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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D.C. 20549
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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2001
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: 000-25717
[GRAPHIC OMITTED][GRAPHIC OMITTED]
BETA OIL "&" GAS, INC.
(Exact name of registrant as specified in its charter)
Nevada 86-0876964
(State of Incorporation) (I.R.S. Employer Identification No.)
6120 S. Yale, Suite 813, Tulsa, OK 74136
(Address of principal executive offices) (Zip Code)
(918) 495-1011
(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 ____
As of April 30, 2001, the Registrant had 12,362,951 shares of Common Stock,
$.001 par value, outstanding.
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INDEX
PAGE
PART 1 - FINANCIAL INFORMATION NO.
- ------------------------------------ -------
ITEM 1. Financial Statements
Consolidated Balance Sheets March 31, 2001 (unaudited) and
December 31, 2000..............................................3
Consolidated Statements of Operations for the three months
ending March 31, 2001 and March 31, 2000 (unaudited)...........4
Consolidated Statements of Cash Flows for the three months
ending March 31, 2001 and March 31, 2000 (unaudited)...........5
Notes to Consolidated Financial Statements......................6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................9
Disclosure Regarding Forward-Looking Statements................9
General........................................................9
Liquidity and Capital Resources................................10
Plan of Operation for 2001.....................................10
Comparison of Results of Operations for the three months ended
March 31, 2001 and 2000 (unaudited)............................12
Income Taxes...................................................13
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.......14
PART II. - OTHER INFORMATION
ITEM 1. Legal Proceedings..............................................15
ITEM 2. Changes in Securities..........................................15
ITEM 3. Defaults Upon Senior Securities................................15
ITEM 4. Submission of Matters to a Vote of Security Holders............15
ITEM 5. Other Information..............................................15
ITEM 6. Exhibits and Reports on Form 8-K...............................15
Signatures..................................................................15
PART I
ITEM 1. FINANCIAL STATEMENTS
BETA OIL "&" GAS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 DECEMBER 31, 2000
-------------- -----------------
CURRENT ASSETS: (Unaudited)
Cash $ 1,505,546 $ 1,536,186
Accounts receivable
Oil and gas sales 2,949,212 2,766,405
Other 103,166 95,439
Prepaid expenses 210,827 200,615
------------- ----------------
Total current assets 4,768,751 4,598,645
OIL AND GAS PROPERTIES, at cost (full cost method)
Evaluated properties 46,100,143 43,110,463
Unevaluated properties 13,555,385 13,450,347
Less - accumulated amortization of full cost pool (7,639,659) (6,354,905)
------------- ----------------
Net oil "&" gas properties 52,015,869 50,205,905
OTHER OPERATING PROPERTY AND EQUIPMENT, at cost
Gas gathering system 1,484,212 1,454,212
Support equipment 1,578,695 1,505,496
Other 138,093 114,672
Less - accumulated depreciation (288,367) (158,918)
------------- ----------------
Net other operating property and equipment 2,912,633 2,915,462
OTHER ASSETS 606,564 746,140
------------- ----------------
TOTAL ASSETS $ 60,303,817 $ 58,466,152
============= ================
CURRENT LIABILITIES:
Current portion of long-term debt $ 81,359 $ 89,209
Accounts payable, trade 595,553 629,696
Income taxes payable 274,733 198,650
Interest payable 82,493 -
Future transaction hedge liability 219,457 -
Other accrued liabilities 579,980 147,853
------------- ----------------
Total current liabilities 1,833,575 1,065,408
LONG-TERM DEBT, less current portion 13,808,498 13,814,034
DEFERRED INCOME TAXES 3,851,306 3,526,304
CONTINGENCIES (NOTE 6)
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value, 5,000,000 shares
authorized; none issued or outstanding
Common stock, $.001 par value; 50,000,000 shares authorized;
12,362,951 and 12,340,951 shares issued and outstanding at
March 31, 2001 and December 31, 2000, respectively 12,363 12,341
Additional paid-in capital 46,656,696 46,592,976
Accumulated other comprehensive loss (219,457) -
Accumulated deficit (5,639,164) (6,544,911)
------------- ----------------
Total stockholders' equity 40,810,438 40,060,406
------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 60,303,817 $ 58,466,152
============= ================
The accompanying notes are an integral part of these consolidated financial
statements
BETA OIL "&" GAS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Quarters ended March 31,
2001 2000
---------------- ---------------
REVENUES:
Oil and gas sales $ 4,335,788 $ 940,250
Field services 360,305 -
---------------- ---------------
Total revenue 4,696,093 940,250
---------------- ---------------
COSTS AND EXPENSES:
Lease operating expense 811,523 33,888
Field services 136,041 -
General and administrative 587,442 489,633
Depreciation and amortization expense 1,414,203 561,072
---------------- ---------------
Total costs and expenses 2,949,209 1,084,593
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INCOME (LOSS) FROM OPERATIONS 1,746,884 (144,343)
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OTHER INCOME (EXPENSE):
Interest expense (272,962) (1,096)
Interest income 10,909 20,013
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Total other income (expense) (262,053) 18,917
---------------- ---------------
INCOME (LOSS) BEFORE TAX PROVISION 1,484,831 (125,426)
PROVISION FOR INCOME TAXES (579,084) -
----------------- ---------------
NET INCOME (LOSS) $ 905,747 $ (125,426)
================= ===============
BASIC NET INCOME (LOSS) PER COMMON SHARE $ 0.07 $ (0.01)
================= ===============
DILUTED NET INCOME (LOSS) PER COMMON SHARE $ 0.07 $ (0.01)
================= ===============
COMPREHENSIVE INCOME (LOSS):
NET INCOME (LOSS) $ 905,747 $ (125,426)
OTHER COMPREHENSIVE INCOME:
Transition adjustment related to change in
accounting for derivative instruments
and hedging activities (net of income
taxes) (953,488) -
Reclassification of realized loss on
qualifying cash flow hedges (net of
income taxes) 429,979 -
Unrealized gains on qualifying cash flow
hedges (net of income taxes) 304,052 -
----------------- ---------------
TOTAL COMPREHENSIVE INCOME (LOSS) $ 686,290 $ (125,426)
================= ===============
The accompanying notes are an integral part of these consolidated financial
statements
BETA OIL "&" GAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
FOR THE QUARTERS ENDED MARCH 31,
2001 2000
------------------ ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 905,747 $ (125,426)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,414,203 561,072
Deferred income tax 325,002 -
Change in operating assets and liabilities:
Accounts receivable (190,534) 73,726
Prepaid expenses (10,212) 9,155
Accounts payable, trade (34,143) (44,226)
Income taxes payable 76,083 -
Other accrued expenses 514,620 (1,256)
------------------ ----------------
Net cash provided by operating activities 3,000,766 473,045
------------------ ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas property expenditures (3,094,716) (500,343)
Change in other assets 139,580 (232,119)
Gas gathering and equipment expenditures (126,622) -
------------------ ----------------
Net cash used in investing activities (3,081,758) (732,462)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of warrants and options 79,000 1,116,465
Proceeds from premiums payable 24,442 -
Repayment of premiums payable (34,985) (8,804)
Repayment of notes payable (2,846) -
Increase (decrease) in deferred offering costs (15,259) -
------------------ ----------------
Net cash provided by financing activities 50,352 1,107,661
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NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (30,640) 848,244
CASH AND CASH EQUIVALENTS, at beginning of period 1,536,186 1,448,655
----------------- ----------------
CASH AND CASH EQUIVALENTS, at end of period $ 1,505,546 $ 2,296,899
================= ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for:
Interest $ 190,469 $ 1,096
================ =================
Income taxes $ 161,000 $ -
================ =================
The accompanying notes are an integral part to these consolidated financial
statements
PART I - ITEM 1 (CONTINUED)
FINANCIAL STATEMENTS
BETA OIL "&" GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The accompanying consolidated financial statements of Beta Oil "&" Gas,
Inc. and subsidiaries ("Beta") have been prepared in accordance with
generally accepted accounting principles for interim financial information
and with the instructions of Form 10-Q and Article 10 of Regulation S-X. In
the opinion of management, the accompanying unaudited financial statements
contain all adjustments necessary to present fairly the Company's financial
position as of March 31, 2001 and the results of its operations and cash
flows for the three months ended March 2001 and 2000. Management believes
all such adjustments are of a normal recurring nature. The results of
operations for interim periods are not necessarily indicative of results to
be expected for a full year. Although we believe that the disclosures in
these financial statements are adequate to make the information presented
not misleading, certain information normally included in financial
statements and related footnotes prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
the rules and regulations of the Securities and Exchange Commission. The
December 31, 2000 consolidated balance sheet was derived from audited
financial statements, but do not include all disclosures required by
generally accepted accounting principles. The accompanying financial
statements should be read in conjunction with the audited financial
statements as contained in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2000 that was filed April 2, 2001.
Note 2. On August 30, 2000, we closed the previously reported Agreement and Plan
of Merger to acquire 100% interest in Red River Energy, Inc. ("RRE"). The
acquisition was consummated through a merger ("Merger") between Beta
Acquisition Company, Inc., a wholly owned subsidiary of Beta, and RRE
following approval of the Agreement. The effective date of the Merger was
September 1, 2000. For additional information please refer to our Annual
Report on Form 10-K for the fiscal year ended December 31, 2000 that was
filed April 2, 2001.
Note 3. For the three months ended March 31, 2001, gross proceeds of $79,000
have been realized from the exercise of stock warrants and options to
purchase our common stock.
Note 4. The Company follows the full-cost method of accounting for oil and gas
properties. Under this method, all productive and nonproductive costs
incurred in connection with the exploration for and development of oil and
gas reserves are capitalized. Such capitalized costs include lease
acquisition, geological and geophysical work, delay rentals, drilling,
completing and equipping oil and gas wells including salaries, benefits and
other internal costs directly attributable to the activities. Costs
associated with production and general corporate activities are expensed in
the period incurred. Interest costs related to unproved properties and
properties under development are also capitalized to oil and gas
properties. Normal dispositions of oil and gas properties are accounted for
as adjustments of capitalized costs, with no gain or loss recognized.
Depreciation, depletion, and amortization of proved oil and gas properties
is computed on the units-of-production method based upon estimates of
proved reserves with oil and gas being converted to a common unit of
measure based on the relative energy content. Unproved oil and gas
properties, including any related capitalized interest costs, are not
amortized, but are assessed for impairment either individually or on an
aggregated basis.
Note 5. NET INCOME (LOSS) PER COMMON SHARE:
The following represents the calculation of net income (loss) per
common share:
For the three months
ended March 31
2001 2000
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BASIC
Net income (loss) applicable to common shareholders ...................... $ 905,747 $ (125,426)
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Weighted average number of common shares ................................. 12,353,439 9,486,113
============== ============
Basic earnings (loss) per share .......................................... $ .07 $ (0.01)
============== ============
DILUTED
Net income (loss) available to common shareholders ....................... $ 905,747 $ (125,426)
============== ============
Weighted average number of common shares ................................. 12,353,439 9,486,113
Common stock equivalent shares representing shares issuable upon exercise
of stock options....................................................... 24,872 --
Common stock equivalent shares representing shares issuable upon exercise
of Warrants............................................................. 433,669 --
-------------- ------------
Weighted average number of shares used in calculation of diluted income
(loss) per share.......................................................... 12,811,980 9,486,113
============== ============
Diluted earnings (loss) per share ........................................ $ .07 $ (0.01)
============== ============
Note 6. CONTINGENCIES
On November 29, 2000 in the District Court of Tulsa County, State of
Oklahoma, a Petition was filed by ONEOK Energy Marketing and Trading
Company, L.P. ("ONEOK"), plaintiffs, naming the Company and two
wholly-owned subsidiaries, Red River Field Services, L.L.C. and Red
River Energy, L.L.C. ("Beta"), as defendants. In the lawsuit, the
plaintiff alleges that Beta discontinued selling gas to the plaintiff
under a fixed price agreement and sold the gas instead to other
suppliers. Beta filed a counterclaim on January 24, 2001, alleging that
the contract had been terminated pursuant to its terms for nonpayment
by the plaintiff for gas supplied prior to termination, and seeking
damages for the unpaid charges. Should the litigation be resolved
adversely to Beta, the net impact to Beta is estimated to be as of June
30, 2001 approximately $270,000 plus costs and litigation expense, if
recoupment from various other working interest owners in the affected
oil and gas properties is successful. If Beta is unable to recoup such
damages, the net adverse impact to Beta is estimated to be
approximately $670,000 plus costs and litigation expense.
Note 7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 (SFAS No.133),
"Accounting for Derivative Instruments and Hedging Activities." The
FASB has subsequently issued Statements No. 137 and Statement No. 138
which are amendments to SFAS No. 133. SFAS No. 133, as amended, is
effective for fiscal years beginning after June 15, 2000 and cannot be
applied retroactively. We adopted SFAS No. 133, as amended, beginning
January 1, 2001.
SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. All derivatives will
be recorded on the balance sheet at fair value and changes in the fair
value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, depending on
the type of transaction. Our derivative contract consists of a cash
flow hedge transaction in which it hedges the variability of cash flow
related to a forecasted transaction. Changes in the fair value of these
derivative instruments will be recorded in other comprehensive income
and will be reclassified as earnings in the periods in which earnings
are impacted by the variability of the cash flows of the hedged item.
The ineffective portion related to basis changes and time value of all
hedges will be recognized in current period earnings.
In accordance with the transition provisions of SFAS No. 133, on
January 1, 2001, in connection with Beta's hedging activities, we
recorded as cumulative effect adjustments a loss of $953,488 (net of
$635,658 income tax) in accumulated other comprehensive loss and a gain
of $734,031 (net of $489,353 income tax) for the three-month period
ended March 31, 2001 earnings. In addition, the adoption resulted in
the recognition of a derivative liability on the balance sheet at
January 1, 2001 and March 31, 2001 of $953,488 and $219,457,
respectively. Based on the derivative contract date, we expect to
reclassify all of the transition adjustment recorded in accumulated
other comprehensive loss to earnings in the second quarter of 2001.
Part I - Continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion is to inform you about our financial position,
liquidity and capital resources as of March 31, 2001 and December 31, 2000, and
the results of operations for the three months ended March 31, 2001 and 2000.
Disclosure Regarding Forward-Looking Statements
Included in this report are forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements, other than
statements of historical facts, included in this Form 10-Q that address
activities, events or developments that the Company expects or anticipates will
or may occur in the future are forward-looking statements. The words "believes,"
"intends," "expects," "anticipates," "projects," "estimates," "predicts" and
similar expressions are also intended to identify forward-looking statements.
Although we believe that the expectations reflected in such forward-looking
statements are reasonable, we can give no assurance that such expectations
reflected in such forward-looking statements will prove to have been correct.
All forward-looking statements contained in this report are based on
assumptions believed to be reasonable.
These forward-looking statements include statements regarding:
o Estimates of proved reserve quantities and net present values of those
reserves
o Reserve potential
o Business strategy
o Capital expenditures - amount and types
o Expansion and growth of our business and operations
o Expansion and development trends of the oil and gas industry
o Production of oil and gas reserves
o Exploration prospects
o Wells to be drilled, and drilling results
We can give no assurance that such expectations and assumptions will prove
to be correct. Reserve estimates of oil and gas properties are generally
different from the quantities of oil and natural gas that are ultimately
recovered or found. This is particularly true for estimates applied to
exploratory prospects. Additionally, any statements contained in this report
regarding forward-looking statements are subject to various known and unknown
risks, uncertainties and contingencies, many of which are beyond our control.
These and other risks and uncertainties, which are described in more detail in
our Annual Report on Form 10-K filed with the Securities and Exchange
Commission, could cause actual results and developments to be materially
different from those expressed or implied by any of these forward-looking
statements. Such things may cause actual results, performance, achievements or
expectations to differ materially from the anticipated results, performance,
achievements or expectations.
General
The energy sector experienced expansion in 2000 due to higher than expected
oil and natural gas prices and increased demand for oil and natural gas due to
economic growth and historic below-normal temperatures in the last quarter of
2000. To date, oil and natural gas prices have eased but remain sufficiently
high to promote continued expansion of exploration and production. However,
drilling in many regions has been constrained by limited availability of
manpower and equipment, although reports of new equipment available for service
may ease the constraint in the last half of 2001.
For 2000, we experienced a record performance due to the higher oil and
natural gas prices, as previously discussed, and increased production generated
from our successful merger and ongoing exploration program. For 2001, we expect
to see increased production from our exploration and development efforts and
expect energy prices to remain at a level that will yield above-historical
average returns on our investments. However, historically speaking, commodity
prices are extremely volatile and pricing trends are extremely difficult to
project. Should oil and natural gas prices decline unexpectedly and/or our
exploration efforts are unsuccessful, our actual 2001 financial results would
not meet our 2001 expectations.
Liquidity and Capital Resources
A company's liquidity is the amount of time expected to elapse until an
asset can be converted to cash or conversely until a liability has to be paid.
Liquidity is one indication of a company's ability to meet its obligations or
commitments. Historically, our major sources of liquidity have come from
internally generated cash flow from operations, funds generated from the
exercise of warrants and our initial public offering.
Our working capital was a surplus of $2,935,176 at March 31, 2001 compared
to a surplus of $3,533,237 at December 31, 2000. The 17% decrease in working
capital was primarily due to an increase in capital expenditures associated with
our drilling activity in the first quarter of 2001. We participated in the
drilling of ten wells during the three-month period ended March 31, 2001, for
which approximately $2.1 million was expended. Additionally, approximately $.9
million was expended for undeveloped acreage. Our cash flow from operations for
the three-month period ended March 31, 2001 was significantly higher compared to
the same period for 2000 due to a significant increase in the price received for
natural gas and increased production volumes, which will be discussed in detail
below in "Comparison of Results of Operations Quarter Ended March 31, 2001
Compared to Quarter Ended March 31, 2000.
The following table represents the sources and uses of cash for the
quarters indicated.
For the quarters ended
March 31,
2001 2000
------------- ---------------
Beginning cash balance $ 1,536,186 $ 1,448,655
Sources of cash:
Cash provided from operations 3,000,766 473,045
Cash provided from financing activities 50,352 1,107,661
Cash provided from other assets 139,580 -
------------- ---------------
Total sources of cash including cash on hand 4,726,884 3,029,361
Uses of cash:
Oil and gas expenditures (3,094,716) (500,343)
Other assets (including advance to industry partners) (126,622) (232,119)
------------- ---------------
Total uses of cash (3,221,338) (732,462)
------------- ---------------
Ending cash balance $ 1,505,546 $ 2,296,899
============= ===============
For the three months ended March 31, 2001, funds on hand and net funds
received from operations and from the exercise of warrants were sufficient to
meet our capital requirements.
During the quarter ended March 31, 2001, we expended approximately $2.1
million to fund the drilling of ten exploratory prospects of which seven were
successful. By region, the drilling results were as follows: Jackson County,
Texas - $667,000 expended on four Frio wells (three discoveries and one dry
hole) and one Yegua well which was a dry hole; Waller County, Texas - $138,000
expended on two Miocene wells which were discoveries; McIntosh County, Oklahoma
- - $100,000 expended on one Cromwell well which was a dry hole and one Wilcox
which was a discovery; and Terrebonne Parish, Louisiana - $1,121,000 expended on
one Duvall well completed as a discovery. Additionally, $900,000 was expended
for the acquisition of additional undeveloped and unevaluated acreage in the
South Texas and Louisiana areas during the three months ended March 31, 2001.
Plan of Operation for 2001
For the balance of 2001, we expect to fund our capital requirements from
existing working capital, net cash flow from operations (after general and
administrative expense), the exercise of common stock purchase warrants and
through a private placement offering of convertible preferred stock. We expect
the private placement to take place in the second quarter of 2001.
Our projected capital expenditures for the balance of 2001 are as follows:
o $6.2 million for drilling and completion costs associated with our South
Texas and Louisiana prospects.
o $1.9 million associated with drilling, completion and workovers in the
Mid-Continent Region. $1.5 million is for a saltwater disposal well and a
re-drill project for the WEHLU unit.
o $4 million for the exploration of a prospect located in the Wind River
Basin, Wyoming. We acquired this prospect in the first quarter of 2001 with
management reviewing the prospect potential since December 2000.
o $.1 million for leasehold acquisition and seismic.
As with any projection, the timing and amounts can vary. The timing for
drilling wells has been more difficult to estimate due to drilling rig
availability. Generally, funds must be advanced within thirty days or less after
our election to participate.
Our planned capital expenditures and administrative expenses could exceed
those amounts budgeted and could exceed our cash from all sources. Due to the
volatility of natural gas and crude oil prices, while our capital expenditures
are on budget we could see a significant deficiency in cash flow from operations
should these prices materially decrease. If our current production rate
decreases significantly this could also create a material deficiency in cash
flow from operations. If any one or all of these events happen, it would be
necessary for us to raise additional funds. It is anticipated that additional
funds could be raised from one or more of the following sources:
1) We have approximately 375,725 callable common stock purchase warrants
outstanding exercisable at a price of $7.50 per share. We are able to
call these warrants at any time after our common stock has traded on
Nasdaq at a market price equal to or exceeding $10.00 per share for 10
consecutive days which was achieved in July 2000. It is our intent to
call all of these warrants at such time, if and when, the cash is
needed to fund capital requirements. We will receive proceeds equal to
the exercise price times the number of shares which are issued from the
exercise of warrants net of commission to the broker of record, if any.
We could realize net proceeds of approximately $2,814,500 from the
exercise of all of these warrants. There is no assurance that any
warrants will be exercised or that we will ever realize any proceeds
from the $7.50 warrant calls.
2) We currently have approximately $500,000 of available borrowing
capacity under our revolving credit facility.
3) We may seek mezzanine financing, if available, on terms acceptable to
us. Mezzanine financing usually involves debt with a higher cost of
capital as compared to conventional bank financing. We would seek
mezzanine financing in the range of $1,000,000 to $5,000,000. We would
seek to use this means of financing in the event that a particular
acquisition did not have sufficient proved producing reserve collateral
to support a conventional bank loan.
4) We may realize additional cash flow from oil and gas wells to be
drilled, if found to be productive. We own working interests in wells
that are currently producing and in additional wells, which are
presently being completed and equipped for production. We currently
estimate that during the balance of 2001 the wells will generate
approximately $16 million of net cash flow at present commodity prices
after deducting lease-operating expenses of approximately $4 million.
5) We may realize additional cash from issuance of Convertible Preferred
Stock in a Private Placement that we have extended to June 29, 2001. We
are seeking a minimum of $1,500,000 and a maximum of $5,000,000 in
units, with each unit consisting of one share of Series A 8%
Convertible Preferred Stock and one-half warrant to purchase one share
of common stock. There is no assurance that we will complete any
portion of this offering.
If the above additional sources of cash are insufficient or do not
materialize on terms acceptable to us, we would expect to reduce the scope of
our business activities. If we are unable to fund planned expenditures within a
thirty to sixty-day period after a well is proposed for drilling, it may be
necessary to:
1) Forfeit our interest in wells that are proposed to be drilled;
2) Farm-out our interest in proposed wells;
3) Sell a portion of our interest in proposed wells and use the sale
proceeds to fund our participation for a lesser interest; or
4) Reduce general and administrative expenses.
The timing of most of our capital expenditures is discretionary. We have no
material long-term commitments associated with our capital expenditure plans or
operating agreements. Consequently, we have a significant degree of flexibility
to adjust the level of such expenditures as circumstances warrant. The level of
capital expenditures will vary in future periods depending on the success we
experience on planned future exploratory drilling activities, gas and oil price
conditions and other related economic factors. Accordingly, we have not prepared
an estimate of capital expenditures for future periods beyond 2001.
Our long-term goal is to continue the pattern of growing the Company by
accumulating oil and gas reserves through acquisition and drilling during the
next three to five year period, and then sell the Company. In the event we
cannot raise additional capital, or the industry market is unfavorable, we may
have to slow or alter our long-term goal accordingly.
Comparison of Results of Operations
Quarter ended March 31, 2001 Compared to Quarter ended March 31, 2000
We have reported net income of $905,747 for the three-month period ended
March 31, 2001 compared to a net loss of ($125,426) for the same period ended
2000. Our results of operations have been significantly impacted by our ability
to increase production through our exploration activities and acquisition of oil
and gas properties. Also, increases in natural gas and crude oil prices have
also significantly impacted these results.
The following table summarizes key items of comparison and their related
increase (decrease) for the periods indicated.
In Thousands ......................... Quarters Ended March 31 $-Increase %-Increase
2001 2000 (Decrease) (Decrease)
--------- --------- ------------- ----------
Net income (loss) .................... $ 905.7 $ (125.4) $ 1,031.1 --
Oil and gas sales .................... 4,335.8 940.3 3,395.5 361%
Field service income ................. 360.3 -- 360.3 -- 360.3
Operating expense .................... 811.5 33.9 777.6 2294%
Field service expense ................ 136.0 -- 136.0 --
G"&"A expense .................... 587.4 489.6 97.8 20%
Depletion - Full cost ................ 1,284.8 558.4 726.4 130%
Depreciation - Field Service and Other 129.4 2.7 126.7 4693%
Interest expense ..................... 273.0 1.1 271.9 24718%
Income tax provision ................. 579.1 -- 579.1 --
Production:
Natural Gas - Mcf .................... 611.4 331.8 279.6 84%
Crude Oil - Bbl ...................... 25.3 1.1 24.2 2200%
Natural Gas Equivalent - Mcfe ........ 763.4 338.6 424.8 125%
$ per unit:
Ave. gas price - Mcf ................. $ 5.93 $ 2.74 $ 3.19 116%
Ave. oil price - Bbl ................. $ 28.13 $ 27.88 $ 0.25 1%
Ave. operating expense - Mcfe ........ $ 1.06 $ 0.10 $ 0.96 960%
Ave. G"&"A - Mcfe ................ $ 0.77 $ 1.45 $ (0.68) -47%
For the three months ended March 31, 2001 oil and gas sales increased
$3,395,500, or 361%, to $4,335,800 from the same period ended 2000. As
previously discussed, substantially higher natural gas prices favorably impacted
our natural gas sales for the quarter. The higher natural gas prices during the
quarter ended 2001 resulted in additional revenues of $1,950,000 or 58% of the
increase in oil and gas sales. Increased production volume of natural gas and
crude oil accounted for the remaining 42% of the increase in oil and gas sales
for the quarter. Of the increase in sales due to volume, natural gas comprised
53% of the increase while crude oil accounted for the remaining 47%. The
increase in the production volume for the three months ended March 31, 2001,
compared to the same period for 2000, was due to acquired production in the
Merger.
Generally, we sell our natural gas to various purchasers on an
indexed-based price. These indices are generally affected by the NYMEX - Henry
Hub spot price. We use hedges on a limited basis to lessen the impact of price
volatility. However, fixed pricing from hedges only cover 23% of our production
on an equivalent Mcf basis. Based on our natural gas production for the three
months ended March 31, 2001, a change in the average natural gas price realized
by the Company of $1.00 per Mcf would have resulted in an approximate $600,000
reduction in net income before income taxes.
Operating expenses, including production and ad valorem taxes, increased
approximately $777,600 or 2294%, to $811,500 for the quarter ended March 31,
2001. The increased expenses were due to approximately $640,000 of additional
operating expenses associated with the Merger properties and the increase in
number of wells put on production during 2000. The average operating expense for
the Merger oil and gas wells was $1.32 per equivalent Mcf for the three-month
period ended March 31, 2001. This operating cost per equivalent Mcf is
significantly higher than the quarterly average for the remaining properties of
$.62 per equivalent Mcf due to the Merger properties being older in production
life and the necessity to dispose of a significant volume of salt water
produced. Additionally, due to the age of the properties, repair and maintenance
costs are higher than that of the other properties.
G"&"A expenses for the three months ended March 31, 2001 increased in
absolute dollars by approximately $97,800, but decreased $.68 on a per
equivalent Mcf basis from the same period in 2000 to $.77 per equivalent Mcf.
The increase in G"&"A for the quarter ended 2001 compared to the same period for
2000 was due to higher salaries and associated payroll taxes. Additional
personnel have been hired since March 31, 2000 resulting in higher payroll and
associated personnel costs.
Depletion and depreciation expense increased $853,200 or 152%, to
$1,414,200 for the three months ended March 31, 2001 from $561,000 for the same
period in 2000. Depletion for oil and gas properties is calculated using the
"Unit of Production" method, which essentially amortizes the capitalized costs
associated with the evaluated properties based on the ratio of production volume
for the current period to total remaining reserve volume for the evaluated
properties. Hence, due to the increase in production volume for the quarter
ended March 31, 2001 compared to the same period ended for 2000, depletion
expense was higher by approximately $726,000. Depreciation expense for the three
months ended March 31, 2001 increased due to gathering assets acquired in the
Merger. There were no comparable assets at March 31, 2000.
Interest expense increased for the quarter ended March 31, 2001, compared
to the same period 2000 as a result of the debt acquired in the Merger.
Income Taxes
As of March 31, 2001, we had available, to reduce future taxable income, a
tax net operating loss carryforward of approximately $11,624,000, which expires
in the years 2013 through 2020. Utilization of the tax net operating loss
carryforward may be limited in the event a 50% or more change of ownership
occurs within a three-year period. The tax net operating loss carryforward may
be limited by other factors as well. As of March 31, 2001, we have a deferred
tax liability of approximately $3,851,306.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
We are exposed to market risk related to adverse changes in oil and gas
prices. Our oil and gas revenues can be significantly affected by volatile oil
and gas prices. This volatility can be mitigated through the use of oil and gas
derivative financial hedging instruments. Currently, we have derivative
financial instruments in place to mitigate the fluctuations in gas price. The
hedged volume represents approximately 22% of our gas equivalent production and
is hedged until July 2001. Another 10% of our gas equivalent production was
committed to a twelve-month fixed price contract, which was in effect until July
2001. However, in October 2000, we ceased deliveries to the purchaser due to the
non-performance of payment. No further deliveries have been made under this
contract and said contract is currently in litigation. The remainder of our
production is not hedged and we may continue to experience wide fluctuations in
oil and gas revenues as a result. We are also exposed to market risk related to
adverse changes in interest rates. This volatility could be mitigated through
the use of financial derivative instruments. Currently, we do not have any
derivative financial instruments in place to mitigate this potential risk.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 6 to Consolidated Financial Statements.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of the shareholders in the first
quarter of 2001.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) No exhibits are filed with this report:
(b) There were no reports filed on Form 8-K during the quarter ended
March 31, 2001.
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 who is duly authorized.
BETA OIL "&" GAS, INC.
Date: May 8, 2001 By /s/ Joseph L. Burnett
------------------------
Joseph L. Burnett
Chief Financial Officer and
Principal Accounting Officer
