sales (mcfd)
|
|
|
5,747
|
7,306
|
|
-21.3
|
Combined
average daily sales (mboed)
|
|
|
3,824
|
3,935
|
|
-2.8
|
Combined
average daily sales (mmcfed)
|
|
|
22,944
|
23,608
|
|
-2.8
|
The
following table highlights the change for 2009 from the comparable period in
2008:
Selected
Income Statement Items
|
|
Three
Months
|
for
the periods ending March 31
|
|
$
thousands
|
%
|
Oil
and natural gas revenues
|
|
-14,702
|
-51.3
|
Lease
operations
|
|
+1,151
|
+27.2
|
Depreciation,
depletion & amortization
|
|
+6,214
|
+55.1
|
Impairment
expense
|
|
+19,647
|
+7,704.7
|
Operating
loss
|
|
+40,086
|
n/m
|
Net
loss
|
|
+50,813
|
n/m
|
Loss
to common stockholders
|
|
+51,051
|
n/m
|
n/m - %
change not meaningful due to a move from income to loss for the
period
Three Months Ended
March 31,
2009
, Compared
with Three Months Ended
March 31, 2008
:
Revenues
The 51.3%
decrease in oil and natural gas revenue is primarily due to lower average
realized prices for crude oil and natural gas, as well as lower volumes for
natural gas sales. Sales volumes decreased 2.8% on a mcfed basis. Natural gas
sales volumes were down 22.2% primarily due to a combination of factors,
including reductions in volumes on non-operated properties, the sale of 15
non-core properties with 1.3 mmcfed of production during third-quarter 2008, one
less production day in the 2009 quarter, and normal maturing natural gas well
decline curves. Oil sales volumes increased 4.3% primarily due to Georgetown and
San Miguel oil wells put on production since March 31, 2008, largely offset by
reductions in oil volumes on non-operated properties. Excluding the impact of
hedging, average realized sales prices for natural gas were down 46.1%,
while those for crude oil were down 63.7%. Derivative gains on hedges
increased revenues by $2.3 million for the quarter, compared with losses of $1.4
million for the prior-year quarter.
Lease
Operations ("LOE")
The 27.2%
increase reflects costs related to 40.5 net oil wells and 6.6 net natural gas
wells placed on production since March 31, 2008, partially offset by reduced
costs on properties for which we assumed operation and those properties that
were sold during third-quarter 2008.
Exploration
Expenses
The 11.2%
increase primarily reflects delay rental payments on certain leased
properties.
Impairment
The $19.6
million increase in impairment expense reflects significantly increased
impairment recognized due to current and forecasted lower product
prices.
Depreciation,
Depletion and Amortization ("DD&A")
The 55.1%
increase is due to higher depletion rates as a result of lower reserve balances
and costs related to new wells placed on production over the last year,
partially offset by lower sales levels.
General
and Administrative ("G&A")
G&A
expense was down 13.7% due to absence of legal costs accrued in the prior
year quarter for a proxy contest. However, as a percentage of revenue
it increased to 22.3% from 12.5% last year, primarily due to sharply lower
commodity sales prices this year. During fourth quarter 2008, G&A as a
percentage of revenue was 14.1%.
Interest
Expense
The
111.2% increase was due to higher average outstanding balances on our bank
credit facilities and the application of default interest rates.
Accretion
of Premium on Redeemable Preferred Stock
The $27.6
million recorded in first-quarter 2009 reflects a non-cash expense
reflecting the redemption premium on our convertible preferred stock, which
became mandatorily redeemable as the result of an event of default on our bank
credit facilities.
Income
Tax Expense
Our
effective tax rate was 28.9%. The rate in the prior year period was 2.9% due to
the tax benefit received on the exercise of stock options during that
period.
Subsequent
Events
On May 4,
2009, we reduced our staff by 25 employees, approximately 30% of our
workforce including Roberto Thomae, Vice President Capital Markets, and
nine consultants. Additionally, on May 7, 2009, P. Mark Stark the Chief
Financial Officer and James J. Bookout the Chief Operating Officer were
terminated as employees. TXCO will incur one-time termination costs of
approximately $380,000 during second-quarter 2009.
Drilling
Activities
Due to
liquidity restraints, we have severely limited our drilling activity thus far in
2009, focusing primarily on the Georgetown formation. We drilled or
participated in drilling five wells in first-quarter 2009, four of which were in
the Maverick Basin. Our costs on two of the 2009 wells were carried by our
partner in the Georgetown project. By comparison, we participated in 25 wells
during first-quarter 2008.
In April
2009, we spudded one re-entry to a Georgetown well. At April 30, 2009, of the
six total wells that we participated in this year, four were on production, one
was in completion, and one remained drilling. Additionally, two wells that
were in progress at year-end 2008 were placed on production in
2009.
The
following table shows net daily sales for the periods presented:
|
Quarter
Ended
|
|
%
Change from
|
Average
net daily sales volumes :
|
March
31,
2009
|
December
31,
2008
|
March
31,
2008
|
|
4th
Qtr
2008
|
1st
Qtr
2008
|
Overall
:
|
|
|
|
|
|
|
Oil,
bopd
|
2,866
|
3,086
|
2,717
|
|
-7.1
|
+5.5
|
Natural
gas, mcfd
|
5,747
|
2,588
*
|
7,306
|
|
*
|
-21.3
|
Oil
equivalent, boed
|
3,824
|
3,518
*
|
3,935
|
|
*
|
-2.8
|
Primary
formations
or
fields
:
|
|
|
|
|
|
|
Georgetown,
boed
|
378
|
215
|
239
|
|
+75.8
|
+58.2
|
Eagle
Ford, boed
|
45
|
26
|
0
|
|
+73.1
|
+100.0
|
Pearsall,
boed
|
115
|
62
|
155
|
|
+85.5
|
-25.8
|
Glen
Rose, boed
|
2,031
|
2,627
|
2,095
|
|
-22.7
|
-3.1
|
San
Miguel, boed
|
292
|
265
|
211
|
|
+10.2
|
+38.4
|
Fort
Trinidad, boed
|
196
|
118
|
233
|
|
+66.1
|
-15.9
|
*
Fourth-quarter 2008 included a large prior period adjustment related to
non-operated properties.
Natural
gas sales volumes decreased from first-quarter 2008 due to the sale of 15
non-core properties, with approximately 1.3 mmcfed of net production in
third-quarter 2008, seasonal production declines experienced during the hunting
season drilling moratorium and normal declines on maturing oil and natural gas
wells. These declines were partially offset by volumes from 6.6 net new
natural gas wells put on production since March 31, 2008.
Crude oil
sales volumes increased from first-quarter 2008 primarily due to 40.5 net new
oil wells placed on production since March 31, 2008, partially offset by
production declines on non-operated properties and normal declines on maturing
oil wells.
There is
currently one rig under contract to facilitate drilling or re-entry of
wells, primarily to hold leases, in the Maverick Basin. TXCO owns two
drilling rigs, which are currently stacked.
Georgetown
-
- We drilled or re-entered
three Georgetown wells in first-quarter 2009, and one in April
2009. One of these wells is producing natural gas and two are
producing oil, while one continues drilling. We also participated in three
Georgetown wells in the comparable prior year period.
O
ther -
- We participated in
one re-entry to a shallow offshore well and spud one vertical well targeting the
Olmos formation during first-quarter 2009. The re-entry is producing gas and the
Olmos well awaits completion.
Our
drilling operations have been severely curtailed due to our current liquidity
constraints. We still believe that our acreage positions in the Maverick and
Marfa Basins and the Fort Trinidad field have significant value and potential
for growth. Please refer to the discussion of these areas in the "Drilling
Activity" section under "Item 2. Properties" in our Annual Report on Form 10-K
for the year ended December 31, 2008.
At
year-end 2008 we had 7.6 million barrels of proved oil reserves and 36.0 billion
cubic feet of proved natural gas reserves. For further information see "Item 2.
Properties" in our Annual Report on Form 10-K for the year ended December 31,
2008.
ITEM
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market
risk represents the risk of loss that may impact the financial position, results
of operations, or cash flows due to adverse changes in interest rates and
commodity prices.
Commodity
Risk:
Our major market-risk exposure is the commodity pricing applicable
to our oil and natural gas production. Realized commodity prices received for
such production are primarily driven by the prevailing worldwide price for crude
oil and spot prices applicable to natural gas. Prices have fluctuated
significantly over the last five years and such volatility is expected to
continue, and the range of such price movement is not predictable with any
degree of certainty. We enter into financial price hedges from time to time
covering a portion of our monthly volumes. The amount and timing are generally
determined by requirements under our bank credit facilities. However, with
permission from the lenders under these bank credit facilities, all of our
derivative agreements were terminated during first-quarter 2009. Please
refer to
Note 5
to the consolidated financial
statements included herein for additional information on our commodity hedging
contracts and activity.
Interest Rate
Risk:
We are exposed to market risk through interest rates related to our
credit facility borrowing. Our credit facilities borrowings are based on the
LIBOR or prime rate plus an applicable margin and are used to assist in meeting
our working capital needs. As of March 31, 2009, we had $150.4 million in total
borrowings under our credit facilities at a weighted average interest rate of
4.67% per annum. Due to the covenant violations previously discussed, the
average rate increased to 6.67% during April 2009. An annualized 100-basis point
fluctuation in the interest rate charged on the $150.4 million balance would
have approximately $1.5 million impact on our annual net income, before
taxes.
Call Spread
Transactions
:
In
connection with the offer and sale of each series of the preferred stock, we
entered into convertible preferred stock hedge transactions, or "call spread"
transactions, with one of the buyers of the stock (the "Counterparty"). These
transactions are intended to reduce the potential dilution upon conversion of
the preferred stock, if the market value per share of our common stock at the
time of exercise is greater than approximately 120% of the issue price (which
corresponds to the initial conversion price of the related convertible preferred
stock). These transactions include a purchased call option and a sold call
option. The purchased call options cover approximately the same number of shares
of our common stock, par value $0.01 per share, which, under most circumstances,
represents the maximum number of shares of common stock underlying the preferred
stock. The sold call options have an exercise price of 150% of the issue price
and are expected to result in some dilution should the price of our common stock
exceed this exercise price.
For
additional information, see also our Annual Report on Form 10-K for the year
ended December 31, 2008, "Part II, Item 7A. Quantitative and Qualitative
Disclosures About Market Risk."
ITEM
4. CONTROLS
AND PROCEDURES
The SEC
has adopted rules requiring reporting companies to maintain disclosure controls
and procedures to provide reasonable assurance that a registrant is able to
record, process, summarize and report the information required in the
registrant's quarterly and annual reports under the Securities Exchange Act of
1934 (the "Exchange Act"). While we believe that our existing disclosure
controls and procedures have been effective to accomplish these objectives, we
intend to continue to examine, refine and formalize our disclosure controls and
procedures and to monitor ongoing developments in this area.
Based on
their evaluation as of March 31, 2009, our chief executive officer and principal
financial officer concluded that our disclosure controls and procedures (as
defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act) were effective to
provide reasonable assurance that the information required to be disclosed by us
in the reports that we file or submit under the Exchange Act is: (1) recorded,
processed, summarized and reported within the time periods as specified in the
SEC's rules and forms, and (2) accumulated and communicated to our management,
including our chief executive and principal financial officers, as applicable,
to allow timely decisions regarding required disclosure.
There
were no changes in our internal control over financial reporting (as defined in
Rule 13a-15(f) or 15d-15(f) under the Exchange Act) during the fiscal quarter to
which this report relates that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
However in May 2009, there was a reduction in force, which terminated one-third
of our accounting staff and our Chief Financial Officer as well as 22 other
employees. Numerous changes will be necessary to our internal control over
financial reporting as a result of these terminations. No assurance can be given
that these controls will continue to be effective under this reduced staffing
complement.
PART II - OTHER INFORMATION
ITEM
1. LEGAL
PROCEEDINGS
On May
17, 2009, the Company and its subsidiaries filed voluntary petitions for relief
under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court
for the Western District of Texas (Case Numbers 09-51807 through 09-51817). TXCO
intends to continue to operate its business as debtor-in-possession under the
jurisdiction of the Bankruptcy Court and in accordance with the applicable
provisions of the Bankruptcy Code and orders of the Bankruptcy Court. As a
result of the filing, attempts to collect, secure, or enforce remedies with
respect to pre-petition claims against TXCO are subject to the automatic stay
provisions of section 362 of the Bankruptcy Code. The Bankruptcy Case is
discussed in greater detail in Note 12 to the accompanying condensed
consolidated financial statements.
We were
not involved in any other potentially material matters of litigation that were
not disclosed in our Form 10-K for the year ended December 31, 2008, as of
May 13, 2009.
ITEM
1A. RISK
FACTORS
Information
concerning risks and uncertainties appears in Part I, Item 1A "Risk Factors" of
our Annual Report on Form 10-K for the fiscal year ended December 31, 2008. You
should carefully consider these risks and uncertainties, which could materially
affect our business, financial position and results of operations.
We have
identified the following additional risk factors to supplement those set forth
in our Annual Report on Form 10-K for the fiscal year ended December 31,
2008.
The
prices of our equity securities are volatile, and, in connection with our
reorganization, holders of our securities may receive no payment or payment that
is less than the purchase price of such securities.
Prior to
the Bankruptcy Filing, the market price for our common stock was volatile. In
addition, we expect our common stock will be suspended from the Nasdaq Global
Select Market pending delisting following the Bankruptcy Filing and will trade
over the counter. Accordingly, trading in the securities of the Company may be
limited, and holders of such securities may not be able to resell their
securities for their purchase price or at all. We can make no assurance that the
price of our securities will not fluctuate substantially in the
future.
It is
possible that, in connection with our reorganization, all of the outstanding
shares of common stock and preferred stock could be cancelled, and holders of
our common stock and preferred stock may not be entitled to any payment in
respect of their shares. In addition, new shares of our common stock and/or
preferred stock may be issued. It is also possible that shares of our common
stock and/or preferred stock may be issued to certain holders of our debt in
satisfaction of their claims. The value of any common stock and/or preferred
stock so issued may be less than the purchase price of such holders' securities,
and the price of any such common shares and/or preferred stock may be
volatile.
Accordingly,
trading in our securities during the pendency of the Bankruptcy Cases is highly
speculative and poses substantial risks to purchasers of such securities, as
holders may not be able to resell such securities or, in connection with our
reorganization, may receive no payment, or a payment or other consideration that
is less than the purchase price of such securities.
The
Company filed for reorganization under Chapter 11 on May 17, 2009 and is subject
to the risks and uncertainties associated with the Bankruptcy
Cases.
For the
duration of the Bankruptcy Cases, our operations and our ability to execute our
business strategy will be subject to the risks and uncertainties associated with
bankruptcy. These risks include:
·
|
our
ability to continue as a going
concern;
|
·
|
our
ability to operate within the restrictions and the liquidity limitations
of any DIP financing and any cash collateral order entered by the
Bankruptcy Court in connection with the Bankruptcy
Cases;
|
·
|
our
ability to obtain Bankruptcy Court approval with respect to motions filed
in the Bankruptcy Cases from time to
time;
|
·
|
our
ability to develop, prosecute, confirm and consummate a plan of
reorganization with respect to the Chapter 11
cases;
|
·
|
the
ability of third parties to seek and obtain court approval to terminate or
shorten the exclusivity period for us to propose and confirm a plan of
reorganization, to appoint a Chapter 11 trustee or to convert the
Bankruptcy Cases to Chapter 7
cases;
|
·
|
our
ability to obtain and maintain normal payment and other terms with
customers, vendors and service
providers;
|
·
|
our
ability to maintain our leased properties and acreage and other contracts
that are critical to our
operations;
|
·
|
our
ability to attract, motivate and retain key
employees;
|
·
|
our
ability to attract and retain customers, vendors and service providers;
and
|
·
|
our
ability to fund and execute our business
plan.
|
We will
also be subject to risks and uncertainties with respect to the actions and
decisions of our creditors and other third parties who have interests in the
Bankruptcy Cases that may be inconsistent with our plans.
These
risks and uncertainties could affect our business and operations in various
ways. For example, negative events or publicity associated with the Bankruptcy
Cases could adversely affect our relationships with our customers, vendors and
employees, which in turn could adversely affect our operations and financial
condition. Also, pursuant to the Bankruptcy Code, we need Bankruptcy Court
approval for transactions outside the ordinary course of business, which may
limit our ability to respond timely to events or take advantage of
opportunities. Because of the risks and uncertainties associated with the
Bankruptcy Cases, we cannot predict or quantify the ultimate impact that events
occurring during the Chapter 11 reorganization process will have on our
business, financial condition and results of operations, and there is no
certainty as to our ability to continue as a going concern.
As a
result of the Bankruptcy Cases, realization of assets and liquidation of
liabilities are subject to uncertainty. While operating under the protection of
the Bankruptcy Code, and subject to Bankruptcy Court approval or otherwise as
permitted in the normal course of business, we may sell or otherwise dispose of
assets and liquidate or settle liabilities for amounts other than those
reflected in our consolidated financial statements. Further, a plan of
reorganization could materially change the amounts and classifications reported
in our consolidated historical financial statements, which do not give effect to
any adjustments to the carrying value of assets or amounts of liabilities that
might be necessary as a consequence of confirmation of a plan of
reorganization.
A
long period of operating under Chapter 11 could harm our business.
A long
period of operating under Chapter 11 could adversely affect our business and
operations. So long as the Bankruptcy Cases continue, our senior management will
be required to spend a significant amount of time and effort dealing with the
Bankruptcy Cases instead of focusing exclusively on business operations. A
prolonged period of operating under Chapter 11 will also make it more difficult
to attract and retain management and other key personnel necessary to the
success and growth of our business. In addition, the longer the Bankruptcy Cases
continue, the more likely it is that our vendors will lose confidence in our
ability to successfully reorganize our business, and they may seek to establish
alternative arrangements for providing us with goods and services, including
alternative payment arrangements, which in turn could have an adverse effect on
our liquidity and/or results of operations. Our having sought bankruptcy
protection may also adversely affect our ability to negotiate favorable terms
from suppliers, contract or trading counterparties and others and to attract and
retain customers and counterparties. The failure to obtain such favorable terms
and to attract and retain customers and other contract or trading counterparties
could adversely affect our financial performance.
We
may not be able to obtain confirmation of our Chapter 11 plan, and our emergence
from Chapter 11 proceedings is not assured.
Our plan
of reorganization has not yet been formulated or submitted to the Bankruptcy
Court. In order to successfully emerge from Chapter 11 bankruptcy protection, we
believe that we must develop, and obtain requisite court and creditor approval
of, a viable Chapter 11 plan of reorganization. This process requires us to meet
statutory requirements with respect to adequacy of disclosure with respect to a
plan, soliciting and obtaining creditor acceptance of a plan, and fulfilling
other statutory conditions for plan confirmation. We may not receive the
requisite acceptances to confirm a plan. Even if the requisite acceptances of a
plan are received, the Bankruptcy Court may not confirm it.
If a plan
is not confirmed by the Bankruptcy Court, it is unclear whether we would be able
to reorganize our business and what, if any, distributions holders of claims
against us, including secured creditors, would ultimately receive with respect
to their claims. If an alternative reorganization could not be agreed upon, it
is possible that we would have to liquidate our assets, in which case it is
likely that holders of claims would receive substantially less favorable
treatment than they would receive if we were to emerge as a viable, reorganized
entity. There can be no assurance as to whether we will successfully reorganize
and emerge from Chapter 11 proceedings or, if we do successfully reorganize, as
to when we would emerge from Chapter 11 proceedings.
We
have substantial liquidity needs and may be required to seek additional
financing.
We have
historically addressed our short and long-term liquidity requirements through
cash provided by operating activities, the issuance of debt and equity
securities when market conditions permit, sale of non-strategic assets, and our
bank credit facilities. Our liquidity position is significantly influenced by
our operating results, which in turn are substantially dependent on commodity
prices, especially prices for oil and natural gas. As a result, adverse
commodity price movements adversely impact our liquidity.
We face
uncertainty regarding the adequacy of our liquidity and capital resources and
have limited access to additional financing. In addition to the cash
requirements necessary to fund ongoing operations, we have incurred significant
professional fees and other costs in connection with the Bankruptcy Cases and
expect that we will continue to incur significant professional fees and costs.
We cannot assure you that the amounts of cash available from operations,
together with any DIP financing, will be sufficient to fund our operations,
including operations during the period until such time as we are able to propose
a plan of reorganization that will receive the requisite acceptance by creditors
and be confirmed by the Bankruptcy Court.
Our
liquidity and our ability to continue as a going concern, including our ability
to meet our ongoing operational obligations, is dependent upon, among other
things: (i) our ability to secure adequate DIP financing; (ii) our
ability to comply with the terms and conditions of any DIP financing and any
cash collateral order entered by the Bankruptcy Court in connection with the
Bankruptcy Cases; (iii) our ability to maintain adequate cash on hand;
(iv) our ability to generate cash from operations; (v) our ability to
obtain confirmation of and to consummate a plan of reorganization under the
Bankruptcy Code; and (vi) the cost, duration and outcome of the
reorganization process. Our ability to maintain adequate liquidity depends in
part upon industry conditions and general economic, financial, competitive,
regulatory and other factors beyond our control. Accordingly, there can be no
assurance as to the success of our efforts. In the event that cash flows and any
available borrowings under our proposed DIP financing are not sufficient to
meet our cash requirements, we may be required to seek additional financing. We
can provide no assurance that additional financing would be available or, if
available, offered to us on acceptable terms. Our access to additional financing
is, and for the foreseeable future will likely continue to be, very limited. Our
long-term liquidity requirements and the adequacy of our capital resources are
difficult to predict at this time and ultimately cannot be determined until a
plan of reorganization has been developed and is confirmed by the Bankruptcy
Court.
We
may be unable to secure financing.
Our
ability to continue our operations during the pendency of our reorganization
under chapter 11 and to develop a viable plan of reorganization will depend our
having available capital to finance our operations. The Company anticipates
seeking approval of DIP financing on both an interim and final basis in an
amount sufficient to address immediate liquidity issues but there can be no
assurance that we will be able to obtain commitments for or Bankruptcy Court
approval of such DIP financing.
If we are unable to
secure sufficient DIP financing, we could be forced to discontinue some or all
of our operations, and could lose a substantial portion of our leased
acreage.
Our
ability to arrange financing (including any extension or refinancing) and the
cost of the financing are dependent upon numerous factors. Access to capital
(including any extension or refinancing) for participants in the exploration and
production industry, including for us, has been significantly restricted for the
last several months and may, as a result of the Bankruptcy Filing, be further
restricted in the future. Other factors affecting our access to financing
include:
·
general
economic and capital market conditions;
·
conditions
in exploration and production markets;
·
regulatory
developments;
·
credit
availability from banks or other lenders for us and our industry peers, as well
as the economy in general;
·
investor
confidence in the exploration and production industry and in us;
and
·
provisions
of tax and securities laws that are conducive to raising capital.
We
may not have sufficient cash to service our indebtedness and other liquidity
requirements.
Our
ability to service any DIP financing indebtedness and successfully consummate a
plan of reorganization will depend, in part, on our ability to generate
cash. We cannot be certain that cash on hand together with cash from
operations will by itself be sufficient to meet our cash and liquidity
needs. If we are unable to generate enough cash to meet our liquidity
needs, we could be forced to discontinue some or all of our
operations.
Our
proposed DIP financing will impose significant operating and financial
restrictions on us, compliance or non-compliance with which could have a
material adverse effect on our liquidity and operations.
Restrictions
imposed by the terms of our proposed DIP financing could adversely affect us by
limiting our ability to plan for or react to market conditions or to meet our
capital needs and could result in an event of default under the DIP financing.
These restrictions might limit our ability, subject to certain exceptions, to,
among other things:
·
incur
additional indebtedness and issue stock;
·
make
prepayments on or purchase indebtedness in whole or in part;
·
pay
dividends and other distributions with respect to our capital stock or
repurchase our capital stock or make other restricted
payments;
·
make
investments;
·
enter
into transactions with affiliates on other than arm's-length terms;
·
create or
incur liens to secure debt;
·
consolidate
or merge with another entity, or allow one of our subsidiaries to do
so;
·
lease,
transfer or sell assets and use proceeds of permitted asset leases, transfers or
sales;
·
incur
dividend or other payment restrictions affecting subsidiaries;
·
make
capital expenditures beyond specified limits;
·
engage in
specified business activities; and
·
acquire
facilities or other businesses.
These
limitations could have a material adverse effect on our liquidity and
operations. If we fail to comply with the restrictions under any DIP financing
and are unable to obtain a waiver or amendment or a default exists and is
continuing under the DIP financing, the lenders could declare outstanding
borrowings and other obligations under the DIP financing immediately due and
payable. Our ability to comply with these restrictions may be affected by events
beyond our control, and any material deviations from our forecasts could require
us to seek waivers or amendments of covenants or alternative sources of
financing or to reduce expenditures. We cannot assure you that such waivers,
amendments or alternative financing could be obtained, or if obtained, would be
on terms acceptable to us. If we are unable to comply with the terms of the DIP
financing, or if we fail to generate sufficient cash flow from operations, or,
if it became necessary, to obtain such waivers, amendments or alternative
financing, it could adversely impact the timing of, and our ultimate ability to
successfully implement, a plan of reorganization.
We
may be subject to claims that will not be discharged in the Bankruptcy Cases,
which could have a material adverse effect on our results of operations and
profitability.
The
Bankruptcy Code provides that the confirmation of a plan of reorganization
discharges a debtor from substantially all debts arising prior to confirmation
and specified debts arising afterwards. With few exceptions, all claims that
arose prior to the Petition Date and before confirmation of the plan of
reorganization (i) would be subject to compromise and/or treatment under
the plan of reorganization or (ii) would be discharged in accordance with
the Bankruptcy Code and the terms of the plan of reorganization. Any claims not
ultimately discharged by the Bankruptcy Court could have an adverse effect on
our results of operations and profitability.
Our
financial results may be volatile and may not reflect historical
trends.
While in
bankruptcy, we expect our financial results to continue to be volatile as asset
impairments, asset dispositions, restructuring activities, contract terminations
and rejections, and claims assessments may significantly impact our consolidated
financial statements. As a result, our historical financial performance is
likely not indicative of our financial performance after the date of the
Bankruptcy Filing. In addition, if we emerge from bankruptcy, the amounts
reported in subsequent consolidated financial statements may materially change
relative to historical consolidated financial statements, including as a result
of revisions to our operating plans pursuant to a plan of reorganization. In
addition, if we emerge from bankruptcy, we may be required to adopt fresh start
accounting. If fresh start accounting is applicable, our assets and liabilities
will be recorded at fair value as of the fresh start reporting date. The fair
value of our assets and liabilities may differ materially from the recorded
values of assets and liabilities on our consolidated balance sheets. In
addition, if fresh start accounting is required, our financial results after the
application of fresh start accounting may be different from historical trends.
See Note 1 of the notes to the condensed consolidated financial statements in
Item 1 of Part I of this report for further information on our accounting
while in bankruptcy.
Conducting
a successful Chapter 11 reorganization will depend significantly on our ability
to retain and motivate management and key employees.
Our
success depends significantly on the skills, experience and efforts of our
personnel. We do not maintain "key person" life insurance for any of our
officers. The loss of any of our officers, including our Chief Restructuring
Officer, could have a material adverse effect upon our results of operations and
our financial position and could delay or prevent the achievement of our
business objectives. Our ability to develop and successfully consummate a plan
of reorganization will be highly dependent upon the skills, experience and
effort of our senior management, including our Chief Restructuring Officer, and
other personnel. Our ability to attract, motivate and retain key employees is
restricted, however, by provisions of the Bankruptcy Code, which limit or
prevent our ability to implement a retention program or take other measures
intended to motivate key employees to remain with the Company during the
pendency of the Chapter 11 proceedings. In addition, we must obtain Bankruptcy
Court approval of employment contracts and other employee compensation programs.
The loss of the services of one or more members of our senior management or
certain employees with critical skills, or a diminution in our ability to
attract talented, committed individuals to fill vacant positions when needs
arise, could have a material adverse effect on our ability to successfully
reorganize, emerge from bankruptcy or sell all or a portion of our assets as
part of the bankruptcy process.
Transfers
of our equity, or issuances of equity in connection with our restructuring, may
impair our ability to utilize our federal income tax net operating loss
carryforwards in the future.
Under
federal income tax law, a corporation is generally permitted to deduct from
taxable income in any year net operating losses carried forward from prior
years. We had net operating loss carryforwards of approximately $217 million as
of March 31, 2009. Our ability to deduct net operating loss carryforwards
could be subject to a significant limitation if we were to undergo an "ownership
change" for purposes of Section 382 of the Code during or as a result of
the Bankruptcy Cases. The Company has sought Bankruptcy Court approval of an
order which places limitations on the trading in our common stock including
options to acquire common stock, as further specified in the order. However, we
can provide no assurance that these limitations will prevent an "ownership
change" or that our ability to utilize our net operating loss carryforwards may
not be significantly limited as a result of our reorganization.
ITEM
2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM
3. DEFAULTS
UPON SENIOR SECURITIES
None.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM
5. OTHER
INFORMATION
None.
ITEM
6. EXHIBITS
a)
|
Exhibit
10.1
|
Joint
Exploration Agreement between TXCO Resources Inc. and Millenium E&P
Resources Fund I, LLC (incorporated herein by reference to the Company's
Current Report on Form 8-K filed January 6, 2009).
|
|
|
|
b)
|
|
Certification
of Chief Executive Officer required pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934; filed herewith.
|
|
|
|
c)
|
|
Certification
of Acting Principal Financial Officer required pursuant to Rule 13a-14(a)
of the Securities Exchange Act of 1934; filed herewith.
|
|
|
|
d)
|
|
Certification
of Chief Executive Officer required pursuant to 18 U.S.C. Section 1350 as
required by the Sarbanes-Oxley Act of 2002; furnished
herewith.
|
|
|
|
e)
|
|
Certification
of Acting Principal Financial Officer required pursuant to 18 U.S.C.
Section 1350 as required by the Sarbanes-Oxley Act of 2002; furnished
herewith.
|
|
|
|
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
TXCO
RESOURCES INC.
|
|
(Registrant)
|
|
|
|
/s/
James
E. Sigmon
|
|
James
E. Sigmon,
|
|
Chief
Executive Officer
(Duly
Authorized Officer)
|
|
|
|
/s/
Richard
A
. Sartor
|
|
Richard
A. Sartor,
|
|
Controller
(Principal
Accounting Officer)
|
Date: May
18, 2009
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