Pacific Energy Resources Ltd. has announced the filing of its restated financial results for the first quarter of 2008.
As previously disclosed, the Company is in violation of covenants contained in credit and swap agreements with its lenders. The covenant violations provide the lenders the right to demand repayment; however, they have not demanded repayment or waived the covenant violations. The Company and the lenders are currently negotiating amendments to the agreements.
The Company has re-examined the accounting treatment in light of the delay in completing its negotiations with its lenders and now concludes that the more appropriate accounting treatment is to record the notes payable and derivative liability balances as current rather than long term liabilities as of March 31, 2008. Accordingly, it is necessary to record in the first quarter of 2008 a $48.4 million expense for the non-cash write-off of deferred financing costs and non-cash accelerated expense for the accretion of discount, both required in order to bring the carrying amount of the debt up to its face value. Formerly, these amounts would have been expensed over the remaining term of the debt. The acceleration of this expense eliminated a $5.8 million expense in the second quarter of 2008.
Based on subsequent discussions with its lenders, the Company continues to believe it will obtain the covenant violation waivers and that it will obtain satisfactory covenant amendments, although there is no assurance this will be achieved.
The Company's June 30, 2008 debt balance pursuant to its Alaska and Beta credit agreements is $470 million, reflecting the debt portion of the funding of acquisitions of the Alaska assets in August 2007 and the Beta Field in March 2007, and the funding of the first stages of a significant capital expenditure program to develop these assets to increase production. Interest expense totaled $24.5 million for the quarter with $7.1 million being non-cash. The Company plans to reduce the debt amount by 20-25% during 2008. The first part of this reduction recently occurred, with $45 million of proceeds from the July 2008 asset sale used to repay a portion of this indebtedness. In addition, the Company is working towards the establishment of a surety line to allow it to replace about half of the approximate $100 million in cash it has on deposit for abandonment liability and performance deposits. If the Company is able to secure a new surety line, restricted cash freed up as a result thereof would also be used to repay a portion of this indebtedness.
Increasing production with the resultant increase in cash flow will also contribute to reducing the Company's leverage ratio. Further alternatives to reduce the ratio will likely include additional asset sales and securing third party investors for a portion of the capital program, which would allow the Company to share in increased production with lower up-front investment.
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