Costilla Reports Status of Bank Loan Payments; Results of Second Quarter Reported; Agreement with Prize Energy to Provide New Exploration Opportunities South Texas Farmout Well Successfully Completed, Producing 7.5 Mmcfe Per Day

MIDLAND, Texas, Aug. 12 /PRNewswire/ -- Costilla Energy, Inc. (Nasdaq: COSE) reported today that it has been unable to conclude negotiations with its secured lenders in connection with an extension of payments due under its bank credit facility, and has not made certain payments required by the terms of the credit facility. The Company declined to accept a modification to its loan agreement that would have required payment of an amendment fee out of its otherwise available cash as a condition of obtaining an extension. The Company's bank group has not taken any action with respect to the default, and the Company believes that any action by the banks to accelerate the maturity of the bank debt is unlikely. Costilla is continuing discussions with its secured lenders, holders of its 10 1/4% Senior Notes and holders of its convertible preferred stock with respect to its long-term, comprehensive plan to restructure the Company's financial obligations. Additionally, the Company is continuing to work with its trade creditors to assure its ongoing operations. Costilla also reported results of operations for the second quarter of 1999. For the quarter ended June 30, 1999, Costilla recorded negative cash flow(1) of $91,000, or $0.01 per share, and a net loss applicable to common equity of $16.8 million, or $1.20 per share. The net loss includes a non-cash charge of approximately $9.2 million as a result of the impairment of oil and gas properties(2) resulting primarily from the near term expirations of certain undeveloped leasehold acreage in East Texas to which proved undeveloped reserves had previously been assigned, and a non-cash loss of $1.8 million resulting from certain derivative contracts that were not a hedge or did not fully qualify as a hedge. These results compare with cash flow of $2.0 million, or $0.20 per share, and a net loss applicable to common equity of $9.0 million, $0.90 per share, for the quarter ended June 30, 1998. Adjusted EBITDA(3) for the second quarter of 1999 was $5.3 million compared with $6.8 million for the quarter ended June 30, 1998. The Company produced 4.5 Billion cubic feet of natural gas and 227,000 barrels of crude oil, or a total of approximately 5.9 Billion cubic feet of natural gas equivalent (Bcfe) for the second quarter of 1999, an average rate of approximately 64.5 Million cubic feet of natural gas equivalent (Mmcfe) per day. This compares with 7.2 Bcfe, or approximately 78.7 Mmcfe per day for the second quarter of 1998. The decline in production is attributable to the sale of Rocky Mountain assets during the first half of 1999, and the Company's curtailed drilling program beginning with the fourth quarter of 1998. During the second quarter of 1999, Costilla realized an average net gas price of $2.06 per thousand cubic feet (Mcf) which included $0.15 per Mcf from hedging. The Company sold oil at an average price of $13.31 per barrel, net of a hedging cost of $1.53 per barrel. In the second quarter of 1998, Costilla realized net prices of $2.15 per Mcf of gas, and $15.42 per barrel of oil, which included $0.11 per Mcf and $4.46 per barrel respectively from hedging. Costilla's oil and gas revenues for the quarter ended June 30, 1999 totaled $12.3 million, including $304,000 in net hedging revenue. Oil and gas revenues for the second quarter of 1998 were $16.7 million, including $2.7 million as a result of oil and gas hedges. For the second quarter of 1999, the Company reduced its lease operating expenses to $0.63 per Mcfe excluding production taxes, from $0.89 per Mcfe for the comparable quarter of 1998. "The results of our efforts to reduce LOE have been very rewarding," said Henry G. Musselman, Costilla's Chief Operating Officer. "On a per unit basis, adjusted for non-recurring expenses, our operations have become more efficient in each of the last five quarters. This noteworthy trend demonstrates our commitment to cutting costs." The Company also reported its mid-year reserve estimates. Following property dispositions since year-end, revisions to prior estimates due to performance and pricing, and production for the first two quarters of 1999, Costilla reported proven reserves at July 1, 1999 of 115.4 Bcfe, with a PV-10 value of $105.7 million. The estimates are based on SEC prices as of June 30, 1999, with adjustments for the Company's current hedging position. Costilla announced that it has obtained exploration rights to certain oil and gas properties and other consideration from Prize Energy Corp. in exchange for due diligence data related to properties that Prize recently acquired from Pioneer Natural Resources Company. Prize's acquisition from Pioneer includes most of the properties previously included in the transaction between Costilla and Pioneer, which was terminated in April. Cadell Liedtke, Chairman of Costilla's Board of Directors said, "We are very pleased with our agreement with Prize Energy with whom we look forward to a very beneficial relationship. Our arrangement avails Costilla to additional opportunities in core areas where our exploration efforts have proven to be very successful. While we are not positioned to exploit these opportunities at the present time, we look forward to doing so following our financial restructuring." Costilla also announced the recent completion of the Northington #1, which is currently producing at the rate of 7.5 Mmcfe per day. The Company has the option of increasing its 4.17 percent over-riding royalty interest to a 33.33 percent working interest (26.12 percent net revenue interest) after cumulative production has reached 400 Mmcfe. A Costilla farmout operated by Walter Oil & Gas Corporation, the Northington #1 is drilled to the upper Cook Mountain formation in Wharton County, Texas. Costilla Energy, Inc. is an independent oil and gas company with operations in South and East Texas and the Permian Basin of West Texas and Southeastern New Mexico. Headquartered in Midland, Texas, the Company and its predecessors have been in business since 1988. The Company's common stock is traded on the Nasdaq National Market under the symbol COSE. Additional information about Costilla is available on the Internet at http://www.costillaenergy.com. (1) Cash flow is the net loss for the period, plus deferred taxes, depreciation, depletion and amortization, impairment of oil and gas properties, exploration and abandonments, other non-cash items, and extraordinary items. (2) In accordance with Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and Assets to be Disposed Of, an impairment loss is indicated if the sum of the expected undiscounted future cash flows, on a depletable basis, is less than the carrying amount of oil and gas assets. The impairment loss is the amount by which the carrying amount of the asset exceeds the fair value of the asset, based upon discounted future net cash flows. (3) Adjusted EBITDA is earnings before income taxes, interest, depreciation, depletion and amortization, impairment of oil and gas properties, exploration and abandonments, other non-cash items and extraordinary items. Certain statements in this news release constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of Costilla Energy, Inc. to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: the volatility of oil and gas prices; the Company's ability to replace its oil and gas reserves; the availability of capital resources; the reliance upon estimates of proved reserves; operating hazards and uninsured risks; competition; government regulation; and the ability of the Company to implement its business strategy. Additional information is available in the Company's filings with the Securities and Exchange Commission, which are incorporated by reference as though fully set forth herein. SUMMARY FINANCIAL AND OTHER DATA (in thousands, except financial data) Three months ended Six months ended June 30, June 30, 1999 1998 1999 1998 Production Oil (MBbl) 227 505 586 1,049 Gas (Mmcf) 4,508 4,130 9,291 7,562 MBOE 978 1,193 2,135 2,309 Mmcfe 5,870 7,160 12,807 13,856 Average Net Sales Price Oil (per Bbl) $ 13.31 $ 15.42 $ 11.51 $ 15.39 Gas (per Mcf) $2.06 $2.15 $1.97 $ 2.10 Revenues Oil $ 3,015 $ 7,790 $ 6,740 $ 16,152 Gas $ 9,273 $ 8,880 $ 18,312 $ 15,863 Net loss $(16,811) $ (8,977) $(71,739) $(16,615) Per share - basic(A) $(1.20) $ (0.90) $(5.34) $ (1.66) Cash Flow(B) $(91) $2,000 $(1,577) $ 4,065 Per share - basic $(0.01) $0.20 $(0.12) $ 0.41 Per share - diluted as if preferred stock converted $(0.00) $0.18 $(0.09) $ 0.38 Adjusted EBITDA(C) $ 5,312 $6,806 $ 8,656 $ 13,416 Adjusted EBITDA/ Interest 0.7x 1.4x 0.7x 1.4x Weighted average shares - basic 14,025 9,981 13,423 10,027 Weighted average shares - as if preferred stock converted 18,212 11,223 17,602 10,651 (A) Earnings per share - diluted will not be presented in GAAP financial statements since an assumed conversion of the preferred stock would be anti-dilutive to the net loss reported. (B) Net loss plus deferred taxes, depreciation, depletion and amortization, impairment of oil and gas properties, exploration and abandonments, other non-cash items, and extraordinary items. (C) Net loss plus income taxes, interest, depreciation, depletion and amortization, impairment of oil and gas properties, exploration and abandonments, other non-cash items, and extraordinary items. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Three months ended Six months ended June 30, June 30, 1999 1998 1998 1997 Revenues: Oil and gas sales $ 12,288 $ 16,670 $25,052 $32,015 Interest and other 5 155 16 360 Other 253 --- 251 337 12,546 16,825 25,319 32,712 Expenses: Oil and gas production 4,713 7,441 10,718 14,226 General and administrative 2,446 2,577 5,366 5,070 Exploration and abandonments 412 2,078 1,531 5,228 Depreciation, depletion and amortization 5,205 8,305 10,387 14,364 Loss on termination of purchase option 74 --- 47,562 --- Impairment of oil and gas properties 9,154 --- 9,154 --- Loss on investments 1,793 --- 1,793 --- Interest 5,560 5,094 10,547 9,833 29,357 25,495 97,058 48,721 Loss before Extraordinary item (16,811) (8,670) (71,739) (16,009) Extraordinary loss resulting from early extinguishment of debt --- --- --- (299) Net loss (16,811) (8,670) (71,739) (16,308) Cumulative preferred stock dividend $ --- $ 307 $ 1,000 $ 307 Loss before extraordinary item applicable to common equity $(16,811) $ (8,977) $(72,739) $(16,316) Net loss applicable to common equity $(16,811) $ (8,977) $(72,739) $(16,615) Loss per share: Loss before extraordinary item $ (1.20) $ (0.90) $ (5.42) $ (1.63) Extraordinary loss resulting from early extinguishment of debt --- --- --- (0.03) Net loss $ (1.20) $ (0.90) $ (5.42) $ (1.66) Weighted average shares outstanding 14,025 9,981 13,423 10,027 SUMMARY CONSOLIDATED BALANCE SHEETS (in thousands) June 30, December 31, 1999 1998 ASSETS Current assets: Cash $ 3,054 $ 5,251 Other current assets 8,848 12,041 Total current assets 11,902 17,292 Net property, plant and equipment, at cost 93,999 185,553 Other assets 7,709 8,109 Total $ 113,610 $ 210,954 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities $47,687 $75,626 Long-term debt, less current maturities 181,665 181,780 Other noncurrent liabilities --- --- Stockholders' equity (115,742) (46,452) Total Liabilities and Stockholders' Equity $ 113,610 $ 210,954