10-Q 1 h81933e10-q.txt PETSEC ENERGY INC. - DATED SEPTEMBER 30, 2000 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 [ ] 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 333-31625* PETSEC ENERGY INC.* (Exact name of Registrant as specified in its charter) NEVADA 84-1157209 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 143 RIDGEWAY DRIVE, SUITE 113 LAFAYETTE, LOUISIANA 70503 (Address of principal executive offices) (Zip Code) (337) 989-1942 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 [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all reports required to be filed by Section 12, 13 or 15 (d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES [X] NO [ ] (There has been no plan confirmed by a court pursuant to which securities were distributed.) 2 APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. On November 14, 2000, Petsec Energy Inc. has one class of common stock, and one share of common stock outstanding. *Petsec Energy Inc. is a wholly owned operating subsidiary of Petsec Energy Ltd, a listed Australian public company registered with the Securities and Exchange Commission as a result of its public offering of American Depositary Receipts (ADRs) traded under the ticker symbol PSJEE.OB. Effective April 13, 2000 and as a result of Petsec Energy Inc.'s Chapter 11 bankruptcy filing, Petsec Energy Inc.'s financial results are no longer consolidated with the results of Petsec Energy Ltd. Shareholders and holders of American Depositary Receipts are advised to refer to the filings of Petsec Energy Ltd for the consolidated results prior to April 13, 2000. Forward Looking Statements This Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical facts included in this Form 10-Q, including without limitation statements regarding the projected cash flows, planned capital expenditures, oil and gas production and reserve additions, the Company's financial position, business strategy and other plans and objectives for future operations, are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. There are numerous risks and uncertainties that can affect the outcome of certain events including many factors beyond the control of the Company including without limitation those described in the Company's latest Annual Report filed on Form 10-K with the Securities and Exchange Commission for the year ended December 31, 1999. All written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by such factors. 2 3 PETSEC ENERGY INC. TABLE OF CONTENTS PART 1. FINANCIAL INFORMATION* 4 ITEM 2. FINANCIAL STATEMENTS..................................................................................4 Balance Sheets........................................................................................4 Statements of Operations and Accumulated Deficit......................................................5 Statements of Cash Flows..............................................................................6 Notes To Financial Statements.........................................................................7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................10 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........................................18 PART II. OTHER INFORMATION...................................................................................18 ITEM 1. LEGAL PROCEEDINGS....................................................................................18 ITEM 3. DEFAULTS UPON SENIOR SECURITIES......................................................................18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................................................19 SIGNATURES...................................................................................................20

* IMPORTANT NOTE: The financial information in this Quarterly Report refers to Petsec Energy Inc., a wholly owned subsidiary of Petsec Energy Ltd. The publicly listed Petsec Energy Ltd files its annual consolidated financial statements separately under Form 20-F and a summary of its quarterly consolidated financial statements under Form 6-K. Effective April 13, 2000 and as a result of its Chapter 11 bankruptcy filing, Petsec Energy Inc. is no longer consolidated in the results of Petsec Energy Ltd. 3 4 PART 1. FINANCIAL INFORMATION ITEM 2. FINANCIAL STATEMENTS PETSEC ENERGY INC. (DEBTOR-IN-POSSESSION AS OF APRIL 13, 2000) A WHOLLY OWNED SUBSIDIARY OF PETSEC ENERGY LTD BALANCE SHEETS (Dollars in thousands, except share amounts)

See accompanying notes to financial statements. 4 5 PETSEC ENERGY INC. (DEBTOR-IN-POSSESSION AS OF APRIL 13, 2000) A WHOLLY OWNED SUBSIDIARY OF PETSEC ENERGY LTD STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT (UNAUDITED) (Dollars in thousands)

See accompanying notes to financial statements. 5 6 PETSEC ENERGY INC. (DEBTOR-IN-POSSESSION AS OF APRIL 13, 2000) A WHOLLY OWNED SUBSIDIARY OF PETSEC ENERGY LTD STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars in thousands)

See accompanying notes to financial statements. 6 7 PETSEC ENERGY INC. (DEBTOR-IN-POSSESSION AS OF APRIL 13, 2000) A WHOLLY-OWNED SUBSIDIARY OF PETSEC ENERGY LTD NOTES TO FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - The accompanying financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements and footnotes should be read in conjunction with the financial statements and notes thereto included in Petsec Energy Inc.'s (the "Company") Annual Report on Form 10-K for the year ended December 31, 1999 and the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section in this Form 10-Q. The financial information for the three and nine-month periods ended September 30, 2000 and 1999 has not been audited. However, in the opinion of management, all adjustments (consisting only 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 the current period's presentations. The results of operations for interim periods are not necessarily indicative of the operating results that may be expected for the full fiscal year. NOTE 2 - On April 13, 2000, the Company filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Western District of Louisiana, Opelousas Division (the "Bankruptcy Court"). The Bankruptcy Court assumed jurisdiction on that day. The case name is In Re Petsec Energy Inc., and the docket number is 00BK-50741 (the "Bankruptcy Case"). Subject to the supervision of the Bankruptcy Court, the Company remains in possession of the Company's assets and will manage the business for the benefit of the Company's creditors and equity holder in accordance with Sections 1107 and 1108 of the Bankruptcy Code. The Company did not make the $4.75 million interest payment due on December 15, 1999 to the holders of its 9 1/2% senior subordinated notes due June 2007 (the "9 1/2% Notes"). On January 18, 2000, after asking the noteholders to organize, the Company met with an informal subcommittee of the holders of the 9 1/2% Notes in an effort to reach a solution to its financial situation. On June 16, 2000, an agreement was reached among the Company, Petsec (USA) Inc., as equity owner ("PUSA"), certain senior management of the Company, the Official Committee of Unsecured Creditors in the Bankruptcy Case (the "Creditors' Committee) and certain holders of the 9 1/2% Notes. The agreement provides for the sale of the Company or all of its assets and for distribution of the sale proceeds to the Company's creditors, PUSA and certain of the Company's senior management team in the USA. Details of the June 16, 2000 agreement are described in the 8-K current report filed by the Company with the Securities and Exchange Commission on June 19, 2000. On June 30, 2000, the Company filed a Plan of Reorganization (the "Plan") and a Disclosure Statement (the Disclosure Statement, and together with the Plan, collectively the "Plan Documents") that incorporates the provisions of the June 16, 2000 agreement. The 7 8 Bankruptcy Court approved the Disclosure Statement on October 13, 2000. The Bankruptcy Court hearing to confirm the Plan of Reorganization is scheduled for November 21, 2000. While the Company expects that the Plan of Reorganization will be confirmed at this hearing, there can be no assurance that this will be the case. Consistent with the Plan Documents and the June 16, 2000 agreement, the Company commenced a marketing process to sell the Company or all of its assets. Pursuant to this process the Company has entered into agreements for the sale of substantially all of its assets for approximately $56.8 million. In addition PUSA was the high bidder on certain of the Company's assets, and under the Plan of Reorganization, those assets will remain in the Company. The Plan contemplates that the Company will emerge from Chapter 11 as a reorganized entity, and PUSA will control the Company through the ownership of all of the Company's common stock. PUSA will pay the liquidating trust that will be under the control of the Company's creditors $3.0 million for these assets. These transactions are subject to approval of the Bankruptcy Court at the confirmation hearing on November 21, 2000. An impairment charge of $2.5 million has been recognized during the quarter ended September 30, 2000 on the assets on which PUSA was the high bidder. Liquidity Position The Company has inadequate capital resources to service its debt and meet anticipated capital requirements necessary to maintain and grow its business over the long term. After filing for bankruptcy protection, the Company entered into a post-petition revolving credit facility with Foothill Capital Corporation ("Foothill"), the Company's pre-petition lender, which was approved by the Bankruptcy Court on June 20, 2000. The revolving facility is for $30 million, subject to monthly borrowing base adjustments, and is expected to provide the Company with sufficient liquidity throughout the Bankruptcy Case although there can be no assurance of this. On November 10, 2000, $20.2 million cash was on hand with no outstanding borrowings under the Foothill facility. Secured Credit Facility On June 20, 2000, the Company entered into a $30 million revolving credit facility with Foothill. Under the facility, outstanding borrowings accrue interest at the reference rate most recently announced by Wells Fargo Bank N.A., (9.5% per annum as of October 31, 2000) plus a margin of 2.5% per annum; the default rate is the reference rate plus 6.5%. The Company is also required to pay an unused line fee of 0.5% of the unused amount available for borrowing, a $10,000 per month service charge and certain other fees and expenses. The Company has paid all interest that is presently due. Public Senior Subordinated Indebtedness In June 1997 the Company issued $100 million of 9 1/2% Notes. The principal is due in a lump sum in June 2007. The 9 1/2% Notes were issued at a discount with a yield to maturity of 9.56% per annum. Interest at the rate of 9.5% per annum is payable semiannually on June 15 and December 15 of each year. The Company did not make the interest payment due in the amount of $4.75 million on the 9 1/2% Notes at December 15, 1999, and is in default under the Indenture governing the 9 1/2% Notes. The Company did not make the interest payment due in the amount of $4.75 million on June 15, 2000. The 9 1/2% Notes and accrued interest are classified as "liabilities subject to compromise" and the Company has discontinued accruing interest effective April 13, 2000. Subordinate Loans from PUSA Petsec Energy Ltd ("PEL"), indirectly through PUSA, made an initial cash investment of $11.4 million in the Company and subsequently increased this investment with advances of 8 9 $18.5 million from an Australian offering of Ordinary Shares in September 1995 and $31.0 million out of the net proceeds from a U.S. offering of ADRs in July 1996. Funds advanced by PUSA historically have been provided substantially in the form of subordinated loans denominated in Australian and US dollars. These loans are subordinated to the payment of both the Foothill credit facility and the 9 1/2% Notes. The biannual interest payments on these loans were not paid in January and July, 2000. These loans and accrued interest are classified as "liabilities subject to compromise" and the Company has discontinued accruing interest effective April 13, 2000. The loans from PUSA do not have mandatory principal payments due until December 31, 2007. Any payments or distributions made by the Company to PEL and PUSA have been for reimbursement of direct expenses incurred in connection with the Company's operations and interest under the subordinated loans. Neither PEL nor PUSA has any commitments to make any further advances to the Company. The Plan of Reorganization contemplates that the 9 1/2% Notes and PUSA subordinated loans will be cancelled when the Plan becomes effective. The holders of the 9 1/2% Notes will receive distributions from the liquidating trust based on the proceeds available from the sale of the Company's assets. PUSA will receive the distribution provided for in the Plan--which begins at 3.375% of the amount otherwise available for distribution to the holders of the 9 1/2% Notes up to $60 million. The percentage available to PUSA increases for recoveries to the holders of the 9 1/2% Notes in excess of $60 million. NOTE 3 - The Company is involved in certain lawsuits arising in the ordinary course of business. While the outcome of any of these lawsuits cannot be predicted with certainty, management expects these matters to have no material adverse effect on the financial position, results of operations or liquidity of the Company. NOTE 4 - The Company has in the past entered into forward swap contracts with major financial institutions to reduce the price volatility on the sale of oil and gas production. In swap agreements, the Company receives the difference between a fixed price per unit of production and a floating price issued by a third party. If the floating price is higher than the fixed price, the Company pays the difference. On April 25, 2000, the Company had hedging arrangements in place with The Chase Manhattan Bank, N.A., and Bank of America, N.A. The Company was prohibited by bankruptcy law from paying certain pre-petition debts falling due on April 25, 2000 with respect to these contracts. On April 26, 2000, the counterparties drew on letters of credit the Company had posted to secure its obligations to pay these obligations. In addition, the counterparties terminated the hedging arrangements with respect to future transactions, and closed out all hedging arrangements. The cost to terminate these contracts was $3.0 million. 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following discussion is intended to assist in the understanding of Petsec Energy Inc.'s (the "Company") historical financial position and results of operations for the three-month and nine-month periods ended September 30, 2000 and 1999. The Company's unaudited financial statements and notes thereto should be referred to in conjunction with the following discussion. On April 13, 2000, the Company filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Western District of Louisiana, Opelousas Division (the "Bankruptcy Court"). The Bankruptcy Court assumed jurisdiction on that day. The case name is In Re Petsec Energy Inc., and the docket number is 00BK-50741 (the "Bankruptcy Case"). Subject to the supervision of the Bankruptcy Court, the Company remains in possession of the Company's assets and will manage the business for the benefit of the Company's creditors and equity holder in accordance with Sections 1107 and 1108 of the Bankruptcy Code. The Company did not make the $4.75 million interest payment due on December 15, 1999 to the holders of its 9 1/2% senior subordinated notes due June 2007 (the "9 1/2% Notes"). On January 18, 2000, after asking the noteholders to organize, the Company met with an informal subcommittee of the holders of the 9 1/2% Notes in an effort to reach a solution to its financial situation. On June 16, 2000, an agreement was reached among the Company, Petsec (USA) Inc., as equity owner ("PUSA"), certain senior management of the Company, the Creditors' Committee in the Bankruptcy Case and certain holders of the 9 1/2% Notes. The agreement provides for the sale of the Company or all of its assets and for distribution of the sale proceeds to the Company's creditors, PUSA and certain of the Company's senior management team in the USA. Details of the June 16, 2000 agreement are described in the 8-K current report filed by the Company with the Securities and Exchange Commission on June 19, 2000. On June 30, 2000, the Company filed a Plan of Reorganization (the "Plan") and a Disclosure Statement (the Disclosure Statement, and together with the Plan, collectively the "Plan Documents") that incorporates the provisions of the June 16, 2000 agreement. The Disclosure Statement was approved by the Bankruptcy Court on October 13, 2000. A Bankruptcy Court hearing to confirm the Plan of Reorganization is scheduled for November 21, 2000. While the Company expects that the Plan of Reorganization will be confirmed at this hearing, there can be no assurance that this will be the case. Consistent with the Plan Documents and the June 16, 2000 agreement, the Company commenced a marketing process to sell the Company or all of its assets. Pursuant to this process the Company has either sold or entered into agreements for the sale of substantially all of its assets, although these sales are subject to approval of the Bankruptcy Court at the confirmation hearing on November 21, 2000. These proposed sales are described below. 10 11 SALE TRANSACTIONS On August 3, 2000, the Company entered into a purchase and sale agreement with LLOG Exploration Offshore, Inc. ("LLOG") to sell to LLOG effective as of August 1, 2000 all of the Company's interest in six exploratory leases and one producing lease in the Mustang Island area for a cash payment of $6.4 million. Net proved reserves attributable to the Mustang Island 883S producing lease, estimated by Ryder Scott Company, L.P. ("Ryder Scott"), the Company's independent reserve engineering firm, were 0.1 million barrels of oil and 3.2 Bcf of gas as of July 1, 2000. The sale was approved by the Bankruptcy Court and completed on September 25, 2000. The leases subject to the sale cover portions of Mustang Island blocks 748L, 749L, 795L, 797L, 883S, 940S and 941S. A purchase and sale agreement was signed with Apache Corporation ("Apache") on October 2, 2000 for the sale of the Company's 50% working interests in Main Pass leases 5, 6, 7, 84, 90, 91, 93, 104 and 105, Grand Isle 45, Ship Shoal leases 192, 193 and 194, South Marsh Island 7, and West Cameron leases 237, 543, 544 and 653. Net proved reserves attributable to these leases, estimated by Ryder Scott were 2.6 million barrels of oil and 22.6 Bcf of gas as of July 1, 2000. The effective date of the sale is October 1, 2000. The sale price is $51.2 million. This sale transaction is subject to approval of the Bankruptcy Court. Two purchase and sale agreements were signed with ATP Oil and Gas Corporation on October 2, 2000 ("ATP") in respect of the Company's 100% working interest in the West Cameron 461 lease, on the one hand, and the Company's 100% working interests in the South Marsh Island 189 and 190 leases on the other hand. The purchase prices are $1.6 million and $3.1 million, respectively, each with an effective date of October 1, 2000. Net proved reserves attributable to these leases, estimated by Ryder Scott were 0.6 million barrels of oil and 21.1 Bcf of gas as of July 1, 2000. These sale transactions are subject to approval of the Bankruptcy Court. On October 2, 2000, the Company entered into a purchase and sale agreement with Stone Energy Corporation ("Stone") for the sale of the Company's 100% working interest in the South Pelto 22 lease for a purchase price of $0.8 million, with an effective date of June 1, 2000. Net proved reserves attributable to this lease, estimated by Ryder Scott were 0.5 million barrels of oil and 2.3 Bcf of gas as of July 1, 2000. This sale transaction is subject to the approval of the Bankruptcy Court. PUSA was the high bidder on certain of the Company's assets, and under the Plan of Reorganization, these assets will remain in the Company. The Plan contemplates that the Company will emerge from Chapter 11 as a reorganized entity, and PUSA will control the Company through the ownership of all of the Company's common stock. The assets that will be retained by the Company are seven exploration leases in which the Company owns a 100% working interest (High Island 33 (one Texas state and one federal lease), High Island 307, High Island 308, Ship Shoal 180, Vermilion 258, West Cameron 145), certain seismic and geological licenses, certain contractual rights, the corporate books, records and tax attributes, and furniture, fixtures and equipment located in Lafayette, Louisiana. PUSA will pay the liquidating trust that will be under the control of the Company's creditors $3,034,000 for these assets. This transaction is subject to approval of the Bankruptcy Court. The Apache, ATP, Stone and PUSA transactions will be incorporated into the Plan of Reorganization and will be considered by the Bankruptcy Court at the November 21, 2000 confirmation hearing. At the request of the Company, Ryder Scott Company, L.P., issued a mid-year reserve analysis on June 12, 2000, effective as of July 1, 2000. The Company had this mid-year report prepared for use in connection with the sale process. The report was not prepared in accordance with Securities and Exchange Commission rules; it used pricing assumptions selected by the Company and was prepared using a forward looking effective date. The pricing assumptions, present value calculations and reserve estimates were disclosed by the Company in an 8-K Current Report filed with the Securities and Exchange Commission on June 19, 2000. GENERAL INFORMATION The Company is the wholly owned principal operating subsidiary of Petsec Energy Ltd ("PEL") an Australian public company with ordinary shares listed on the Australian Stock Exchange (symbol: PSA) and American Depositary Receipts ("ADRs") traded under the ticker symbol PSJEE.OB. The results discussed in this report refer only to the Company. PEL's results are filed with the Securities and Exchange Commission separately under Forms 6-K (quarterly) and 20-F (annually). PEL's shareholders and holders of ADRs are advised to refer to these filings for information pertaining to PEL. The Company explores for, develops and produces hydrocarbons primarily in state and federal waters in the Gulf of Mexico. A discussion of the Company's operating history is contained in the Company's most recent Annual Report on Form 10-K. The Plan of Reorganization filed with the Bankruptcy Court contemplates the sale to third parties of all of the Company's producing properties and substantially all of the Company's exploration leases. All cash, accounts receivable and the right to receive cash attributable to the period prior to the effective date of the Plan of Reorganization (which is expected to be December 15, 2000) will be transferred into a liquidating trust controlled by the Company's creditors. PUSA participated in the sale process as a buyer, and it is the high bidder on certain of the Company's non-producing assets. These assets will be retained in the Company which, it is expected, will operate as a reorganized entity. The Company has not formulated any business plans relating to the period after the Plan of Reorganization becomes effective. 11 12 The Company markets its oil and gas production through contracts that generally reflect spot market conditions in the central Gulf of Mexico. The Company has historically entered into crude oil and natural gas price swaps to reduce its exposure to price fluctuations. The results of operations described herein reflect any hedging transactions undertaken. The Company follows the successful efforts method of accounting. Under this method, the Company capitalizes lease acquisition costs, costs to drill and complete exploration wells in which proved reserves are discovered and costs to drill and complete development wells. Costs to drill exploratory wells that do not find proved reserves are expensed. Seismic, geological and geophysical, and delay rental expenditures are expensed as incurred. The Company reimburses PEL and PUSA for direct expenses incurred in connection with its operations. In addition, the Company has received subordinated loans from PUSA to finance its operations. See the discussion below in the "Liquidity and Capital Resources" section of this Form 10-Q. The Company's revenues, profitability and cash flow are substantially dependent upon prevailing prices for oil and gas, which are in turn dependent upon numerous factors that are beyond the Company's control, such as economic, political and regulatory developments and competition from other sources of energy. The energy markets have historically been volatile, and there can be no assurance that oil and gas prices will not be subject to wide fluctuations in the future. Notwithstanding the recent increase in oil and gas prices, a substantial or extended decline in prices could have a material adverse effect on the Company's existing financial position, results of operations and access to capital, as well as the quantities of oil and gas reserves that may be economically produced. RESULTS OF OPERATIONS The following table sets forth certain operating information with respect to the oil and gas operations of the Company. 12 13

(1) Includes effects of hedging activities GENERAL. During the three months ended September 30, 2000, the Company sold all of its interests in the Mustang Island 748L, 749L, 795L, 797L, 883S, 940S, and 941S leases for $6.4 million effective August 1, 2000. The sale was completed on September 25, 2000 and resulted in a gain of $3.2 million. In addition to this sale, during the nine months ended September 30, 2000, the Company sold all of its interests in West Delta 112/113, West Cameron 515/516/526 and Vermilion 34/47 for $8.9 million, net of closing adjustments, effective February 1, 2000. The sale was completed on April 11, 2000 and resulted in a gain of $0.6 million. OIL AND GAS REVENUES. Oil and gas revenues for the three months ended September 30, 2000 were $13.3 million, an increase of $6.4 million, or 93%, from $6.9 million for the comparable period in 1999. A 23% increase in gas production coupled with a 78% increase in gas prices, resulted in a $4.4 million increase in gas revenues. An 11% decrease in oil production offset by an 80% increase in oil prices resulted in a $1.9 million increase in oil revenues. Oil and gas revenues for the nine-month period ended September 30, 2000 were $30.3 million, an increase of $6.0 million, or 25% over $24.3 million for the comparable period in 1999. Oil production in the nine months to September 30, 2000 decreased 20% and gas production decreased 15% from the comparable 1999 period. The average realized price of oil increased by 78% and gas increased by 35%. For the three months ended September 30, 2000, the average realized gas price was $3.80 per Mcf, or 9% below the $4.16 per Mcf average gas price before hedging. Hedging activities resulted in a $0.8 million decrease in gas revenues. There were no oil hedging contracts in place during the quarter. For the comparable period in 1999 the average realized gas price was $2.13 per Mcf, or 13% below the $2.44 per Mcf average gas price before hedging. In the same period the average realized oil price was $17.19, or 13% below the $19.82 per Bbl average oil price before hedging. Hedging activities resulted in a $1.0 million decrease in oil and gas revenues for the three-month period ended September 30, 1999. 13 14 For the nine months ended September 30, 2000, the average realized gas price was $3.03 per Mcf, or 11% below the $3.42 per Mcf average gas price before hedging. Over the same period, the average realized oil price was $26.74 per Bbl, or 8% below the $29.08 per Bbl average oil price before hedging. Hedging activities resulted in a $3.3 million decrease in oil and gas revenues for the nine-month period ended September 30, 2000. For the comparable period in 1999, the average realized gas price was $2.25 per Mcf, or 13% above the $1.99 per Mcf average gas price before hedging. In the same period the average realized oil price was $15.04, or $0.01 below the $15.05 per Bbl average oil price before hedging. Hedging activities resulted in a $1.7 million increase in oil and gas revenues for the nine-month period ended September 30, 1999. LEASE OPERATING EXPENSES (including production taxes). Lease operating expenses increased 65% to $2.8 million for the three months ended September 30, 2000, from $1.7 million for the three months ended September 30, 1999. Lease operating expenses per Mcfe increased from $0.58 for the comparable period in 1999 to $0.90 for the three months ended September 30, 2000 as a result of higher workover costs. Lease operating expenses for the nine-month period ended September 30, 2000 were $5.7 million, an increase of 10% from the corresponding period in 1999. Lease operating expenses per Mcfe increased from $0.50 for the comparable period in 1999 to $0.66 for the nine-month period to September 30, 2000 due to higher workover costs and production decline. DEPLETION, DEPRECIATION AND AMORTIZATION ("DD&A"). DD&A expense of $4.4 million for the three months ended September 30, 2000, was in line with the same period in 1999. Consistent with an increase in production, the unit rate decreased to $1.42 per Mcfe for the three months ended September 30, 2000 from $1.54 per Mcfe for the same period in 1999. DD&A expense for the nine-month period ended September 30, 2000 decreased 19% to $13 1 million from $16.2 million for the corresponding period in 1999. The depletion rate per unit of $1.53 per Mcfe for the nine-month period ended September 30, 2000 decreased slightly from $1.56 per Mcfe for the corresponding period in 1999. EXPLORATION EXPENDITURES. Seismic, geological and geophysical expenditures of $42,000 were expensed during the quarter, a decrease of $0.5 million from the comparable period in 1999. Exploration expenditures for the nine months ended September 30, 2000 were $0.6 million, a decrease of $1.9 million over the comparable period in 1999. ABANDONMENTS AND IMPAIRMENTS. A $2.5 million impairment charge was recorded in the third quarter of 2000 on five unproved leases. An abandonment charge of $0.9 million was recorded in the first quarter of 1999 for the write-off of the West Cameron 480 and 462 leases and a charge of $0.1 million was recorded in the third quarter of 1999 for the plugging and abandonment of the West Cameron 542 B-1 well. INTEREST EXPENSE. Interest expense decreased $2.7 million, or 81% to $0.6 million for the three months ended September 30, 2000, from $3.3 million for the same period in 1999. For the nine months ended September 30, 2000, interest expense was $5.3 million compared to interest expense of $10.2 million during the same period in 1999 primarily due to the automatic stay as a result of the bankruptcy filing. Contractual interest for the three and nine month periods ended September 30, 2000 would have been $3.8 million and $11.2 million, respectively. 14 15 GENERAL, ADMINISTRATIVE AND STOCK COMPENSATION EXPENSE. General, administrative and stock compensation expense increased $0.1 million, or 9%, to $1.0 million for the three months ended September 30, 2000 from the comparable period in 1999. On a per Mcfe basis, the rate was $0.33 per Mcfe for both periods. For the nine-month period ended September 30, 2000, the general, administrative and stock compensation expense decreased $0.3 million to $3.4 million from $3.7 million for the comparable period in 1999. On a per Mcfe basis, the rate increased from $0.36 per Mcfe for the nine-month period ended September 30, 1999 to $0.39 per Mcfe for the comparable period in 2000 due to production decline. ADVICE ON LIQUIDITY SOLUTIONS. For the three-month period ended September 30, 2000, professional services for advice on the Company's liquidity problems were $0.9 million. For the nine-month period ended September 30, 2000, professional services for advice on the Company's liquidity problems was $2.7 million. NET INCOME (LOSS). Net income of $4.5 million was recorded for the three months ended September 30, 2000, an increase of $8.3 million from the net loss of $3.8 million for the comparable period in 1999. Net income for the nine months ended September 30, 2000 was $1.6 million, an improvement of $16.1 million over the comparable 1999 period. LIQUIDITY AND CAPITAL RESOURCES Liquidity Position The Company has inadequate capital resources to service its debt and meet anticipated capital requirements necessary to maintain and grow its business over the long term. After filing for bankruptcy protection, the Company entered into a post-petition revolving credit facility with Foothill Capital Corporation ("Foothill"), the Company's pre-petition lender, to provide liquidity during the pendency of the Bankruptcy Case. The revolving credit facility is for $30 million, subject to monthly borrowing base adjustments. At September 30, 2000, there were no borrowings outstanding on the facility. The credit facility will terminate once the Plan of Reorganization is consummated. The Company does not presently have adequate capital resources on hand to fund future operations assuming that the Bankruptcy Court approves the PUSA transactions at the confirmation hearing, and the Company continues in operation as a reorganized entity. It is expected that the Company will be capitalized by its ultimate parent, PEL, but the level of funding the Company will receive is not known to the Company. Cash Flow The following table represents cash flow data for the Company for the periods indicated:

15 16 The increase in cash provided by operating activities from 1999 to 2000 is due primarily to higher oil and gas prices and lower interest costs paid in 2000. Cash provided by operating activities in both years was impacted by working capital changes. Cash provided by operating activities before working capital changes in 2000 and 1999 was $15.7 million and $3.3 million, respectively. The cash provided by investing activities in 2000 resulted from the receipt of net proceeds from the sales of certain oil and gas assets net of expenditures on oil and gas exploration and development activities. The cash provided by investing activities in 1999 was due primarily to the receipt of proceeds from the sale of a 50% working interest in certain assets to Apache Corporation. The cash movements in financing activities in 2000 and 1999 consisted of repayments and borrowings under the secured credit facilities. Capital Expenditures During the three-month period ended September 30, 2000, the Company spent $2.9 million in capital and exploration expenditures, and in the nine months ended September 30, 2000 spent $11.4 million. In the comparable periods in 1999, the Company spent $1.8 million and $9.7 million, respectively. To meet anticipated capital requirements during the pendency of the Bankruptcy Case, the Company has obtained post-petition credit from Foothill, which was approved by the Bankruptcy Court on June 20, 2000. See the foregoing discussion in this "Liquidity and Capital Resources" section of this Form 10-Q. Secured Credit Facility On June 20, 2000, the Company entered into a $30 million revolving credit facility with Foothill. Under the facility, outstanding borrowings accrue interest at the reference rate most recently announced by Wells Fargo Bank N.A., (9.5% per annum as of October 31, 2000) plus a margin of 2.5% per annum; the default rate is the reference rate plus 6.5%. The Company is also required to pay an unused line fee of 0.5% of the unused amount available for borrowing, a $10,000 per month service charge and certain other fees and expenses. The Company has paid all interest that is presently due. This credit facility will terminate once the Plan of Reorganization is consummated. Public Senior Subordinated Indebtedness In June 1997 the Company issued $100 million of 9 1/2% Senior Subordinated Notes. The principal is due in a lump sum in June 2007. The 9 1/2% Notes were issued at a discount with a yield to maturity of 9.56% per annum. Interest at the rate of 9.5% per annum is payable semiannually on June 15 and December 15 of each year. The Company did not make the interest payment due in the amount of $4.75 million on the 9 1/2% Notes at December 15, 1999, and is in default under the Indenture governing the 9 1/2% Notes. The Company did not make the interest payment due in the amount of $4.75 million on June 15, 2000. 16 17 The Plan of Reorganization contemplates that this indebtedness will be cancelled when the Plan becomes effective. The bondholders will receive distributions from the liquidating trust based on the proceeds available from the sale of the Company's assets. Subordinate Loans from PUSA PEL, indirectly through PUSA, made an initial cash investment of $11.4 million in the Company and subsequently increased this investment with advances of $18.5 million from an Australian offering of Ordinary Shares in September 1995 and $31.0 million out of the net proceeds from a U.S. offering of ADRs in July 1996. Funds advanced by PUSA historically have been provided substantially in the form of subordinated loans denominated in Australian and US dollars. These loans are subordinated to the payment of both the Foothill credit facility and the 9 1/2% Notes. The biannual interest payments on these loans were not paid in January and July, 2000, and as a result of the Chapter 11 filing, interest has ceased to be accrued as of April 13, 2000. The loans from PUSA do not have mandatory principal payments due until December 31, 2007. Any payments or distributions made by the Company to PEL and PUSA have been for reimbursement of direct expenses incurred in connection with the Company's operations and interest under the subordinated loans. Neither PEL nor PUSA has any commitments to make any further loan advances to the Company. The Plan of Reorganization contemplates that this indebtedness will be cancelled. PUSA will receive the distribution provided for in the Plan--which begins at 3.375% of the amount otherwise available for distribution to the holders of the 9 1/2% Notes up to $60 million. The percentage available to PUSA increases for recoveries to the holders of the 9 1/2% Notes in excess of $60 million. NEW ACCOUNTING PRONOUNCEMENT In June of 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (Statement 133), "Accounting for Derivative Instruments and Hedging Activities". Statement 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Statement 133 requires that all derivatives be recognized as either assets or liabilities in the balance sheet and measured at fair value. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and resulting designation. If certain conditions are met, a derivative may be specifically designated as a "fair value hedge," "cash flow hedge," or a hedge of the foreign currency exposure of a net investment in a foreign operation. Statement 133 amends and supersedes a number of existing Statements of Financial Accounting Standards, and nullifies or modifies the consensus reached in a number of issues addressed by the Emerging Issues Task Force. Statement 133, as amended, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Adoption of Statement 133 on January 1, 2001 is not expected to have a material effect on the Company's financial position or results of operations. 17 18 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Except as described in Note 4 to the unaudited financial statements, there has been no material change to the information disclosed in the Company's most recent Annual Report on Form 10-K. PART II. OTHER INFORMATION. ITEM 1. LEGAL PROCEEDINGS. As reported in the Form 10-Q filed by the Company on May 15, 2000, the Company filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on April 13, 2000. Other than the filing of the Plan Documents with the Bankruptcy Court (see discussion in the section of this Form 10-Q under "Management's Discussion and Analysis of Financial Condition and Results of Operations"), there have not been any material developments in the Bankruptcy Case during the period covered by this Form 10-Q. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. The Company is in default under the indenture governing the 9 1/2% Notes. See discussion in the section of this Form 10-Q under "Management's Discussion and Analysis of Financial Condition and Results of Operations." 18 19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits There were no reports on Form 8-K filed during the quarter covered by this report. The following instruments and documents are included as Exhibits to this Form 10-Q. Exhibits incorporated by reference are so indicated by parenthetical information. Exhibit No. Exhibit 27 Financial Data Schedule 19 20 SIGNATURES 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. Petsec Energy Inc. November 14, 2000 By: /s/ Ross A. Keogh ------------------------------------ Ross A. Keogh Director, Vice President--Chief Financial Officer, and Treasurer (Principal Financial and Accounting Officer) November 14, 2000 By: /s/ James E. Slatten, III ------------------------------------ James E. Slatten, III Director, Vice President--Land and Legal, and Secretary (Duly Authorized Officer) 20 21 INDEX TO EXHIBITS

PETSEC ENERGY INC 10-Q