FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to ____
Commission file number 1-12108
GULFWEST ENERGY INC.
---------------------
(Exact name of Registrant as specified in its charter)
Texas 87-0444770
---------------------------------- --------------------
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
480 North Sam Houston Parkway East
Suite 300
Houston, Texas 77060
(Address of principal executive offices) (zip code)
(281) 820-1919 (Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(D) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES __X__ NO ____
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date, May 13, 2005, was 28,726,831 shares of
Class A Common Stock, $.001 par value.
GULFWEST ENERGY INC.
FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2005
Page of
Form 10-Q
---------
Part I: Financial Statements
Item 1. Financial Statements
Consolidated Balance Sheets, March 31, 2005,
and December 31, 2004 3
Consolidated Statements of Operations-for the three
months ended March 31, 2005, and 2004 5
Consolidated Statements of Cash Flows-for the three
months ended March 31, 2005, and 2004 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Item 4. Controls and Procedures 17
Part II: Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 6. Exhibits 18
Signatures 22
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
GULFWEST ENERGY INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 AND DECEMBER 31, 2004
ASSETS
March 31, December 31,
2005 2004
(Unaudited) (Audited)
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 2,274,825 $ 411,377
Accounts receivable - trade, net of allowance
for doubtful accounts of $-0- in 2005 and 2004 2,634,920 1,674,448
Prepaid expenses 302,785 128,717
------------ ------------
Total current assets 5,212,530 2,214,542
------------ ------------
PROPERTY AND EQUIPMENT
Oil and gas properties, using the successful efforts
method of accounting 60,541,372 58,557,072
Other property and equipment 1,482,930 1,437,206
Less: accumulated depreciation, depletion and
amortization (10,526,740) (9,870,962)
------------ ------------
Net property and equipment 51,497,562 50,123,316
------------ ------------
OTHER ASSETS
Deposits 9,804
9,804
Investments 297,368 274,362
Debt issue cost, net --
1,756,316
Deferred tax asset 4,710,242 3,322,551
------------ ------------
Total other assets 5,017,414
5,363,033
------------ ------------
TOTAL ASSETS $ 61,727,506 $ 57,700,891
============ ============
The Notes to Consolidated Financial Statements are an integral part of these
statements.
3
GULFWEST ENERGY INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 AND DECEMBER 31, 2004
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
2005 2004
(Unaudited) (Audited)
------------ -------------
CURRENT LIABILITIES
Notes payable $ 40,300 $ 4,916,568
Notes payable - related parties -- 2,140,000
Current portion of long-term debt 92,544 22,686,254
Current portion of long-term debt - related parties -- 112,192
Accounts payable - trade 2,800,703 4,654,561
Accrued expenses
293,072 940,587
Income taxes payable
118,255 118,255
------------ ------------
Total current liabilities 3,344,874 35,568,417
------------ ------------
NONCURRENT LIABILITIES
Long-term debt, net of current portion 92,245 805,450
Asset retirement obligations 1,164,015 1,144,854
------------ ------------
Total noncurrent liabilities 1,256,260 1,950,304
------------ ------------
OTHER LIABILITIES
Derivative instruments 3,519,009 1,505,527
------------ ------------
Total Liabilities 8,120,143 39,024,248
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock
1,045 253
Common stock
24,923 19,394
Additional paid-in capital 72,767,869 34,062,502
Retained deficit (19,186,474) (15,405,506)
------------ ------------
Total stockholders' equity 53,607,363 18,676,643
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 61,727,506 $ 57,700,891
============ ============
The Notes to Consolidated Financial Statements are an integral part of these
statements.
4
GULFWEST ENERGY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
Three Months Ended March 31,
---------------------------
2005 2004
------------ -----------
OPERATING REVENUES
Oil and gas sales $ 3,634,160 $ 2,500,640
Operating overhead and other income 30,173 38,089
----------- -----------
Total Operating Revenues 3,664,333 2,538,729
----------- -----------
OPERATING EXPENSES
Lease operating expenses 1,400,864 1,314,284
Depreciation, depletion and amortization 655,778 439,202
Dry holes, abandoned property and impaired assets -- 2,156
Accretion expense 19,161 20,358
General administrative 618,227 401,192
----------- -----------
Total Operating Expenses 2,696,186 2,175,036
----------- -----------
INCOME FROM OPERATIONS 968,147 363,693
----------- -----------
OTHER INCOME AND EXPENSE
Interest expense (1,198,501) (920,168)
Other financing costs -- (1,905,159)
Loss on sale of property and equipment (13,022) --
Unrealized gain (loss) on derivative instruments (2,013,481) 287,847
----------- -----------
Total Other Income and (Expense) (5,130,163) (632,321)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (4,162,016) (268,628)
INCOME TAX BENEFIT 1,387,691 --
----------- -----------
NET INCOME (LOSS) (2,774,325) (268,628)
DIVIDENDS ON PREFERRED STOCK (Paid 2005
- $1,006,643; Paid 2004 - 0) (773,120) (34,375)
----------- -----------
NET INCOME (LOSS) AVAILABE TO COMMON SHAREHOLDERS $(3,547,445) $ (303,003)
=========== ===========
NET INCOME (LOSS) PER SHARE, BASIC AND DILUTED $ (.17) $ (.02)
=========== ===========
The Notes to Consolidated Financial Statements are an integral part of these
statements
5
GULFWEST ENERGY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
Three Months Ended March 31,
----------------------------
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,774,325) $ (268,628)
Adjustments to reconcile net income
(loss) to net cash Provided by
operating activities:
Depreciation, depletion and amortization 655,778 439,202
Accretion expense 19,161 20,358
Stock option expense 70,250 --
Debt issue cost expense 1,779,596 --
Discount on note payable 502,120 --
Deferred tax asset (1,387,691) --
Note payable issued and charged to interest -- 61,046
Loss on sale of property and equipment 13,022 --
Unrealized (gain) loss on derivative instruments 2,013,482 (287,847)
(Increase) in accounts receivable - trade, net (949,222) (269,388)
(Increase) in prepaid expenses (174,068) (236,952)
Increase (decrease) in accounts
payableand accrued expenses (2,571,623) 373,384
------------ ------------
Net cash provided by (used in) operating activities (2,803,520) (168,825)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 41,175 --
Capital expenditures (2,061,503) (84,082)
------------ ------------
Net cash used in investing activities (2,020,328) (84,082)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock, net 38,345,646 --
Proceeds from common stock warrants exercised 200 --
Payments on debt (31,803,219) (122,867)
Proceeds from debt issuance 820,000 130,258
Dividends paid (675,331) --
------------ ------------
Net cash provided by financing activities 6,687,296 7,391
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,863,448 (245,516)
CASH AND CASH EQUIVALENTS,
Beginning of period 411,377 483,618
------------ ------------
CASH AND CASH EQUIVALENTS,
End of period $ 2,274,825 $ 238,102
============ ============
CASH PAID FOR INTEREST $ 1,906,616 $ 778,889
============ ============
The Notes to Consolidated Financial Statements are an integral part of these
statements.
6
GULFWEST ENERGY INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(UNAUDITED)
1. BASIS OF PRESENTATION
During interim periods, we follow the accounting policies set forth in
our Annual Report on Form 10-K filed with the Securities and Exchange
Commission. Users of financial information produced for interim periods
are encouraged to refer to the footnotes contained in the Annual Report
when reviewing interim financial results.
The accompanying financial statements include the Company and its
wholly-owned subsidiaries: RigWest Well Service, Inc. formed September
5, 1996; GulfWest Texas Company formed September 23, 1996; DutchWest
Oil Company formed July 28, 1997; Southeast Texas Oil and Gas Company,
L.L.C. acquired September 1, 1998; SETEX Oil and Gas Company formed
August 11, 1998; GulfWest Oil & Gas Company formed February 8, 1999;
LTW Pipeline Co. formed April 19, 1999; GulfWest Development Company
formed November 9, 2000; and, GulfWest Oil & Gas Company (Louisiana)
LLC formed July 31, 2001. All material intercompany transactions and
balances are eliminated upon consolidation.
In management's opinion, the accompanying interim financial statements
contain all material adjustments, consisting only of normal recurring
adjustments necessary to present fairly the financial condition, the
results of operations, and the cash flows of GulfWest Energy Inc. for
the interim periods.
2. NON-CASH INVESTING AND FINANCING ACTIVITIES
During the three month period ended March 31, 2005 we paid $331,313 in
dividends by issuing 356,250 shares of common stock and we issued
29,100 shares of common stock to satisfy and record a $23,280 fee for a
loan extension. Also, on March 30, 2005 one of our employees exercised
25,000 common stock options for $11,250 which is recorded as an account
receivable. Under our cashless exercise procedures, the stock has been
posted for sale by a broker and the receivable will be settled when the
stock is sold. During the period we invested $23,006 in an oil and gas
partnership by contributing our cost basis in undrilled oil and gas
leases. In addition, we financed new field trucks for the $45,724 cost.
During the three month period ended March 31, 2004, we issued a note
payable for $600,000 in exchange for an account payable for $538,954
and $61,046 in interest expense was recorded.
3. DERIVATIVE INSTRUMENTS
In the past we have entered into, and may in the future enter into,
certain derivative arrangements with respect to portions of our oil and
natural gas production to reduce our sensitivity to volatile commodity
prices. During 2005 and 2004, we entered into price swaps and put
agreements with financial institutions. We believe that these
derivative arrangements, although not free of risk, allow us to achieve
a more predictable cash flow and to reduce exposure to price
fluctuations. However, derivative arrangements limit the benefit to us
of increases in the prices of crude oil and natural gas sales.
Moreover, our derivative arrangements apply only to a portion of our
production and provide only partial price protection against declines
in price. Such arrangements may expose us to risk of financial loss in
certain circumstances. We expect that the monthly volume of derivative
arrangements will vary from time to time. We continuously reevaluate
our price hedging program in light of market conditions, commodity
price forecasts, capital spending and debt service requirements. The
following hedges were in place at March 31, 2005 or were added
subsequent to that date and are effective for the periods shown.
7
Crude Oil Volume/ Month Average Price/ Unit
--------- -------------- -------------------
May 2004 thru October 2005 Swap 10,000 Bbls $32.00
April 2005 thru June 2005 Swap 2,000 Bbls $56.50
July 2005 thru October 2005 Swap 1,000 Bbls $56.50
November & December 2005 Swap 11,000 Bbls $56.50
January 2006 thru March 2006 Collar 10,000 Bbls Floor $50.00-$59.00 Ceiling
April 2006 thru December 2006 Collar 9,000 Bbls Floor $50.00-$59.00 Ceiling
January 2007 thru December 2007 Collar 3,000 Bbls Floor $45.00-$59.45 Ceiling
Natural Gas Volume/ Month Average Price/ Unit
------------ ------------- --------------------
June 2004 thru October 2005 Swap 60,000 MMBTU $5.15
April 2005 thru June 2005 Swap 20,000 MMBTU $7.45
July 2005 thru October 2005 Swap 10,000 MMBTU $7.45
November & December 2005 Swap 70,000 MMBTU $7.45
January 2006 thru December 2006 Collar 70,000 MMBTU Floor $6.00-$8.25 Ceiling
January 2007 thru December 2007 Collar 20,000 MMBTU Floor $6.00-$6.95 Ceiling
These volumes represent approximately 75% of the estimated production
(for both oil and natural gas) on currently producing properties for
the remainder of 2005 and for 2006 and approximately 30% of estimated
production for 2007.
We also had the following put options in place during the first quarter
of 2005, for the months reflected. These contracts were terminated in
conjunction with the new swap and cost-less collars added effective
April 1, 2005.
Crude Oil Monthly Volume Price per Bbl
--------- -------------- --------------
November 1, 2005 to April 30, 2006 7,000 Bbls $25.75 put
May 1, 2006 to October 31, 2006 6,000 Bbls $25.75 put
November 1, 2006 to April 30, 2007 5,000 Bbls $25.75 put
Natural Gas Monthly Volume Price per MMBTU
------------ -------------- ----------------
November 1, 2005 to April 30, 2006 50,000 MMBTU $4.50 put
May 1, 2006 to October 31, 2006 40,000 MMBTU $4.50 put
November 1, 2006 to April 30, 2007 30,000 MMBTU $4.50 put
At the end of each reporting period we are required by SFAS 133 to
record on our balance sheet the marked to market valuation of our
derivative instruments. These valuations are based on the NYMEX strip
prices for those future periods, as of the balance sheet date. As a
result of these agreements, we recorded a non-cash charge to earnings
of $2,013,481 for the three month period ended March 31, 2005 and a
benefit of $287,847 for the three month period ended March 31, 2004.
The estimated change in fair value of the derivatives is reported in
Other Income and Expense as unrealized (gain) loss on derivative
instruments. The estimated fair value of the derivatives is reported in
Other Liabilities as derivative instruments.
8
4. STOCK BASED COMPENSATION
In October 1995, SFAS No. 123, "Stock Based Compensation," (SFAS 123)
was issued. This statement requires that we choose between two
different methods of accounting for stock options and warrants. The
statement defines a fair-value-based method of accounting for stock
options and warrants but allows an entity to continue to measure
compensation cost for stock options and warrants using the accounting
prescribed by APB Opinion No. 25 (APB 25), "Accounting for Stock Issued
to Employees." Use of the APB 25 accounting method results in no
compensation cost being recognized if options are granted at an
exercise price at the current market value of the stock on the date of
grant or higher. We will continue to use the intrinsic value method
under APB 25 but are required by SFAS 123 to make pro forma disclosures
of net income (loss) and earnings (loss) per share as if the fair value
method had been applied in our 2005 and 2004 financial statements.
We use the Black Sholes option pricing model to estimate the fair
value of the options. If we had used the fair value method required by
SFAS 123, our net loss and per share information would approximate the
following amounts:
2005 2004
------------------------------ -------------------------------------- -----------------------------------
As Reported Proforma As Reported Proforma
SFAS 123
compensation cost $ $(11,322,000) $ $
APB 25
compensation cost $ $ $ $
Net income (loss) $ (3,547,445) $(14,869,445) $ (303,003) $ (303,000)
Income (loss) per
common share,
Basic and diluted $ (.21) (.72) (.02) (.02)
------------------------------ - ----------------- -- ----------------- - ----------------- -- --------------
On December 16, 2004, the Financial Accounting Standards Board (FASB)
issued FASB Statement No. 123 (revised 2004), Share-Based Payments
which is a revision of FASB No. 123, Accounting for Stock-Based
Compensation. Statement 123 (R) supercedes APB opinion No. 25,
Accounting for Stock Issued to Employees, and amends FASB Statement No.
95, Statement of Cash Flows. Generally, the approach in Statement 123
(R) is similar to the approach described in Statement 123. However,
Statement 123 (R) requires all share- based payments to employees,
including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro forma disclosure will
no longer be an alternative. The effective date of this statement will
be our first quarter of 2006. Management has not yet determined the
impact that this statement will have on our consolidated financial
statements.
5. FINANCING ACTIVITY
On April 27, 2004, we completed an $18,000,000 financing package with
new energy lenders. We used $15,700,000 in net proceeds from the
financing to retire existing debt of $27,584,145, resulting in
forgiveness of debt of $12,475,612, the elimination of a hedging
liability and the return to the Company of Series F Preferred Stock
with an aggregate liquidation preference of $1,000,000 (this preferred
stock, at the request of the Company, was transferred by the previous
lender to a financial advisor to the Company and to two companies
affiliated with two transactions. The taxable gain resulting from these
transactions will be completely offset by available net operating loss
carryforwards. The term of the note was eighteen months and it bore
interest at the prime rate plus 11%. The rate increased by .75% per
month beginning in month ten. We paid the new lenders $1,180,000 in
cash fees and also issued them warrants to purchase 2,035,621 shares of
our Common Stock at an exercise price of $.01 per share, expiring in
five years. The warrants were subject to anti-dilution provisions. In
connection with the February 2005 transactions described below, the
anti-dilution provisions were amended such that additional issuances of
stock (other than issuances to all holders) would not trigger an
adjustment to the number of shares issuable upon exercise of the
warrants.
9
On January 7, 2005, we amended our April 2004 credit agreement to
extend the target date for repayment to February 28, 2005. We exercised
this option on January 26, 2005 and issued 29,100 shares of our common
stock in connection with this amendment.
On February 28, 2005, we sold in a private placement, 81,000 shares of
our Series G Preferred Stock to OCM GW Holdings, LLC ("OCMGW") for an
aggregate offering price of $40.5 million. GulfWest Oil and Gas
Company, ("GWOG") a subsidiary of the Company, issued, in a private
placement, 2,000 shares of our Series A Preferred Stock, having a
liquidation preference of $1.0 million, to OCMGW for $1.5 million. Net
proceeds of the offerings of approximately $38 million after expenses
are being used for the repayment of substantially all of our
outstanding debt and other past due liabilities and for general
corporate purposes.
The Series G Preferred Stock bears a coupon of 8% per year, has an
aggregate liquidation preference of $40.5 million, is convertible in to
Common Stock at $0.90 per share and is senior to all of our capital
stock. For the first four years after issuance, we may defer the
payment of dividends on the Series G Preferred Stock and these deferred
dividends will also be convertible into our Common Stock at $0.90 per
share. In addition, the Series G Preferred Stock is entitled to
nominate and elect a majority of the members of the Board of Directors
of GulfWest.
In connection with these transactions, the terms of the Series A
Preferred Stock were amended such that by March 15, 2005, all such
stock would either convert into a newly created Series H Preferred
Stock on a one for one basis or into Common Stock at a conversion price
of $0.35 per share. The Series H Preferred Stock is required to be paid
a dividend of 40 shares of Common Stock per share of Series H Preferred
Stock per year. In addition, the Series H Preferred Stock is
convertible into Common Stock at a conversion price of $0.35 per share.
At March 15, 2005, holders of 6,700 shares of Series A Preferred Stock
converted to Series H Preferred Stock and holders of 3,250 shares of
Series A Preferred Stock converted to an aggregate 4,642,859 shares of
Common Stock. One Series H Preferred Stock holder converted its shares
of Series H Preferred Stock in to 285,715 shares of Common Stock. The
outstanding Series H Preferred Stock has an aggregate liquidation
preference of $3.25 million. The Series H Preferred Stock is senior to
all of our capital stock other than Series G Preferred Stock.
In addition, we amended the terms of our 9,000 shares of Series E
Preferred Stock such that the coupon of 6% per year may be deferred for
the next four years and these deferred dividends will be convertible
into Common Stock at conversion price of $0.90 per share. The original
liquidation preference of the Series E Preferred Stock of $500 per
share remains convertible into Common Stock at $2.00 per share. The
Series E Preferred Stock has an aggregate liquidation preference of
$4.5 million, and is senior to all of our Common Stock, of equal
preference with our Series D Preferred Stock as to liquidation and
junior to our Series G and Series H Preferred Stock.
10
6. NOTES PAYABLE
March 31, 2005 December 31, 2004
----------------- -----------------
Non-interest bearing note payable to an unrelated party;
payable out of 50% of the net transportation revenues
from a certain natural gas pipeline that is not yet in
service; no due date. $ 40,300 $ 40,300
Promissory note payable to a former director at 8%; due
May, 2001; unsecured. Retired March, 2005 40,000
Promissory note payable to an unrelated party at 10%; payable on
demand; unsecured. Retired March, 2005 5,000
Promissory note payable to an unrelated party; payable on
demand; interest at 8%; interest increased to 12% on
January 1, 2003; secured by certain oil and gas
properties. Retired March, 2005. 180,000
Note payable to a bank; due July, 2004; secured by guaranty
of a director; interest at prime rate (prime rate 5.25% at
December 31, 2004 with a floor of 4.75% and a
ceiling of 8.0%. Retired February, 2005 948,291
Promissory note payable to unrelated party; interest at 6%; due
June, 2003. Retired January, 2005. 55,300
Promissory note payable to one of our directors; interest at
8%; due on demand; unsecured. Retired March, 2005. 50,000
Promissory note payable to one of our directors; interest at
prime rate (prime rate 5.25% at December 31, 2004); due
May, 2003; secured by Common Stock of DutchWest Oil
Company, our wholly owned subsidiary. Retired March, 2005 1,450,000
Promissory note payable to an unrelated party at 8%; due
June 2003; secured by 4% in the last draft of the
Common Stock of DutchWest Oil Company, our wholly
owned subsidiary. Retired March, 2005. 100,000
Promissory note payable to an unrelated party at 8%; due
May 2003; secured by 8% of the Common Stock of
DutchWest Oil Company, our wholly owned subsidiary.
Retired March, 2005. 140,000
Note payable to an entity owned by two directors of the
company, due September 2004; interest at prime plus
2% (prime rate 5.25% at December 31, 2004). Secured
by oil and gas leases. Retired March, 2005. 600,000
11
March 31, 2005 December 31, 2004
----------------- -----------------
Line of credit (up to $3,500,000) to a bank; due June 2004;
secured by the guaranty of a director; interest at prime
rate (prime rate 5.25% at December 31, 2004) with a
floor of 4.75% and a ceiling of 8.0%. Retired February,
2005. 3,447,677
---------------- ----------------
$ 40,300 $ 7,056,568
================ ================
Long-term debt is as follows:
March 31, December 31
2005 2004
---------------- ----------------
Line of credit (up to $3,000,000) to a bank; due July, 2005; secured
by the guaranty of a director; interest greater prime rates less
.25% or 5.25% (prime note 5.25% at December 31, 2004); retired
February 2005. $ $ 2,995,488
Subordinated promissory notes to various individuals at 9.5%
interest per annum; amounts include $50,000 due to related
parties. Retired $100,000 March, 2005. 50,000 150,000
Notes payable to finance vehicles, payable in aggregate monthly
installments of approximately $4,000, including interest of.9% to
13% per annum; secured by the related equipment; due various
dates through 2010. 134,789 99,900
Promissory note to a director; interest at 8.5%; due December 31,
2003. Retired March, 2005. 62,192
Note payable to lender; interest at prime plus 11% (prime rate 5.25%
at December 31, 2004) interest only; due October,2006; secured
by related oil and gas properties. Retired February, 2005. 19,021,880
Note payable to a bank with monthly principal payments
of $36,000; interest at prime plus 1% (prime rate 5.25%
at December 31, 2004 with a minimum prime rate of
5.5%; final payment due November, 2003; secured by related oil
and gas properties; extended to July, 2007. Retired February, 2005 1,224,000
Note payable to unrelated party to finance saltwater disposal well
with monthly installments of $4,540, including interest at 10%
per annum; final payment due January, 2005; secured by related
well. Retired March, 2005. 50,436
---------------- ----------------
23,603,896
Less current portion 92,544 (22,798,446)
---------------- ----------------
Total long-term debt $ 92,245 $ 805,450
================ ================
12
7. TAXES
We incurred a taxable loss of approximately $1.5 million and temporary
tax differences of approximately $2.1 million in the first quarter of
2005 which resulted in an increase of approximately $1.4 in our
deferred tax asset. We expect to fully utilize theses changes in the
future.
8. STOCKHOLDERS EQUITY
The following table sets forth the changes in the stockholder's equity
during the period ended March 31, 2005.
NUMBER OF SHARES
-------------------------
PREFERRED COMMON COMMON PREFERRED ADDITIONAL RETAINED
STOCK STOCK STOCK STOCK PAID-IN CAPITAL DEFICIT
------------ --------- ------- --------- ---------------- -------------
BALANCE DECEMBER 31, 2004 19,393,969 25,290 19,394 253 34,062,502 (15,405,506)
Common stock issued 29,100 29 23,251
Preferred stock issued
Series A 2,000 20 1,499,980
Series G 81,000 810 36,844,836
Preferred stock conversions
Series A to common stock (3,250) 4,642,859 4,643 (33) (4,610)
Series F to common stock (340) 170,000 170 (3) (167)
Series H to common stock (200) 285,715 286 (2) (284)
Common stock dividends paid
Series A Preferred 356,250 356 330,956
Options and warrants exercised 45,000 45 11,405
Current year loss (2,774,325)
Dividends paid on preferred stock (1,006,643)
------------ ---------- ---------- -------- --------------- ------------
BALANCE MARCH 31, 2005 104,500 24,922,893 24,923 1,045 72,767,869 (19,186,474)
============ ========== ========== ======== =============== ===========
Also during the period the holders of the remaining 6,700 shares of the
Series A Preferred Stock, of our wholly owned subsidiary GulfWest Oil and
Gas Company, converted to our Series H Preferred Stock.
Dividends on all classes of our preferred stock are cumulative until
declared as payable by our Board of Directors. Our Series E Preferred Stock
accumulates at 6% per annum payable in cash, Series G Preferred Stock
accumulates at 8% per annum payable in cash and Series H Preferred Stock
accumulates at 40 shares of our common stock per share of the Series H
Preferred Stock per annum.
The following table sets forth the accumulated value of undeclared
dividends of our preferred stock at March 31, 2005.
Series E Preferred Stock $ 23,671
Series G Preferred Stock 284,055
Series H Preferred Stock 25,784
--------
$333,510
========
Subsequent to the end of the quarter holders of 1,250 shares of our Series
H Preferred Stock converted to 1,785,714 shares of our common stock and
2,018,224 common stock warrants were exercised.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview.
We are primarily engaged in the acquisition, development, exploitation
and production of crude oil and natural gas, primarily in the onshore
producing regions of the United States. Our focus is on increasing
production from our existing properties through further exploitation,
development and exploration, and on acquiring additional interests in
undeveloped crude oil and natural gas properties. Our gross revenues
are derived from the following sources:
1. Oil and gas sales that are proceeds from the sale of crude oil
and natural gas production to midstream purchasers. This
represents over 98% of our gross revenues.
2. Operating overhead and other income that consists of
administrative fees received for operating crude oil and
natural gas properties for other working interest owners, and
for marketing and transporting natural gas for those owners.
This also includes earnings from other miscellaneous
activities.
The following is a discussion of our consolidated results of
operations, financial condition and capital resources. You should read
this discussion in conjunction with our Consolidated Financial
Statements and the Notes thereto contained elsewhere herein.
Results of Operations.
The factors which most significantly affect our results of operations
are (1) the sales price of crude oil and natural gas, (2) the level of
total sales volumes of crude oil and natural gas, (3) the cost and
efficiency of operating our own properties, (4) depletion and
depreciation of oil and gas property costs and related equipment (5)
the level of and interest rates on borrowings, (6) the level and
success of acquiring or finding new reserves, and the acquisition,
finding and development costs incurred in adding these reserves, and
(7) the adoption of changes in accounting rules.
We consider depletion and depreciation of oil and gas properties and
related support equipment to be critical accounting estimates, based
upon estimates of total recoverable oil and gas reserves.
The estimates of oil and gas reserves utilized in the calculation of
depletion and depreciation are estimated in accordance with guidelines
established by the Securities and Exchange Commission and the Financial
Accounting Standards Board, which require that reserve estimates be
prepared under existing economic and operating conditions with no
provision for price and cost escalations over prices and costs existing
at year end, except by contractual arrangements.
We emphasize that reserve estimates are inherently imprecise.
Accordingly, the estimates are expected to change as more current
information becomes available. Our policy is to amortize capitalized
oil and gas costs on the unit of production method, based upon these
reserve estimates. It is reasonably possible that the estimates of
future cash inflows, future gross revenues, the amount of oil and gas
reserves, the remaining estimated lives of the oil and gas properties,
or any combination of the above may be increased or reduced in the near
term. If reduced, the carrying amount of capitalized oil and gas
properties may be reduced materially in the near term.
14
Comparative results of operations for the periods indicated are
discussed below.
Three-Month Period Ended March 31, 2005 compared to Three Month Period
Ended March 31, 2004.
Revenues
Oil and Gas Sales. During the first quarter of 2005, our sales volumes
were 44,708 barrels of crude oil and 344,015 Mcf of natural gas, or
102,044 barrels of oil equivalent compared to 45,184 barrels of crude
oil and 253,756 Mcf of natural gas,or 87,477 barrels of oil equivalent
in the first quarter of 2004. On a daily basis we produced an average
of 1,134 barrels of oil equivalent in the first quarter of 2005
compared to a daily average of 972 barrels of oil equivalent in the
2004 quarter.
Oil and gas prices are reported net of the realized effect of our
hedging agreements. Prices realized were $35.84 per Bbl and $5.91 per
Mcf in the first quarter of 2005 compared to $27.97 per Bbl and $4.87
per Mcf in the first quarter of 2004. Prices before the effects of the
hedging agreements were $47.82 per Bbl and $6.26 per Mcf in the first
quarter of 2005 compared to $32.60 per Bbl and $5.53 per Mcf in the
first quarter of 2004.
Revenues from the sale of crude oil and natural gas for the first
quarter, and net of realized losses from our hedging instruments,
increased 45% from $2,500,600 in 2004 to $3,634,200 in 2005. Losses
realized on our hedges during the 2005 quarter were $535,300 for oil
and $121,200 for gas, compared to $209,100 for oil and 167,100 for gas
in the 2004 quarter. This was due to an increase in natural gas sales
volumes and an increase in both crude oil and natural gas sales prices.
Higher natural gas sales volumes were a result of the completion of two
new wells in our Iola Field in east Texas and increased production from
our Grand Lake Field in southwest Louisiana following workovers
completed in the fourth quarter of 2004. The Grand Lake Field also had
an increase in oil production, which offset the loss of production from
the sale of properties in 2004.
Operating Overhead and Other Income. Revenues from these activities
decreased from $38,100 in 2004 to 30,200 in 2005, due primarily to
lower overhead recoveries on company-operated properties.
Costs and Expenses
Lease Operating Expenses. Lease operating expenses increased 7% from
$1,314,300 in 2004 to $1,400,900 in 2005 due to higher vendor prices.
On a per unit basis, expenses decreased from $15.02 per barrel of oil
equivalent in 2004 to $13.73 per barrel of oil equivalent in 2005 due
to increased production on existing properties.
Depreciation, Depletion and Amortization (DD&A). DD&A increased 49%
from $439,200 in 2004 to $655,800 in 2005 due to higher production
volumes, and from an increase in the DD&A rate per unit from $5.02 per
barrel of oil equivalent in 2004 to $6.43 per barrel of oil equivalent
in 2005.
General and Administrative (G&A) Expenses. Our G&A expenses increased
54% from $401,200 in 2004 to $618,200 in 2005 due to the recent
additions to our management team and to the accrual of $70,200 in
non-cash stock option expense. On a per unit basis, expenses increased
from $4.59 per barrel of oil equivalent in 2004 to $6.06 per barrel of
oil equivalent in 2005.
Interest Expense. Interest expense increased 30% from $920,200 in 2004
to $1,198,500 in 2005, primarily due to the amortization of the
remaining note discount associated with debt retired.
15
Financial Condition and Capital Resources
At March 31, 2005, our current assets exceeded our current
liabilities by $1,867,656, while at December 31, 2004 our
current liabilities exceeded our current assets by
$33,353,875. The improvement was attributable to repayment of
debt with proceeds from the sale of the Series G Preferred
Stock. For the first quarter of 2005 we had a loss of
$3,547,445 compared to a loss of $303,003 for the same period
in 2004. The loss for 2005 included, however, a non-cash loss
of approximately $2.1 million (1.3 million after tax)
associated with the change in our estimate of the fair value
of our hedges, compared to a gain of approximately $.3 in the
2004 quarter, and approximately $2.4 million ($1.2 million
after tax) in charges related to the non cash writeoff of
unamortized issuance cost associated with the debt retired on
February 28, 2005.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following market rate disclosures should be read in conjunction
with the quantitative disclosures about market risk contained in our
2004 Annual Report on Form 10-K, as well as with the consolidated
financial statements and notes thereto included in this quarterly
report on Form 10-Q.
All of our financial instruments are for purposes other than trading.
We only enter into derivative financial instruments in conjunction with
our oil and gas hedging activities.
Hypothetical changes in interest rates and prices chosen for the
following stimulated sensitivity effects are considered to be
reasonably possible near-term changes generally based on consideration
of past fluctuations for each risk category. It is not possible to
accurately predict future changes in interest rates and product prices.
Accordingly, these hypothetical changes may not be an indicator of
probable future fluctuations.
Interest Rate Risk
At March 31, 2005, we had no variable rate debt.
Commodity Price Risk
We hedge a portion of price risk associated with our oil and natural
gas sales through contractual arrangements which are classified as
derivative instruments. As of March 31, 2005, these derivative
instruments had an estimated fair value liability of $3,519,009. A
hypothetical change in oil and gas prices could have an effect on oil
and gas futures prices, which are used to estimate the fair value of
our derivative instruments. However, it is not practicable to estimate
the resultant change, if any, in the fair value of our derivative
instrument.
16
ITEM 4. CONTROLS AND PROCEDURES
As of March 31, 2005, our President, Chief Executive Officer and Chief
Financial Officer evaluated the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Rule
13a-15 (b) under the Securities Exchange Act of 1934, as amended ("the
Exchange Act"). Based upon this evaluation, they concluded that,
subject to the limitations described below, the Company's disclosure
controls and procedures offer reasonable assurance that the information
required to be disclosed by the Company in the reports it files under
the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the rules and forms adopted by the
Securities and Exchange Commission.
During the period covered by this report, there has been no change in
the Company's internal controls over financial reporting that
materially affected, or is reasonably likely to materially affect,
these controls.
Limitations on the Effectiveness of Controls. Our management, including
the President, Chief Executive Officer and Chief Financial Officer,
does not expect that the Company's disclosure controls and procedures
will prevent all error and all fraud. A well conceived and operated
control system is based in part upon certain assumptions about the
likelihood of future events and can provide only reasonable, not
absolute, assurance that the objectives of the control systems are met.
Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be
considered relative to their costs. There have been no significant
changes in our internal controls or in other factors that could
significantly affect internal controls subsequent to March 31, 2005.
17
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
On January 10, 2005, two individual business associates lent an
aggregate of $200,000 to the Company, which was repaid in full on
February 28, 2005. The two lenders received warrants to purchase 50,000
shares of Common Stock at $0.01 share in connection with this
transaction. We believe, due to the nature of the relationship of these
persons to us and the isolated nature of the transactions, that the
issuance of the warrants was exempt from registration under the
Securities Act of 1933, as amended, pursuant to Section 4(2) of that
Act.
On January 7, 2005 we amended our April 2004 credit agreement to extend
the target date for repayment to February 28, 2005. We exercised this
option on January 26, 2005. We issued 29,100 shares of our Common Stock
in connection with this amendment. We believe, due to the nature of the
relationship of the lender to us and the isolated nature of the
transaction, that the issuance of the Common Stock was exempt from
registration under the Securities Act of 1933, as amended, pursuant to
Section 4(2) of that Act.
ITEM 6. EXHIBITS.
Number Description
------ -----------
3.1 Articles of Incorporation of the Registrant and Amendments thereto.
(Previously filed with our Registration Statement on Form S-1, Reg. No.
33-53526, filed with the Commission on October 21, 1992.)
3.2 Amendment to the Company's Articles of Incorporation to increase the
number of shares of Class A Common Stock that the Company will have
authority to issue from 20,000,000 to 40,000,000 shares, approved by
the Shareholders on November 19, 1999 and filed with the Secretary of
State of Texas on December 3, 1999. (Previously filed with our
Definitive Proxy Statement, filed with the Commission on October 20,
1999.)
3.3 Amendment to the Articles of Incorporation of the Registrant changing
the name of the Registrant to "GulfWest Energy Inc.", approved by the
Shareholders on May 18, 2001 and filed with the Secretary of Texas on
May 21, 2001. (Previously filed with our Definitive Proxy Statement,
filed with the Commission on April 16, 2001.)
3.4 Bylaws of the Registrant. (Previously filed with our Registration
Statement on Form S-1, Reg. No. 33-53526, filed with the Commission on
October 21, 1992.)
3.5 Statement of Resolution Establishing Series H Convertible Preferred
Stock, dated February 28, 2005. (Previously filed with our Form 8-K,
Reg. No. 001-12108, filed with the Commission on March 4, 2005.)
18
3.6 Statement of Resolution Establishing Series G Convertible Preferred
Stock, dated February 28, 2005. (Previously filed with our Form 8-K,
Reg. No. 001-12108, filed with the Commission on March 4, 2005.)
3.7 Certificate of Correction to the Statement of Resolution Establishing
Series G Convertible Preferred Stock, dated March 16, 2005. (Previously
filed with our Form 10-K, Reg. No. 001-12108, filed with the Commission
on March 31, 2005.)
3.8 Articles of Amendment amending Statement of Resolution Establishing
Series E Preferred Stock, dated February 28, 2005. (Previously filed
with our Form 8-K, Reg. No. 001-12108, filed with the Commission on
March 4, 2005.)
3.9 Articles of Amendment amending Statement of Resolution Establishing
Series A Preferred Stock, dated February 28, 2005. (Previously filed
with our Form 8-K, Reg. No. 001-12108, filed with the Commission on
March 4, 2005.)
4.3 Shareholders Rights Agreement between GulfWest Energy Inc. and OCM GW
Holdings, LLC dated February 28, 2005. (Previously filed with our Form
13D, Reg. No. 005-54301, filed with the Commission on March 10, 2005.)
4.4 Omnibus and Release Agreement among GulfWest Energy Inc., OCM GW
Holdings, LLC and those signatories set forth on the signature page
thereto, dated as of February 28, 2004. (Previously filed with our Form
13D, Reg. No. 005-54301, filed with the Commission on March 10, 2005.)
4.5 Share Transfer Restriction Agreement between J. Virgil Waggoner and OCM
GW Holdings, LLC, dated February 28, 2005. (Previously filed with our
Form 10-K, Reg. No. 001-12108, filed with the Commission on March 31,
2005.)
4.6 Irrevocable Proxy executed by J. Virgil Waggoner dated February 28,
2005. (Previously filed with our Form 10-K, Reg. No. 001-12108, filed
with the Commission on March 31, 2005.)
4.7 Exchange Agreement between GulfWest Energy Inc. and GulfWest Oil & Gas
Company, dated February 28, 2005. (Previously filed with our Form 10-K,
Reg. No. 001-12108, filed with the Commission on March 31, 2005.)
4.8 Letter Agreement among OCM GW Holdings, LLC, OCM Principal
Opportunities Fund III, L.P., OCM Principal Opportunities Fund III GP,
LLC, Oaktree Capital Management, LLC, GulfWest Energy Inc., GuflWest
Oil & Gas Company and J. Virgil Waggoner dated February 28, 2005.
(Previously filed with our Form 10-K, Reg. No. 001-12108, filed with
the Commission on March 31, 2005.)
19
4.9 Subscription Agreement among OCM GW Holdings, LLC, Allan D. Keel and
those individuals listed on the signature page thereto, dated February
28, 2005. (Previously filed with our Form 13D, Reg. No. 005-54301,
filed with the Commission on March 10, 2005.)
4.10 First Amendment to Warrant Agreement among GulfWest Energy Inc., D.B.
Zwirn Special Opportunities Fund, L.P. and Drawbridge Special
Opportunities Fund, dated February 28, 2005. (Previously filed with our
Form 10-K, Reg. No. 001-12108, filed with the Commission on March 31,
2005.)
10.1 Employment Agreement between Allan D. Keel and GulfWest Energy, Inc.,
dated February 28, 2005. (Previously filed with our Form 10-K, Reg. No.
001-12108, filed with the Commission on March 31, 2005.)
10.2 Employment Agreement between E. Joseph Grady and GulfWest Energy, Inc.,
dated February 28, 2005. (Previously filed with our Form 10-K, Reg. No.
001-12108, filed with the Commission on March 31, 2005.)
10.4 GulfWest Energy Inc. 2004 Stock Option Incentive Plan. (Previously
filed with our Form 10-K, Reg. No. 001-12108, filed with the Commission
on March 31, 2005.)
10.5 GulfWest Energy Inc. 2005 Stock Option Incentive Plan. (Previously
filed with our Form 10-K, Reg. No. 001-12108, filed with the Commission
on March 31, 2005.)
10.6 Form of GulfWest Energy Inc. 2005 Stock Incentive Plan Stock Option
Agreement. (Previously filed with our Form 10-K, Reg. No. 001-12108,
filed with the Commission on March 31, 2005.)
10.7 Form of Warrant Agreement. (Previously filed with our Form 10-K, Reg.
No. 001-12108, filed with the Commission on March 31, 2005.)
10.8 Indemnification Agreement between GulfWest Energy Inc. and J. Virgil
Waggoner, dated February 28, 2005. (Previously filed with our Form
10-K, Reg. No. 001-12108, filed with the Commission on March 31, 2005.)
10.9 Indemnification Agreement between GulfWest Energy Inc. and B. James
Ford, dated February 28, 2005. (Previously filed with our Form 10-K,
Reg. No. 001-12108, filed with the Commission on March 31, 2005.)
10.10 Indemnification Agreement between GulfWest Energy Inc. and Skardon F.
Baker, dated February 28, 2005. (Previously filed with our Form 10-K,
Reg. No. 001-12108, filed with the Commission on March 31, 2005.)
10.11 Indemnification Agreement between GulfWest Energy Inc. and John Loehr,
dated February 28, 2005. (Previously filed with our Form 10-K, Reg. No.
001-12108, filed with the Commission on March 31, 2005.)
10.12 Indemnification Agreement between GulfWest Energy Inc. and Allan Keel,
dated February 28, 2005. (Previously filed with our Form 10-K, Reg. No.
001-12108, filed with the Commission on March 31, 2005.)
10.13 Letter Agreement among D.B. Zwirn Special Opportunities Fund, LP,
GulfWest Oil & Gas, and Drawbridge Special Opportunities Fund, LP,
dated January 7, 2005. (Previously filed with our Form 10-K, Reg. No.
001-12108, filed with the Commission on March 31, 2005.)
10.14 Series G Subscription Agreement between GulfWest Energy Inc. and OCM GW
Holdings, LLC dated February 28, 2005. (Previously filed with our Form
13D, Reg. No. 005-54301, filed with the Commission on March 10, 2005.)
10.15 Series A Subscription Agreement between GulfWest Oil & Gas Company and
OCW GW Holdings, LLC dated February 28, 2005. (Previously filed with
our Form 13D, Reg. No. 005-54301, filed with the Commission on March
10, 2005.)
10.16 Letter Agreement between W.L. Addison Investment, L.L.C., GulfWest
Energy Inc., and Setex Oil and Gas Company dated February 24, 2005
extending Option Agreement for the Purchase of Oil and Gas Leases dated
March 5, 2004.
*22.1 Subsidiaries of the Registrant (included on page 7 of this Quarterly
Report).
*31.1 Certification of Chief Executive Officer pursuant to Exchange Rule
13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
*31.2 Certification of Chief Financial Officer pursuant to Exchange Rule
13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
*32 Certification pursuant to 18.U.S.C Section 1350 pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.1 Press Release dated April 1, 2005. (Previously filed with our Form 8-K,
Reg. No. 001-12108, filed with the Commission on April 7, 2005.) *Filed
herewith.
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SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GULFWEST ENERGY INC.
(Registrant)
Date: May 16, 2005 By: /s/ Allan D. Keel
Allan D. Keel
------------------------------------
President and Chief
Executive Officer
Date: May 16, 2005 By: /s/ E. Joseph Grady
------------------------------------
E. Joseph Grady
Senior Vice President and
Chief Financial Officer
22