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| TRGL > SEC Filings for TRGL > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
The following discussion is intended to assist you in understanding our business and results of operations together with our present financial condition. This section should be read in conjunction with our Consolidated Financial Statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the year ended December 31, 2008, which was initially filed with the SEC on March 16, 2009 and amended on April 16, 2009. Certain prior-year amounts have been reclassified and adjusted to conform to the 2009 presentation and to present the operations of Turkey, Hungary and Romania as discontinued operations.
DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS
Certain matters discussed under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this report may
constitute "forward-looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and, as such, may involve known and unknown risks, uncertainties and other
factors that may cause the actual results, performance or achievements to be
materially different from future results, performance or achievements expressed
or implied by such forward-looking statements. When used in this report, the
words "anticipates," "estimates," "plans," "believes," "continues," "expects,"
"projections," "forecasts," "intends," "may," "might," "will," "would," "could,"
"should," and similar expressions are intended to be among the statements that
identify forward-looking statements. The factors that may affect our
expectations regarding our operations include, among others, the following:
º •
º our success in development, exploitation and exploration activities;
º •
º our ability to make planned capital expenditures;
º •
º declines in our production of crude oil;
º •
º prices for crude oil;
º •
º our ability to raise equity capital or incur additional indebtedness;
º •
º economic and business conditions;
º •
º political and economic conditions in oil producing countries;
º •
º price and availability of alternative fuels;
º •
º our acquisition and divestiture activities;
º •
º results of our hedging activities; and
º •
º other factors discussed elsewhere in this document.
In addition to these factors, important factors that could cause actual results to differ materially from our expectations ("Cautionary Statements") are disclosed under "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2008, initially filed with the SEC on March 16, 2009 and amended on April 16, 2009, which are incorporated by reference herein.
All written and oral forward-looking statements attributable to us are expressly qualified in their entirety by the Cautionary Statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.
EXECUTIVE OVERVIEW
We are an independent international energy company engaged in the acquisition, exploration, development and production of crude oil. We hold interests in developed and undeveloped oil properties in France and are currently focused on developing the conventional exploration of our French acreage and unconventional exploitation of the Paris Basin Oil Shale. Our financial results depend upon many factors that significantly affect our results of operations including the following:
º •
º the sales price of crude oil;
º •
º the level of total sales volumes of crude oil;
º •
º the availability of, and our ability to raise additional capital
resources and provide liquidity to meet, cash flow needs;
º •
º the level of and interest rates on borrowings; and
º •
º the level and success of exploration and development activity.
During 2008, we saw oil prices rise to unprecedented levels. Then in September 2008 we saw the start of a deterioration in the credit and equity markets, which continued further in the beginning of 2009 before recovering somewhat later in the year. In early to mid-2009 we also experienced a 50% - 60% decline in oil prices from the highest point received in 2008. Although oil prices have begun to rebound, oil prices are, and we expect, will continue to be, extremely volatile for the remainder of the fiscal year 2009. The results of our operations are highly dependent upon the prices received from our oil production, which are dependent on numerous factors beyond our control. Accordingly, significant changes to oil prices are likely to have a material impact on our financial condition, results of operation, cash flows and revenue. As discussed further below, these severe economic conditions have caused the Company to reevaluate its capital expenditure program for 2009 and how the Company will operate on a go forward basis.
In February 2009, we developed a corporate platform that was the building block of our new corporate strategy that was presented at the Annual Shareholder Meeting in June 2009. The Board of Directors and management are committed to restoring shareholder value, exercising financial discipline, transparency in all transactions, assessing strategic alternatives that lay outside and beyond the platform and strengthening the Company during the current economic crisis.
We believe that the following proactive steps will be the base for the future growth of the Company:
º •
º The sale of a 26.75% interest in the SASB to Petrol Ofisi for
aggregate cash consideration of $55 million, $50 million of which was
funded on March 3, 2009, with the remaining $5 million paid by Petrol
Ofisi to us on September 1, 2009;
º •
º A portion of the net proceeds of the sale of the 26.75% interest in
the SASB to Petrol Ofisi have been used to fully repay and retire the
credit facilities with the International Finance Corporation;
º •
º The sale of Toreador Hungary on September 30, 2009, for total
consideration consisting of (1) a cash payment of US$5.4 million
(€3.7 million) paid at closing, (2) US$435,000 (€300,000), which was
held back and is subject to a post-closing adjustment, and (3) a
contingent payment of US$2.9 million (€2 million) to be paid upon
post-transaction completion of agreements relating to certain assets
of Toreador Hungary;
º •
º The sale of Toreador Turkey on October 7, 2009 for total consideration
consisting of: (1) a cash payment of $10.6 million to be paid at
closing (subject to a post-closing adjustment), (2) exploration
success payments dependent upon certain future commercial discoveries
as
provided in the Share Purchase Agreement, up to a maximum aggregate consideration of $40 million, and (3) future quarterly 10% pre-tax net profit interest payments if a field goes into production that was discovered by an exploration well drilled within four years of closing on certain of the licenses then still held by Tiway;
º •
º In April 2009, we repurchased $16.7 million principal amount of the
Convertible Senior Notes on the open market and through privately
negotiated transactions for $12.7 million plus accrued interest and
prepaid loan fees of $650,000. This repurchase resulted in a gain of
$3.4 million on the early extinguishment of debt which was recorded in
the second quarter of 2009. Additionally, in October 2009, we
repurchased $9 million principal amount of the Convertible Senior
Notes on the open market and through privately negotiated transactions
for $8.7 million plus accrued interest and prepaid loan fees of
$340,000. This repurchase resulted in a loss of $26,000 on the early
extinguishment of debt which will be recorded in the fourth quarter of
2009;
º •
º A share buyback program was adopted by the Board of Directors in
February 2009 for the repurchase of up to 1 million shares of Toreador
common stock that may be repurchased in the open market at any time
over the next 12 months. As of September 30, 2009, no shares of
Toreador common stock have been repurchased pursuant to the share
buyback program;
º •
º As of June 30, 2009, the Company has completed the relocation of its
headquarters from Dallas, Texas to Paris;
º •
º The Company expects that the Paris Basin will remain the Company's
core asset with current production of approximately 900 net barrels
per day coming from low-decline, long-life assets. A comprehensive
portfolio review of our fields and 649,000 net acres held pursuant to
licenses continues and an additional 154,000 that are pending
permitting. The results of the study will be used to launch the
three-year strategic plan that was announced at the Annual
Stockholders Meeting in June 2009;
º •
º On June 16, 2009 we entered into futures and swap contracts for
approximately 18,000 Bbls per month for the months of July 2009
through December 2009 with a floor price of $65.00 per Bbl and a
ceiling of $77.00 per Bbl.;
º •
º A rig contract has been signed to drill the La Garenne well, in
France, on the 100% owned Rigny le Ferron permit and is scheduled to
spud late November pending regulatory approvals. The well is an updip
test of the nearby Flacy 1 and 2 oil discoveries made and produced in
the 1980's. The well has the potential of proving between 6-30 mmbo of
oil in place.
For the nine months ended September 30, 2009:
º •
º We had revenues from continuing operations of $13.1 million.
º •
º Operating costs from continuing operations were $24.2 million.
º •
º Loss from discontinued operations, net of income taxes, was
$12 million.
º •
º Net loss available to common shares was $20.5 million.
º •
º Production was 248 MBOE.
º •
º Capital expenditures were $5 million.
º •
º Cash of $10.6 million.
º •
º We had a current ratio of 4.07 to 1.
º •
º We had a debt to equity ratio of 2.02 to 1.
º •
º Oil and natural gas properties held for sale of $16.5 million, which
reflects a $5.3 million impairment (discontinued operations shown on
the statement of operations), recorded at March 31, 2009, of our SASB
field in offshore Turkey due to the 25% reduction in the posted price
of natural gas announced on May 1, 2009. In the third quarter we
recorded $1.3 million to dry hole costs for the Durusu #1 well. We
believe that this amount represents the fair value, less selling cost,
of our remaining 10% interest in the SASB, in addition to our onshore
production, and 2.2 million net acres in exploration licenses that are
currently held in Turkey.
º •
º In September we closed on the sale of Toreador Hungary which resulted
in a financial loss of $4.2 million. Additionally, we recorded an
impairment of the Kiha pipeline and related well costs of
$5.4 million. Both of these amounts are classified as discontinued
operations.
LIQUIDITY AND CAPITAL RESOURCES
This section should be read in conjunction with Note 5 to Notes to Consolidated Financial Statements included in this filing.
The Company's liquidity depends on cash flow from operations and existing
cash resources. As of September 30, 2009, we had cash of $10.6 million, a
current ratio of approximately 4.07 to 1 and a debt to equity ratio of 2.02 to
1. For the nine months ended September 30, 2009, we had an operating loss of
$11.1 million and capital expenditures were $5 million.
During 2008, we saw oil prices rise to unprecedented levels. Then in September 2008 we saw the start of a deterioration in the credit and equity markets, which continued further in the beginning of 2009 before recovering somewhat later in the year. In early to mid-2009 we also experienced a 50% - 60% decline in oil prices from the highest point received in 2008. Although oil prices have begun to rebound, oil prices are, and we expect, will continue to be, extremely volatile for the remainder of the fiscal year 2009. In order to reduce our vulnerability to crude oil price fluctuations, we have entered into a collar for approximately 18,000 Bbls per month for the months of July 2009 through December 2009. This transaction sets the floor at $65.00 per Bbl and the ceiling at $77.00 per Bbl.
As discussed further below, for the year ended December 31, 2008, we had a downward reserves revision of 37.41%. At December 31, 2007 the price used for evaluating our oil reserves was $95.72 per barrel as compared to the December 31, 2008 price of $34.29 per barrel. This 64% decrease in oil price had a severe impact on the economic life of our wells, but also on the discounted present value at 10% and the standardized measure or proved reserves. As discussed further below, these severe economic conditions have caused the Company to reevaluate its capital expenditure program for 2009 and how the Company will operate on a go forward basis.
In June 2009, the Company announced its strategy for the next three years at
the Annual Shareholder Meeting. The strategy is built on: (i) reduction in
overhead-through relocating our corporate headquarters to Paris, France,
significant savings of general and administrative expense due to a consolidation
of job functions and the sale of all the Company's remaining interest in Turkey;
(ii) uses of cash-other than funding our capital program to meet minimum
commitments associated with the Company's licenses, we expect that our primary
use of discretionary cash will be used to reduce debt; (iii) a focused oil
portfolio review-the Company will refocus its efforts to those areas that offer
the best chance of success and have a proven infrastructure for the oil
industry. We believe that our current acreage position in France can serve as
the platform for growth and offer the Company the best opportunity to create
stockholder value; and (iv) performance management-the
Board of Directors and management are committed to the best practices in corporate governance and will continually be reviewing and where necessary revising the procedures used to operate the Company. We intend to use third party expertise to review and challenge our procedures and methodologies, both operationally and administratively. Also performance management, actions followed by positive results, will become a driving principle in operating the Company.
On March 3, 2009, we completed the sale of a 26.75% interest in the SASB to Petrol Ofisi for $55 million. In accordance with the agreement, $50 million of the proceeds was paid by Petrol Ofisi upon closing and the remaining $5 million was paid on September 1, 2009. Simultaneous with the closing of the sale of the 26.75% interest in the SASB to Petrol Ofisi, we repaid the secured revolving credit facility with the International Finance Corporation. The total amount of the payment was $36.4 million, which was comprised of $30 million principal, $5.9 million additional compensation due under the credit facility as a result of our repayment (such additional compensation calculated under the terms of the credit facility as a percentage of the Company's earnings before interest, tax, depreciation, amortization, and exploration expense) and $500,000 for accrued interest and fees. As a result of the early extinguishment, we recorded a loss of $4.9 million for the nine months ended September 30, 2009, which was recorded in discontinued operations. Following the retirement of the credit facility with the International Finance Corporation, the Company does not have a credit facility and currently relies on its cash balance to meet its immediate cash requirements. Management will seek to secure a new facility in 2009, but given the current economic and financial market conditions due to the global credit market crisis, there can be no assurance that a new facility can be obtained on acceptable terms or at all.
On September 30, 2009, we completed the sale of Toreador Hungary for total consideration consisting of (1) a cash payment of US$5.4 million (€3.7 million) paid at closing, (2) US$435,000 (€300,000), which was held back and is subject to a post-closing adjustment, and (3) a contingent payment of US$2.9 million (€2 million) to be paid upon post-transaction completion of agreements relating to certain assets of Toreador Hungary.
On October 7, 2009, we completed the sale of Toreador Turkey for total
consideration consisting of: (1) a cash payment of $10.6 million to be paid at
closing (subject to a post-closing adjustment), (2) exploration success payments
dependent upon certain future commercial discoveries as provided in the Share
Purchase Agreement, up to a maximum aggregate consideration of $40 million, and
(3) future quarterly 10% pre-tax net profit interest payments if a field goes
into production that was discovered by an exploration well drilled within four
years of closing on certain of the licenses then still held by Tiway.
Our capital expenditure budget for 2009 is currently estimated at $8.3 million, which includes $5 million of capital expenditures incurred through September 30, 2009 for our share of capital costs incurred in Turkey and Hungary prior to the sale of those entities and approximately $3.3 million for the drilling of the La Garenne exploratory well in France.
As discussed in Note 11, on April 30, 2009, the Company received a letter from attorneys representing Netherby claiming that Toreador's sale of its 26.75% interest in the SASB to Petrol Ofisi in March 2009 and Toreador's proposed sale of its remaining 10% interest in the SASB constitute a breach of the Netherby Agreement and demanding a $10.4 million payment. Toreador does not believe that Netherby is entitled to the $10.4 million claimed, though no formal legal evaluation of the likely outcome of this claim can be made at this time. Additionally, the Company believes the claim is baseless, without merit and will be vigorously defended against.
On June 17, 2009, The Scowcroft Group, Inc. ("Scowcroft") filed a complaint in the United States District Court for the District of Columbia against the Company. The complaint alleges that Toreador breached a contract (the "Scowcroft Contract") between Scowcroft and Toreador relating to the sale of its interests in the SASB and that Scowcroft is entitled to a success fee thereunder as a result of the
sale of Toreador's interests in the SASB to Petrol Ofisi in March 2009. The complaint also alleges unjust enrichment/quantum meruit and fraud. Scowcroft is seeking damages in the amount of $2 million plus interest, costs and expenses. On July 24, 2009, the Company filed a motion to dismiss the complaint. The district court denied the Company's motion to dismiss the action on October 26, 2009. The Company's answer is due by November 20, 2009. The Company believes the lawsuit lacks merit and intends to continue vigorously defending itself.
We believe we will have sufficient cash flow from operations to meet all of our 2009 obligations. However, if the cash flow from our operations is less than anticipated and if we have used up our cash we may also seek additional capital by: (i) forward selling our crude oil production; (ii) selling our working interest in properties; or (iii) a combination of these actions in addition to issuing new debt or equity securities. Management is also seeking to secure a new credit facility, though there is no guarantee that the Company will be able to obtain a new credit facility on satisfactory terms, if at all. We believe such actions will allow us to meet our capital commitments and that as a result, we will have sufficient liquidity for the remainder of 2009.
On December 28, 2006, we entered into a loan and guarantee agreement with International Finance Corporation. The loan and guarantee agreement provided for a $25 million facility which was a secured revolving facility with a maximum facility amount of $25 million which maximum facility amount would have increased to $40 million when the projected total borrowing base amount exceeds $50 million. The $25 million facility funded on March 2, 2007. The loan and guarantee agreement also provided for an unsecured $10 million facility which funded on December 28, 2006. Both the $25 million facility and the $10 million facility were used to fund our operations in Turkey and Romania.
On March 3, 2009, we repaid and retired the facilities with the International Finance Corporation. The total amount of the payment was $36.4 million, which was comprised of $30 million principal, $5.9 million additional compensation due under the credit facility as a result of our repayment (such additional compensation calculated under the terms of the credit facility as a percentage of the Company's earnings before interest, tax, depreciation, amortization and exploration expense) and $500,000 for accrued interest and fees.
On September 27, 2005, we sold $75 million of Convertible Senior Notes due October 1, 2025 to qualified institutional buyers pursuant to Rule 144A of the Securities Act of 1933. We also granted the initial purchasers the option to purchase an additional $11.25 million aggregate principal amount of Convertible Senior Notes to cover over-allotments. The option was exercised on September 30, 2005. The total principal amount of Convertible Senior Notes issued was $86.25 million and total net proceeds were approximately $82.2 million.
The Convertible Senior Notes bear interest at a rate of 5% per annum and can be converted into common stock at an initial conversion rate of 23.3596 shares of common stock per $1,000 principal amount of Convertible Senior Notes, subject to adjustment (equivalent to a conversion price of approximately $42.81 per share). We may redeem the Convertible Senior Notes, in whole or in part, on or after October 6, 2008, and prior to October 1, 2010, for cash at a redemption price equal to 100% of the principal amount of Convertible Senior Notes to be redeemed, plus any accrued and unpaid interest, if the closing price of our common stock exceeds 130% of the conversion price over a specified period. On or after October 1, 2010, we may redeem the Convertible Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of Convertible Senior Notes to be redeemed, plus any accrued and unpaid interest, irrespective of the price of its common stock.
Holders may convert their Convertible Senior Notes at any time prior to the close of business on the business day immediately preceding their stated maturity, and holders may, upon the occurrence of certain fundamental changes, and on October 1, 2010, October 1, 2015, and October 1, 2020, require us to repurchase all or a portion of their Convertible Senior Notes for cash in an amount equal to 100% of the principal amount of such Convertible Senior Notes, plus any accrued and unpaid interest.
In 2008, we repurchased $6 million in principal amount of the Convertible Senior Notes on the open market and through privately negotiated transactions for $5.3 million plus accrued interest of $109,347. Additionally, we expensed $241,965 of prepaid loan fees attributable to the repurchased Convertible Senior Notes. This resulted in a $458,535 gain on the early extinguishment of debt.
In April 2009, we repurchased $16.7 million in principal amount of the Convertible Senior Notes on the open market for $12.7 million plus accrued interest and prepaid loan fees of $650,000. This repurchase resulted in a gain of $3.4 million on the early extinguishment of debt which was recorded in the second quarter of 2009. In October 2009, we repurchased $9 million principal amount of the Convertible Senior Notes on the open market and through privately negotiated transactions for $8.7 million plus accrued interest and prepaid loan fees of $340,000. This repurchase resulted in a loss of $26,000 on the early extinguishment of debt which will be recorded in the fourth quarter of 2009.
We intend to continue to buy back a portion of the currently outstanding Convertible Senior Notes on the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements and other factors.
Under the terms of the Indenture, the Company may be required on October 1,
2010 to repurchase at the option of the Holders the principal amount outstanding
of the Convertible Senior Notes (up to approximately an aggregate of
$63.6 million as at September 30, 2009). If the Holders exercise their right to
require the Company to repurchase the Convertible Senior Notes, the Company
expects that it may need to secure new financing or raise additional capital
through the issuance of securities to satisfy such payment obligation. If the
Company is unable to generate sufficient cash flow to satisfy its obligations,
it may also seek additional capital by: (i) forward selling its crude oil;
(ii) selling its working interest in properties; or (iii) a combination of these
actions, in addition to seeking financing or issuing new debt or equity
securities. The Company's management is currently is seeking to secure a new
credit facility; however, there is no guarantee that the Company will be able to
obtain a new credit facility on satisfactory terms, if at all. There is no
assurance that any such transactions will be completed, in which case the
Company may not have sufficient liquid resources to satisfy its payment
obligation with respect to the Convertible Senior Notes. An inability to access
replacement or additional sources of liquidity to fund our cash needs or fund
the repayment of the Senior Convertible Notes if the Holders exercise their
repurchase rights could adversely affect our growth, our financial condition,
our results of operations. It will be more difficult to obtain additional
financing if prevailing instability in the credit and financial markets
continues.
An inability to refinance or otherwise fund the Company's payment obligations with respect to the Convertible Senior Notes would result in an event of default under the Convertible Senior Notes, which, if not cured or waived, would permit the holders of the Convertible Senior Notes to declare the outstanding principal, and any accrued and unpaid interest, if any, and any premium, on all the Convertible Senior Notes to be immediately due and payable. If such an acceleration occurs, and the Company is not at that time able to repay, as a result of the actions above or otherwise, or borrow sufficient funds to refinance, the Convertible Senior Notes, the Company may not be able to continue its operations and there would be doubt as to whether the Company could continue as a going concern.
Dividends on our common stock may be declared and paid out of funds legally available when and as determined by our Board of Directors. Our policy is to hold and invest corporate funds on a conservative basis, and, thus, we do not . . .
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