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 March 31, 1998
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 to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes XX No
Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date: 15,510,762 shares of the
Company's Common Stock ($.01 par value) were outstanding as of March 31, 1998.
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 -
March 31, 1998 and December 31, 1997 2
Condensed Consolidated Statements of Income -
Three Months Ended March 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows-Three
Months Ended March 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K 10
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 March 31,
1998, and the related condensed consolidated statements of income and cash
flows for the three-month periods ended March 31, 1998 and 1997. 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 generally
accepted accounting principles.
We have previously audited, in accordance with generally
accepted auditing standards, the consolidated balance sheet of Petroleum
Development Corporation and subsidiaries as of December 31, 1997 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 5, 1998, 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, 1997 is fairly presented, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
KPMG PEAT MARWICK LLP
Pittsburgh, Pennsylvania
May 13, 1998
PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31, 1998 and December 31, 1997
ASSETS
1998 1997
(Unaudited)
Current assets:
Cash and cash equivalents $30,820,800 $46,561,000
Accounts and notes receivable 5,215,800 4,923,400
Inventories 336,300 297,900
Prepaid expenses 1,534,200 2,076,500
Total current assets 37,907,100 53,858,800
Properties and equipment 71,561,100 67,792,200
Less accumulated depreciation, depletion,
and amortization 24,963,400 24,222,900
46,597,700 43,569,300
Other assets 1,096,200 983,500
$85,601,000 $98,411,600
(Continued)
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PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets, Continued
March 31, 1998 and December 31, 1997
LIABILITIES AND
STOCKHOLDERS' EQUITY
1998 1997
(Unaudited)
Current liabilities:
Accounts payable and accrued expenses $12,083,100 $12,424,300
Advances for future drilling contracts 8,342,000 23,291,600
Funds held for future distribution 957,600 1,659,700
Total current liabilities 21,382,700 37,375,600
Other liabilities 2,215,400 1,684,000
Deferred income taxes 3,437,100 3,585,900
Stockholders' equity:
Common stock 155,100 152,500
Additional paid-in capital 31,615,000 31,617,600
Warrants outstanding 46,300 46,300
Retained earnings 26,810,900 24,014,200
Unamortized stock award (61,500) (64,500)
Total stockholders' equity 58,565,800 55,766,100
$85,601,000 $98,411,600
See accompanying notes to condensed consolidated financial statements.
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PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income
Three Months ended March 31, 1998 and 1997
(Unaudited)
1998 1997
Revenues:
Oil and gas well drilling operations $15,489,200 $13,261,100
Oil and gas sales 8,040,000 8,767,500
Well operations and pipeline income 1,066,800 1,130,600
Other income 651,400 248,600
25,247,400 23,407,800
Costs and expenses:
Cost of oil and gas well drilling operations 12,990,400 11,319,400
Oil and gas purchases and production costs 7,454,400 7,561,000
General and administrative expenses 440,100 498,600
Depreciation, depletion, and amortization 758,500 610,200
Interest - 102,600
21,643,400 20,091,800
Income before income taxes 3,604,000 3,316,000
Income taxes 807,300 812,400
Net income $ 2,796,700 $ 2,503,600
Basic earnings per common share $ .18 $ .24
Diluted earnings per common and
common equivalent share $ .17 $ .21
See accompanying notes to condensed consolidated financial statements
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PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1998 and 1997
(Unaudited)
1998 1997
Cash flows from operating activities:
Net income $ 2,796,700 $2,503,600
Adjustments to net income to reconcile
to cash used in operating activities:
Deferred federal income taxes (148,800) 133,800
Depreciation, depletion & amortization 758,500 610,200
Leasehold acreage expired or surrendered 70,500 30,000
Employee compensation paid in stock 3,000 3,100
Gain on disposal of assets (5,000) (54,000)
Decrease in current assets 211,500 2,396,500
Increase in other assets (118,100) (14,500)
Decrease in current liabilities (15,992,900) (13,302,200)
Increase in other liabilities 531,400 69,000
Total adjustments (14,689,900) (10,128,100)
Net cash used in operating activities (11,893,200) (7,624,500)
Cash flows from investing activities:
Capital expenditures (4,444,600) (1,253,700)
Proceeds from sale of leases 592,600 586,000
Proceeds from sale of assets 5,000 55,600
Net cash used in investing activities (3,847,000) (612,100)
Cash flows from financing activities:
Proceeds from sale of common stock - 21,900
Retirement of debt - (1,100,000)
Net cash used in financing activities - (1,078,100)
Net change in cash and cash equivalents (15,740,200) (9,314,700)
Cash and cash equivalents, beginning of period 46,561,000 20,615,400
Cash and cash equivalents, end of period $ 30,820,800 $11,300,700
See accompanying notes to condensed consolidated financial statements.
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PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 1998
(Unaudited)
1. Accounting Policies
Reference is hereby made to the Company's Annual Report on Form 10-K for
1997, 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 three
months ended March 31, 1998 are not necessarily indicative of 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 months ended March 31,
1998 1997
Weighted average common shares outstanding 15,490,151 10,478,337
Weighted average common and
common equivalent shares outstanding 16,378,383 11,702,968
Net income $ 2,796,700 $ 2,503,600
Basic earnings per common share $ .18 $ .24
Diluted earnings per common and
common equivalent share $ .17 $ .21
5. 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. One customer, Hope Gas, Inc., a
regulated public utility, accounted for 5.0 percent of total revenues in the
first three months of 1998.
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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 three 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 $1.0 million. 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 March 31, 1998 Compared With March 31, 1997
Revenues. Total revenues for the three months ended March 31, 1998
were $25.2 million compared to $23.4 million for the three months ended March
31, 1997, an increase of approximately $1.8 million, or 7.7 percent. Such
increase was primarily a result of increased drilling revenues. Drilling
revenues for the three months ended March 31, 1998 were $15.5 million
compared to $13.3 million for the three months ended March 31, 1997, an
increase of approximately $2.2 million, or 16.5 percent. Such increase
resulted from higher volumes of drilling and completion activities, due to
increased levels of drilling partnership-related financing. Oil and gas
sales for the three months ended March 31, 1998 were $8.0 million compared
to $8.8 million for the three months ended March 31, 1997, a decrease of
approximately $800,000, or 9.1 percent. Such decrease was due primarily to
lower average sales prices in the production and gas marketing activities
offset in part by increased natural gas production volumes from the Company's
producing properties. Well operations and pipeline income for the three
months ended March 31, 1998 remained relatively constant at approximately
$1.1 million. Other income for the three months ended March 31, 1998 was
$651,000 compared to $249,000 for the three months ended March 31, 1997, an
increase of approximately $402,000, or 161.4 percent. Such increase resulted
from interest earned on higher average cash balances.
Costs and expenses. Costs and expenses for the three months ended March
31, 1998 were $21.6 million compared to $20.1 million for the three months
ended March 31, 1997, an increase of approximately $1.5 million or 7.5
percent. Oil and gas well drilling operations costs for the three months
ended March 31, 1998 were $13.0 million compared to $11.3 million for the
three months ended March 31, 1997, an increase of approximately $1.7 million,
or 15.0 percent. Such increase resulted from additional expenses resulting
from the increased drilling activity. Oil and gas purchases and production
costs for the three months ended March 31, 1998 remained relatively constant
at approximately $7.5 million. General and administrative expenses for the
three months ended March 31, 1998 decreased to $440,000 compared with
$499,000 for the three months ended March 31, 1997. Depreciation, depletion,
and amortization costs for the three months ended March 31, 1998 were
$758,000 compared to $610,000 for the three months ended March 31, 1997, an
increase of $148,000 or 24.3 percent. Such increase was due to the increased
amount of investment in oil and gas properties owned by the Company.
Interest costs were eliminated after the Company extinguished the balance
on its bank credit line in November 1997.
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Net income. Net income for the three months ended March 31, 1998 was
$2.8 million compared to a net income of $2.5 million for the three months
ended March 31, 1997, an increase of approximately $300,000 or 12.0 percent.
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, if needed, 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 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 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 First National Bank of
Chicago, which provides a borrowing base of $10.0 million, subject to
adequate oil and natural gas reserves. At the request of the Company, the
bank, at its sole discretion, may increase the borrowing base to $20.0 million.
As of March 31, 1998, no balance is outstanding on the line of credit.
Interest accrues at prime, with LIBOR (London Interbank Market Rate)
alternatives available at the discretion of the Company. No principal
payments are required until the credit agreement expires on December 31, 1999.
The Company has commenced sales of units in the first partnership in its
registered PDC 2000 public drilling program which consists of twelve
partnerships scheduled to close over the next three years. The first
partnership is scheduled to close in early June, 1998, with drilling planned
in the second and third quarters of 1998. Additional programs are scheduled
to close in September, November and December of 1998. The 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 was notified that it had submitted a successful bid for the
acquisition of Columbia Gas Transmission Company's Rimersburg natural gas
gathering system, located in northern Pennsylvania. If consummated, this
transaction would occur in the second or third quarter of 1998 and would add
to the Company's existing natural gas gathering system 207 miles of pipeline
located in an area contiguous to the Company's Pennsylvania drilling
operations, at a cost to the Company of $1.4 million.
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In the fourth quarter of 1997, the Company completed a public offering
of 4,077,500 shares of its common stock at a price of $6.25 per share. Net
proceeds to the Company of approximately $23 million from the sale of the
common stock has been partially used to extinguish the balance on the
Company's bank credit line and to purchase producing oil and gas properties.
The remaining $18 million will be used primarily to fund development drilling
on new and existing properties, acquisition of producing properties and
general corporate purposes, including working capital and possible
acquisitions of complementary businesses.
On February 19, 1998, the Company offered to purchase from Investors
their units of investment in the Company's Drilling Programs formed prior to
1993. The Company purchased approximately $2.2 million of producing oil and
gas properties in conjunction with this offer, which expired on March 31,
1998. The Company utilized capital received from its Public Stock Offering
to fund this purchase.
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
for operating improvements and costs efficiencies. Management believes that
the Company has adequate capital to meet its operating requirements.
Year 2000 Issue
The Company has assessed the extent of the Year 2000 Issues affecting
the Company. The Company believes that the new computer system including
operating software currently being installed along with modifications being
made by the Company's computer technicians will address the dating system
flaw inherent in most operating systems. The Company expects to be fully
Year 2000 Compliant by the end of 1998. Management believes that cost to
become Year 2000 Compliant is not material to the Company's financial
position or results of operations.
New Accounting Standards
The Company will implement SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information in 1998. SFAS No. 131 establishes
standards for the way that public enterprises report information about
operating segments in annual and interim financial statements. Because SFAS
No. 131 has a disclosure-only effect on the notes to the Company's financial
statements, adoption of SFAS No. 131 has no impact on the Company's result of
operations or financial condition. In the year of adoption, the disclosure
requirements of SFAS No. 131 need not be applied to interim financial
statements. The Company will implement SFAS No. 131 in its full year 1998
financial statements.
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CONFORMED COPY
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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 March 31, 1998.
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: May 13, 1998 /s/ Steven R. Williams
Steven R. Williams
President
Date: May 13, 1998 /s/ Dale G. Rettinger
Dale G. Rettinger
Executive Vice President
and Treasurer
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