CONFORMED COPY
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities and Exchange Act of 1934
For the period ended June 30, 2001
OR
[ ] Transition Report Pursuant to Section 13 of 15(d) of
the Securities and Exchange Act of 1934
For the transition period from to
Commission file number 0-7246
I.R.S. Employer Identification Number 95-2636730
PETROLEUM DEVELOPMENT CORPORATION
(A Nevada Corporation)
103 East Main Street
Bridgeport, WV 26330
Telephone: (304) 842-6256
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
Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date: 16,244,844 shares
of the Company's Common Stock ($.01 par value) were outstanding
as of June 30, 2001.
PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Independent Auditors' Review Report 1
Condensed Consolidated Balance Sheets -
June 30, 2001 and December 31, 2000 2
Condensed Consolidated Statements of Income - Three
Months and Six Months Ended June 30, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows- Six
Months Ended June 30, 2001 and 2000 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
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PART I - FINANCIAL INFORMATION
Independent Auditors' Review Report
The Board of Directors
Petroleum Development Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of Petroleum Development Corporation
and subsidiaries as of June 30, 2001, and the related condensed consolidated statements of income and cash flows for the
three-month and six-month periods ended June 30, 2001 and 2000. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American Institute of Certified Public
Accountants. A review of interim financial information consists principally of applying analytical review procedures to
financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially
less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the condensed
consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted
in the United States of America.
We have previously audited, in accordance with auditing standards generally accepted in the United States of
America, the consolidated balance sheet of Petroleum Development Corporation and subsidiaries as of December 31, 2000
and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated March 8, 2001, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 2000 is fairly presented, in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
KPMG LLP
Pittsburgh, Pennsylvania
August 8, 2001
PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 2001 and December 31, 2000
ASSETS
2001 2000
(Unaudited)
Current assets:
Cash and cash equivalents $ 26,349,900 $ 46,872,000
Accounts and notes receivable 16,958,300 23,648,000
Inventories 1,630,600 1,097,900
Prepaid expenses 4,372,400 7,134,800
Total current assets 49,311,200 78,752,700
Properties and equipment 153,258,600 141,298,600
Less accumulated depreciation,
depletion, and amortization 39,311,700 35,344,700
113,946,900 105,953,900
Other assets 3,164,400 2,977,900
$166,422,500 $187,684,500
(Continued)
-2-
PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets, Continued
June 30, 2001 and December 31, 2000
LIABILITIES AND
STOCKHOLDERS' EQUITY
2001 2000
(Unaudited)
Current liabilities:
Accounts payable and accrued expenses $ 29,225,000 $ 31,722,500
Advances for future drilling contracts 11,398,900 43,809,400
Funds held for future distribution 6,655,900 2,440,100
Total current liabilities 47,279,800 77,972,000
Long-term debt 15,000,000 17,350,000
Other liabilities 4,430,400 4,396,800
Deferred income taxes 7,540,400 5,708,800
Stockholders' equity:
Common stock 162,400 162,400
Additional paid-in capital 32,919,700 32,917,000
Retained earnings 58,618,400 49,177,500
Accumulated other comprehensive income 471,400 -
Total stockholders' equity 92,171,900 82,256,900
$166,422,500 $187,684,500
See accompanying notes to condensed consolidated financial statements.
-3-
PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income
Three and Six Months ended June 30, 2001 and 2000
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
Revenues:
Oil and gas well drilling operations $21,805,800 $ 7,648,200 $43,228,100 $25,406,000
Gas sales from marketing activities 16,923,600 15,537,200 45,737,700 27,221,400
Oil and gas sales 6,501,200 4,298,300 14,042,100 7,936,100
Well operations and pipeline income 1,381,900 1,291,800 2,689,500 2,579,600
Other income 516,500 287,700 973,000 424,500
47,129,000 29,063,200 106,670,400 63,567,600
Costs and expenses:
Cost of oil and gas well drilling operations 18,868,800 6,012,600 37,351,300 20,416,300
Cost of gas marketing activities 17,111,600 15,691,200 45,280,100 27,340,800
Oil and gas production costs 2,495,100 1,857,200 4,184,400 3,915,100
General and administrative expenses 998,400 1,032,300 1,959,800 1,711,500
Depreciation, depletion, and amortization 1,990,100 1,664,800 3,980,200 3,154,500
Interest 213,700 275,400 427,600 290,000
41,677,700 26,533,500 93,183,400 56,828,200
Income before income taxes 5,451,300 2,529,700 13,487,000 6,739,400
Income taxes 1,635,400 581,900 4,046,100 1,550,200
Net income $ 3,815,900 $ 1,947,800 $ 9,440,900 $ 5,189,200
Basic earnings per common share $ .23 $ .12 $ .58 $ .32
Diluted earnings per share $ .23 $ .12 $ .57 $ .32
See accompanying notes to condensed consolidated financial statements.
-4-
PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2001 and 2000
(Unaudited)
2001 2000
Cash flows from operating activities:
Net income $ 9,440,900 $5,189,200
Adjustments to net income to reconcile
to cash used in operating activities:
Deferred federal income taxes 1,517,300 396,800
Depreciation, depletion & amortization 3,980,200 3,154,500
Leasehold acreage expired or surrendered 191,600 196,100
Amortization of stock award 2,700 2,700
Gain on disposal of assets (3,500) (6,700)
Decrease (increase) in current assets 9,705,100 (9,887,900)
Increase in other assets (199,700) (62,700)
Decrease in current liabilities (30,692,200) (16,625,600)
Increase in other liabilities 33,600 534,500
Total adjustments (15,464,900) (22,298,300)
Net cash used in
operating activities (6,024,000) (17,109,100)
Cash flows from investing activities:
Capital expenditures (13,028,100) (11,688,000)
Proceeds from sale of leases 876,500 392,500
Proceeds from sale of assets 3,500 6,700
(12,148,100) (11,288,800)
Cash flows from financing activities:
Proceeds from exercise of stock options - 95,600
Net (retirement of) proceeds from long-term debt (2,350,000) 4,700,000
Net cash (used in) provided by financing activities (2,350,000) 4,795,600
Net decrease in cash and cash equivalents (20,522,100) (23,602,300)
Cash and cash equivalents, beginning of period 46,872,000 29,059,200
Cash and cash equivalents, end of period $ 26,349,900 $ 5,456,900
See accompanying notes to condensed consolidated financial statements.
-5-
PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2001
(Unaudited)
1. Accounting Policies
349: Reference is hereby made to the Company's Annual
Report on Form 10-K for 2000, which contains a summary of
significant accounting policies followed by the Company
in the preparation of its consolidated financial statements.
These policies were also followed in preparing the quarterly
report included herein.
2. Basis of Presentation
The Management of the Company believes that all adjustments
(consisting of only normal recurring accruals) necessary to a fair statement
of the results of such periods have been made. The results of operations for
the six months ended June 30, 2001 are not necessarily indicative of
358:the results to be expected for the full year.
3. Oil and Gas Properties
Oil and Gas Properties are reported on the successful efforts method.
4. Earnings Per Share
Computation of earnings per common and common equivalent share
are as follows for the three and six months ended June 30, 2001 and 2000:
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
Weighted average common shares outstanding 16,244,519 16,174,331 16,244,283 16,070,290
Weighted average common and
common equivalent shares outstanding 16,695,585 16,436,754 16,681,560 16,313,108
Net income $ 3,815,900 $ 1,947,800 $ 9,440,900 $ 5,189,200
Basic earnings per common share $ .23 $ .12 $ .58 $ .32
Diluted earnings per share $ .23 $ .12 $ .57 $ .32
-6-
5. Business Segments (in Thousands)
PDC's operating activities can be divided into three major segments: drilling
and development, natural gas sales, and well operations. The Company
drills natural gas wells for Company-sponsored drilling partnerships and
retains an interest in each well. The Company also engages in oil and
gas sales to residential, commercial and industrial end-users.
The Company charges Company-sponsored partnerships
and other third parties competitive industry rates for well
operations and gas gathering. Segment information for the
three and six months ended June 30, 2001 and 2000 is
as follows:
Three Months Ended Six Months Ended
June 30,
2001 2000 2001 2000
REVENUES
Drilling and Development $21,806 $ 7,648 $ 43,228 $25,406
Natural Gas Sales 23,425 19,835 59,780 35,157
Well Operations 1,381 1,292 2,689 2,580
Unallocated amounts (1) 517 288 973 425
Total $47,129 $29,063 $106,670 $63,568
(1) Includes interest on investments and partnership management fees which
are not allocated in assessing segment performance.
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
SEGMENT INCOME BEFORE
INCOME TAXES
Drilling and Development $ 2,937 $ 1,635 $ 5,877 $ 4,990
Natural Gas Sales 2,853 1,556 8,307 2,732
Well Operations 395 397 795 673
Unallocated amounts (2)
General and Administrative
expenses (999) (1,032) (1,960) (1,712)
Interest expense (214) (275) (428) (290)
Other (1) 479 249 896 346
Total $5,451 $ 2,530 $13,487 $ 6,739
(2) Items which are not allocated in assessing segment performance.
June 30, 2001 December 31, 2000
SEGMENT ASSETS
Drilling and Development $ 11,033 $ 31,592
Natural Gas Sales 128,329 139,116
Well Operations 11,454 8,490
Unallocated amounts
Cash 5,401 1,567
Other 10,206 6,920
Total $166,423 $187,685
-7-
6. Derivative Instruments and Hedging Activities
The Company utilizes commodity based derivative instruments as hedges
to manage a portion of its exposure to price volatility
stemming from its integrated natural gas production and
marketing activities. These instruments consist of natural
gas futures and option contracts traded on the New York
Mercantile Exchange. The futures and option contracts
hedge committed and anticipated natural gas purchases and
sales, generally forecasted to occur within a 12 month
period. The Company does not hold or issue derivatives
for trading or speculative purposes. Interest rate swap
agreements are used to reduce the potential
impact of increases in interest rates on variable
rate long-term debt.
Statement of Accounting Standards No. 133 and No. 138,
Accounting for Derivative Instruments and Hedging Activities (SFAS
No. 133/138), was issued by the Financial Accounting Standards
Board. SFAS No. 133/138 standardized the accounting for derivative
instruments, including certain derivative instruments embedded in
other contracts. The Company adopted the provisions of the SFAS
133/138 effective January 1, 2001. The natural gas futures and
options and the interest rate swap are derivatives pursuant to SFAS
133/138. The Company's derivatives are treated as hedges of
committed and/or anticipated transactions and have a total
estimated fair value of $471,400 (net of tax) on June 30, 2001.
On adoption of this Statement on January 1, 2001, the
Company recorded a net transition adjustment of
($12,079,100) (net of related income tax benefit of
$8,052,700) which was recorded in accumulated
other comprehensive income (AOCI). During the six months
ended June 30, 2001, the Company reclassified $10,209,400
from AOCI into cost of gas marketing activities and oil and
gas sales relating to the transition adjustment included
in AOCI on January 1, 2001.
Changes in fair value related to qualifying
hedges of firm commitments or anticipated transactions
through the use of natural gas futures and option
contracts and the interest rate swap agreement are deferred
and recorded in AOCI and subsequently recognized in income
when the underlying hedged transaction occurs. In order for
the contracts to qualify as a hedge, there must be sufficient
hedging effectiveness. The change in the fair value of
derivative instruments which do not qualify for hedging
are recognized into income currently.
7. Comprehensive Income
Comprehensive income includes net income
and certain items recorded directly to shareholders' equity
and classified as Other Comprehensive Income. The
Company recorded Other Comprehensive Income for
the first time in the first quarter of 2001. The following table
illustrates the calculation of comprehensive income for
the three and six months ended June 30, 2001.
<c>
Three months ended Six months ended
June 30, 2001 June 30, 3001
Net Income $3,815,900 $ 9,440,900
Other Comprehensive Loss (net of tax)
Cumulative effect of change in accounting principle -
January 1, 2001 (net of tax of $8,052,700) - (12,079,100)
Reclassification adjustment for settled
contracts included in net income (net of
tax of $3,897,300 and $6,806,300, respectively) 5,845,900 10,209,400
Changes in fair value of outstanding hedging
positions (net of tax of $1,637,500
and $1,560,700, respectively) (2,456,300) 2,341,100
Other Comprehensive Loss 3,389,600 471,400
Comprehensive Income $ 7,205,500 $ 9,912,300
There were no items in Other Comprehensive Income/Loss during 2000.
- -8-
8. Commitments and Contingencies
The nature of the independent oil and gas industry involves a
dependence on outside investor drilling capital and involves
a concentration of gas sales to a few customers.
The Company sells natural gas to various
public utilities and industrial customers.
Substantially all of the Company's drilling programs contain a
repurchase provision where Investors may tender their
partnership units for repurchase at any time beginning
with the third anniversary of the first cash distribution.
The provision provides that the Company is obligated to
purchase an aggregate of 10% of the initial
subscriptions per calendar year (at a minimum price of
four times the most recent 12 months' cash distributions),
only if such units are tendered, subject to the Company's
financial ability to do so. The maximum annual 10%
repurchase obligation, if tendered by the investors,
is currently approximately $1,188,000. The Company
has adequate capital to meet this obligation.
The Company is not party to any legal action that would
materially affect the Company's results of operations
or financial condition.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Three Months Ended June 30, 2001 Compared with June 30, 2000
Revenues. Total revenues for the three months ended
June 30, 2001 were $47.1 million compared to $29.1 million
for the three months ended June 30, 2000, an increase of
approximately $18.0 million, or 61.9 percent. Such increase
was primarily a result of increased drilling revenues,
gas marketing activities and oil and gas sales. Drilling
revenues for the three months ended June 30, 2001 were
$21.8 million compared to $7.6 million for the three months
ended June 30, 2000, an increase of approximately $14.2
million, or 186.8 percent. Such increase was due to an
increase in drilling and completion activities, which
was a direct result of an increase in drilling funds from
the Company's public drilling programs. Natural gas
sales from the marketing activities of Riley Natural
Gas (RNG), the Company's marketing subsidiary
for the three months ended June 30, 2001 were $16.9
million compared to $15.5 million for the three months
ended June 30, 2000, an increase of approximately
$1.4 million or 9.0 percent. Such increase was due to
increased volumes of gas sold with higher
average sales prices. Oil and gas sales from the Company's
producing properties for the three months ended June 30, 2001
were $6.5 million compared to $4.3 million for the three months
ended June 30, 2000, an increase of approximately $2.2 million,
or 51.2 percent. Such increase was due to increased production
from new wells drilled along with higher average sales prices of
natural gas and oil from the Company's producing properties.
Financial results depend upon many factors, particularly the
price of natural gas and our ability to market our production on
economically attractive terms. Price volatility in the natural
gas market has remained prevalent in the last few years.
From the third quarter of 1998 through the first quarter of
1999, we experienced a decline in energy commodity
prices. However, in the summer of 2000 and
continuing into early 2001, prices improved. For
the months of April, 2000 through June 30,
2001, we had certain natural gas hedges in place that
prevented us from realizing the full impact of this price
environment. Despite this limitation, our realized natural
gas price for each month in the second quarter
of 2001 was higher than the previous year. In the final
months of 2000 and the first quarter of 2001, the NYMEX
futures market reported unprecendented natural gas
contract prices. During the three months ended June 30,
2001, the hedging activities resulted in oil and gas
sales being $660,000 lower than if the Company had
not hedged. Well operations and pipeline income for
the three months ended June 30, 2001 was $1.4
million compared to $1.3 million for the three months
ended June 30, 2000, an increase of approximately
$100,000 or 7.7 percent. Other income for the three months ended
June 30, 2001 was $516,000 compared to $288,000 for the three
months ended June 30, 2000, an increase of approximately
$228,000, or 79.2 percent. Such increase resulted from more
interest earned on higher average cash balances.
- -9-
Costs and expenses. Costs and expenses for the three months
ended June 30, 2001 were $41.7 million compared to $26.5
million for the three months ended June 30, 2000, an increase
of approximately $15.2 million or 57.4 percent. Oil and gas
well drilling operations costs for the three months ended
June 30, 2001 were $18.9 million compared to $6.0 million
for the three months ended June 30, 2000, an increase
of approximately $12.9 million or 215.0 percent. Such
increase was due to the increased drilling activity
referred to above. The cost of gas marketing
activities for the three months ended June 30, 2001
were $17.1 million compared to $15.7 million for the three
months ended June 30, 2000, an increase of $1.4 million
or 8.9 percent. Such increase was due to the increased gas
marketing activity of RNG with increased volumes
purchased at higher average sales prices. Based on the
nature of the Company's gas marketing activities,
hedging did not have a significant impact on the
Company's net margins from marketing activities during
either period. Oil and gas production costs from the Company's
producing properties for the three months ended June 30, 2001
were $2.5 million compared to $1.9 million for the three
months ended June 30, 2000, an increase of approximately
$600,000 or 31.6 percent. Such increase was due to the
increased production from the Company's producing
properties. General and administrative expenses for the three
months ended June 30, 2001 remained constant at
approximately $1.0 million as compared to the three months
ended June 30, 2000. Depreciation, depletion, and
amortization costs for the three months ended June 30,
2001 were $2.0 million compared to $1.7 million for the
three months ended June 30, 2000, an increase of
approximately $300,000 or 17.6 percent. Such increase
was due to the increased amount of investment in oil
and gas properties owned by the Company. Interest
costs for the three months ended June 30, 2001 were
$214,000 compared to $275,000 for the three months
ended June 30, 2000, a decrease of approximately
$61,000. The decrease was due to lower average
outstanding balances and lower interest rates on
the Company's credit facility.
Net income. Net income for the three months
ended June 30, 2001 was $3.8 million compared to
a net income of $1.9 million for the three months
ended June 30, 2000, an increase of approximately
$1.9 million or 100 percent.
Six Months Ended June 30, 2001 Compared with June 30, 2000
Revenues. Total revenues for the six months ended June 30,
2001 were $106.7 million compared to $63.6 million for the
six months ended June 30, 2000, an increase of
approximately $43.1 million, or 67.8 percent. Such
increase was primarily a result of increased
drilling revenues, gas marketing activities and oil and
gas sales. Drilling revenues for the six months ended
June 30, 2001 were $43.2 million compared to $25.4
million for the six months ended June 30, 2000, an
increase of approximately $17.8 million, or 70.1
percent. Such increase was due to an increase
in drilling and completion activities, which was a
direct result of an increase drilling funds from the
Company's public drilling programs.
Natural gas sales from the marketing activities of Riley Natural
Gas (RNG), the Company's marketing subsidiary for the six
months ended June 30, 2001 were $45.7 million compared to
$27.2 million for the six months ended June 30, 2000, an
increase of approximately $18.5 million or 68.0 percent.
Such increase was due to increased volumes of gas sold with
higher average sales prices. Oil and gas sales from the
Company's producing properties for the six months ended
June 30, 2001 were $14.0 million compared to $7.9 million
for the six months ended June 30, 2000, an increase of
approximately $6.1 million, or 77.2 percent. Such increase
was due to increased production from new wells drilled
along with higher average sales prices of natural gas and
oil from the Company's producing properties. Financial
results depend upon many factors, particularly the price of
natural gas and our ability to market our production on
economically attractive terms. Price volatility in the natural
gas market has remained prevalent in the last few years.
From the third quarter of 1998 through the first quarter
of 1999, we experienced a decline in energy commodity
prices. However, in the summer of 2000 and continuing
into early 2001, prices improved. For the months of April,
2000 through June 30, 2001, we had certain
natural gas hedges in place that prevented us from
realizing the full impact of this price environment.
- -10-
Despite this limitation, our realized natural gas price for each
month in the first six months of 2001 was higher than the
previous year. In the final months of 2000 and the first quarter
of 2001, the NYMEX futures market reported unprecendented
natural gas contract prices. During the six months ended
June 30, 2001, the hedging activities resulted in oil and
gas sales being $4.2 million lower than if the Company
had not hedged. Well operations and pipeline income
for the six months ended June 30, 2001 was $2.7 million
compared to $2.6 million for the six months ended June
30, 2000, an increase of approximately $100,000 or 3.8
percent. Other income for the six months ended June 30,
2001 was $973,000 compared to $425,000 for the six
months ended June 30, 2000, an increase of approximately
$548,000, or 128.9 percent. Such increase resulted
from interest earned on higher average cash balances.
Costs and expenses. Costs and expenses for the
six months ended June 30, 2001 were $93.2 million compared
to $56.8 million for the six months ended June 30, 2000, an
increase of approximately $36.4 million or 64.1 percent.
Oil and gas well drilling operations costs for the six months
ended June 30, 2001 were $37.4 million compared to $20.4
million for the six months ended June 30, 2000, an increase
of approximately $17.0 million or 83.3 percent. Such increase
was due to the increased drilling activity referred to above. The
cost of gas marketing activities for the six months ended June
30, 2001 were $45.3 million compared to $27.3 million for the
six months ended June 30, 2000, an increase of $18.0 million
or 65.9 percent. Such increase was due to the increased gas
marketing activity of RNG with increased volumes purchased
at higher average sales prices. Based on the nature of the
Company's gas marketing activities, hedging did not have a
significant impact on the Company's net margins from
marketing activities during either period. Oil and gas production
costs from the Company's producing properties for the six months
ended June 30, 2001 were $4.2 million compared to $3.9 million
for the six months ended June 30, 2000, an increase of
approximately $300,000 or 17.6 percent. Such increase was
due to the increased production from the Company's producing
properties. General and administrative expenses for the six
months ended June 30, 2001 increased to $2.0 million
compared with $1.7 million for the six months ended
June 30, 2000, an increase of $300,000 or 7.7 percent. Such
increase was due to high corporate expenses as a result of
the significant growth and geographic diversification of
the Company's drilling and production operations.
Depreciation, depletion, and amortization costs for the six
months ended June 30, 2001 were $4.0 million compared
to $3.2 million for the six months ended June 30, 2000, an
increase of approximately $800,000 or 25.0 percent. Such
increase was due to the increased amount of investment in
oil and gas properties owned by the Company. Interest costs
for the six months ended June 30, 2001 were $428,000
compared to $290,000 for the six months ended June 30,
2000, an increase of approximately $138,000. The increase
was due to higher average outstanding balances offset in
part by lower interest rates on the Company's credit facility.
Net income. Net income for the six months ended
June 30, 2001 was $9.4 million compared to a net income
of $5.2 million for the six months ended June 30, 2000, an
increase of approximately $4.2 million or 80.8 percent.
- -11-
Liquidity and Capital Resources
The Company funds its operations through a
combination of cash flow from operations, capital raised
through drilling partnerships, and use of the Company's
credit facility. Operational cash flow is generated
by sales of natural gas from the Company's well interests,
well drilling and operating activities for the Company's investor
partners, natural gas gathering and transportation, and
natural gas marketing. Cash payments from Company-
sponsored partnerships are used to drill and complete wells
for the partnerships, with operating cash flow accruing to the
Company to the extent payments exceed drilling costs.
The Company utilizes its revolving credit arrangement
to meet the cash flow requirements of its
operating and investment activities.
Sales volumes of natural gas have continued to
increase while natural gas prices fluctuate monthly. The
Company's natural gas sales prices are subject to increase
and decrease based on various market-sensitive indices.
A major factor in the variability of these indices is the
seasonal variation of demand for the natural gas, which
typically peaks during the winter months. The volumes of
natural gas sales are expected to continue to increase
as a result of continued drilling activities and additional
investment by the Company in oil and gas properties. The
Company utilizes commodity-based derivative instruments
(natural gas futures and option contracts traded on the
NYMEX) as hedges to manage a portion of its exposure
to this price volatility. The futures contracts hedge
committed and anticipated natural gas purchases
and sales, generally forecasted to occur within a
three to twelve-month period.
The Company has a bank credit agreement with
Bank One, formerly First National Bank of Chicago, which
provides a borrowing base of $30.0 million, subject to
adequate oil and natural gas reserves. As of June 30, 2001,
the outstanding balance was $15.0 million. Interest accrues
at prime, with LIBOR (London Interbank Market Rate)
714: alternatives available at the discretion of the Company. No
principal payments are required until the credit agreement
expires on December 31, 2004.
The Company closed its first drilling program of
2001 in the second quarter and has drilled the wells in the
second and third quarters of 2001. This program closed
with investor subscriptions of $9.4 million compared to the
first program of 2000 which closed with investor subscriptions
of $5.0 million. The Company will close its second drilling
program of 2001 in September, 2001 and will drill the wells
during the third and fourth quarters of 2001. Additional programs
725: are scheduled to close in November and December of 2001. The
726: Company generally invests, as its equity contribution to each
drilling partnership, an additional sum approximating 20% of the
aggregate subscriptions received for that particular drilling
partnership. As a result, the Company is subject to substantial
cash commitments at the closing of each drilling partnership.
The funds received from these programs are restricted to
use in future drilling operations. No assurance can be made
that the Company will continue to receive this level of
funding from these or future programs.
The Company continues to pursue capital
investment opportunities in producing natural gas properties
as well as its plan to participate in its sponsored natural
gas drilling partnerships, while pursuing opportunities
738: for operating improvements and costs efficiencies.
Management believes that the Company has adequate
capital to meet its operating requirements.
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Item 3. Quantitative and Qualitative Disclosure About Market Rate Risk
Interest Rate Risk
There have been no material changes in the reported market risks faced by
the Company since December 31, 2000.
Commodity Price Risk
The Company utilizes commodity-based derivative
instruments as hedges to manage a portion of its exposure to
price risk from its natural gas sales and marketing activities.
These instruments consist of NYMEX-traded natural gas futures
contracts and option contracts. These hedging arrangements
have the effect of locking in for specified periods (at
predetermined prices or ranges of prices) the prices the
Company will receive for the volume to which the hedge
relates. As a result, while these hedging arrangements
are structured to reduce the Company's exposure to
decreases in price associated with the hedging commodity,
they also limit the benefit the Company might otherwise have
received from price increases associated with the hedged
commodity. The Company's policy prohibits the use of
natural gas future and option contracts for speculative
purposes. As of June 30, 2001, PDC had entered into a
series of natural gas future contracts and options
contracts. Open future contracts maturing in 2001 are for
the sale of 2,129,800 dt of natural gas with a weighted
average price of $3.25 dt resulting in a total contract
amount of $6,927,200. Open option contracts maturing
in 2001 are for the sale of 912,200 dt with a weighted
average floor price of $3.75 dt. The fair market
value of the futures contracts and options is $1,483,900
as of June 30, 2001 on a pre-tax basis.
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CONFORMED COPY
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
817: The Company is not a party to any legal actions that would materially
affect the Company's operations or financial statements.
Item 6. Exhibits and Reports on Form 8-K
(a) None.
(b) No reports on Form 8-K have been filed during the quarter ended
June 30, 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 thereunto duly authorized.
Petroleum Development Corporation
(Registrant)
Date: August 8, 2001 /s/ Steven R. Williams
Steven R. Williams
President
Date: August 8, 2001 /s/ Dale G. Rettinger
Dale G. Rettinger
Executive Vice President
and Treasurer
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