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, 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 June 30, 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 -
June 30, 1998 and December 31, 1997 2
Condensed Consolidated Statements of Income -
Three Months and Six Months Ended June 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows - Six
Months Ended June 30, 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 11
Item 6. Exhibits and Reports on Form 8-K 11
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,
1998, and the related condensed consolidated statements of income for the
three-month and six-month periods ended June 30, 1998 and 1997 and
the related condensed consolidated statements of cash flows for the six-month
periods ended June 30, 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
August 5, 1998
PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 1998 and December 31, 1997
ASSETS
1998 1997
(Unaudited)
Current assets:
Cash and cash equivalents $23,621,500 $46,561,000
Accounts and notes receivable 6,563,600 4,923,400
Inventories 395,600 297,900
Prepaid expenses 1,645,600 2,076,500
Total current assets 32,226,300 53,858,800
Properties and equipment 77,129,800 67,792,200
Less accumulated depreciation, depletion,
and amortization 25,759,100 24,222,900
51,370,700 43,569,300
Other assets 1,194,500 983,500
$84,791,500 $98,411,600
(Continued)
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PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets, Continued
June 30, 1998 and December 31, 1997
LIABILITIES AND
STOCKHOLDERS' EQUITY
1998 1997
(Unaudited)
Current liabilities:
Accounts payable and accrued expenses $11,607,200 $12,424,300
Advances for future drilling contracts 6,005,500 23,291,600
Funds held for future distribution 1,257,600 1,659,700
Total current liabilities 18,870,300 37,375,600
Other liabilities 2,208,600 1,684,000
Deferred income taxes 3,419,300 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 28,535,300 24,014,200
Unamortized stock award (58,400) (64,500)
Total stockholders' equity 60,293,300 55,766,100
$84,791,500 $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 and Six Months ended June 30, 1998 and 1997
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Revenues:
Oil and gas well drilling operations $ 8,209,200 $ 6,015,700 $23,698,400 $19,276,800
Oil and gas sales 9,392,500 7,581,300 17,432,500 16,348,800
Well operations and pipeline income 1,079,700 1,117,500 2,146,500 2,248,100
Other income 480,200 202,900 1,131,600 451,500
19,161,600 14,917,400 44,409,000 38,325,200
Costs and expenses:
Cost of oil and gas well drilling
operations 7,085,800 4,439,400 20,076,200 15,758,800
Oil and gas purchases
and production costs 8,429,100 7,155,400 15,883,500 14,716,400
General and administrative expenses 611,000 592,900 1,051,100 1,091,500
Depreciation, depletion, and
amortization 813,600 610,200 1,572,100 1,220,400
Interest - 101,900 - 204,500
16,939,500 12,899,800 38,582,900 32,991,600
Income before income taxes 2,222,100 2,017,600 5,826,100 5,333,600
Income taxes 497,700 611,700 1,305,000 1,424,100
Net income $ 1,724,400 $ 1,405,900 $ 4,521,100 $ 3,909,500
Basic earnings per common share $ .11 $ .13 $ .29 $ .37
Diluted earnings per common and
common equivalent share $ .11 $ .12 $ .28 $ .33
See accompanying notes to condensed consolidated financial statements.
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PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1998 and 1997
(Unaudited)
1998 1997
Cash flows from operating activities:
Net income $ 4,521,100 3,909,500
Adjustments to net income
to reconcile to cash used in
operating activities:
Deferred federal income taxes (166,600) 279,100
Depreciation, depletion & amortization 1,572,100 1,220,400
Leasehold acreage expired or surrendered 84,500 120,000
Employee compensation paid in stock 6,100 6,100
Gain on disposal of assets (36,800) (58,800)
(Increase) decrease in current assets (1,307,000) 2,065,800
Increase in other assets (221,700) (54,700)
Decrease in current liabilities (18,505,300) (16,264,200)
Increase in other liabilities 524,600 148,300
Total adjustments (18,050,100) (12,538,000)
Net cash used in operating activities (13,529,000) (8,628,500)
Cash flows from investing activities:
Capital expenditures (10,215,900) (2,711,500)
Proceeds from sale of leases 758,600 729,000
Proceeds from sale of other assets 46,800 60,300
Net cash (used in) provided by
investing activities (9,410,500) (1,922,200)
Cash flows from financing activities:
Proceeds from sale of common stock - 21,900
Retirement of debt - (1,625,000)
Net cash used in financing activities - (1,603,100)
Net changes in cash and cash equivalents (22,939,500) (12,153,800)
Cash and cash equivalents, beginning of period 46,561,000 20,615,400
Cash and cash equivalents, end of period $ 23,621,500 $ 8,461,600
See accompanying notes to condensed consolidated financial statements.
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PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 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 major 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, 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 six months ended June 30, 1998 and 1997:
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Weighted average common
shares outstanding 15,510,762 10,485,753 15,500,513 10,482,625
Weighted average common and
common equivalent shares outstanding16,406,990 11,699,595 16,395,395 11,696,467
Net income $ 1,724,400 $ 1,405,900 $ 4,521,100 $ 3,909,500
Basic earnings per common share $ .11 $ .13 $ .29 $ .37
Diluted earnings per common and
common equivalent share $ .11 $ .12 $ .28 $ .33
5. Acquisitions
On June 12, 1998 the Company purchased for $3.1 million a majority
interest in the assets of Pemco Gas, Inc., a Pennsylvania producing
company. The assets include 122 natural gas wells, 2,700 undeveloped
acres, gathering systems, natural gas compressors and other facilities.
The Company estimates that its interest includes 4.7 Bcf of natural gas
reserves. The Company utilized capital received from its Public Stock
Offering to fund this purchase.
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6. Commitments and Contingencies
The nature of the independent oil and gas industry involves a
dependence on outside investor drilling capital and involves a
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 7.7% of total revenues in the first six months of 1998.
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 June 30, 1998 Compared With June 30, 1997
Revenues. Total revenues for the three months ended June 30, 1998
were $19.2 million compared to $14.9 million for the three months ended June
30, 1997, an increase of approximately $4.3 million, or 28.9 percent. Such
increase was primarily a result of increased drilling revenues and oil and
gas sales. Drilling revenues for the three months ended June 30, 1998 were
$8.2 million compared to $6.0 million for the three months ended June 30,
1997, an increase of approximately $2.2 million, or 36.7 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 June 30, 1998 were $9.4 million compared
to $7.6 million for the three months ended June 30, 1997, an increase of
approximately $1.8 million, or 23.7 percent. Such increase was due primarily
to the natural gas marketing activities of Riley Natural Gas (RNG), the
Company's marketing subsidiary, along with increased production from the
Company's producing properties. Well operations and pipeline income for the
three months ended June 30, 1998 remained relatively constant at
approximately $1.1 million. Other income for the three months ended June
30, 1998 was $480,000 compared to $203,000 for the three months ended June
30, 1997, an increase of approximately $277,000, or 136.5 percent. Such
increase resulted from interest earned on higher average cash balances.
Costs and expenses. Costs and expenses for the three months ended
June 30, 1998 were $16.9 million compared to $12.9 million for the three
months ended June 30, 1997, an increase of approximately $4.0 million or 31.0
percent. Oil and gas well drilling operations costs for the three months
ended June 30, 1998 were $7.1 million compared to $4.4 million for the three
months ended June 30, 1997, an increase of approximately $2.7 million, or
61.4 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 June 30, 1998 were $8.4 million compared to
$7.2 million for the three months ended June 30, 1997, an increase of
approximately $1.2 million or 16.7 percent. Such increase was due primarily
to natural gas purchases by RNG for resale. General and administrative
expenses for the three months ended June 30, 1998 increased to $611,000
compared with $593,000 for the three months ended June 30, 1997.
Depreciation, depletion, and amortization costs for the three months ended
June 30, 1998 were $814,000 compared to $610,000 for the three months ended
June 30, 1997, an increase of $204,000 or 33.4 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 June 30, 1998 was
$1.7 million compared to a net income of $1.4 million for the three months
ended June 30, 1997, an increase of approximately $300,000 or 21.4 percent.
Six Months Ended June 30, 1998 Compared with June 30, 1997
Revenues. Total revenues for the six months ended June 30, 1998
were $44.4 million compared to $38.3 million for the six months ended June
30, 1997, an increase of approximately $6.1 million, or 15.9 percent. Such
increase was primarily a result of increased drilling revenues and oil and
gas sales. Drilling revenues for the six months ended June 30, 1998 were
$23.7 million compared to $19.3 million for the six months ended June 30,
1997, an increase of approximately $4.4 million, or 22.8 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 six months ended June 30, 1998 were $17.4 million
compared to $16.3 million for the six months ended June 30, 1997, an increase of
approximately $1.1 million, or 6.7 percent. Such increase was due primarily to
the natural gas marketing activities of RNG, along with increased production
from the Company's producing properties offset in part by lower average sales
prices from the Company's producing properties and lower volumes of gas
purchased for resale. Well operations and pipeline income for the six months
ended June 30 1998 remained relatively constant at approximately $2.2
million. Other income for the six months ended June 30, 1998 was $1.1
million compared to $451,000 for the six months ended June 30, 1997, an
increase of approximately $649,000, or 143.9 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, 1998 were $38.6 million compared to $33.0 million for the six
months ended June 30, 1997, an increase of approximately $5.6 million or 17.0
percent. Oil and gas well drilling operations costs for the six months ended
June 30, 1998 were $20.1 million compared to $15.8 million for the six months
ended June 30, 1997, an increase of approximately $4.3 million, or 27.2
percent. Such increase resulted from additional expenses resulting from the
increased drilling activity. Oil and gas purchases and production costs for
the six months ended June 30, 1998 were $15.9 million compared to $14.7
million for the six months ended June 30, 1997, an increase of approximately
$1.2 million, or 8.2 percent. Such increase was due primarily to natural gas
marketing activities of RNG offset in part by lower volumes of gas purchased
for resale by the Company. General and administrative expenses for the six
months ended June 30, 1998 remained relatively constant at approximately
$1.1 million. Depreciation, depletion, and amortization costs for the six
months ended June 30, 1998 were $1.6 million compared to $1.2 million for the
six months ended June 30, 1997, an increase of approximately $400,000 or 33.3
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.
Net income. Net income for the six months ended June 30, 1998 was
$4.5 million compared to a net income of $3.9 million for the six months
ended June 30, 1997, an increase of approximately $600,000 or 15.4 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.
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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 June 30, 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 closed its first drilling program of 1998 in the second
quarter and has drilled the wells in the second and third quarters of 1998.
The Company's first drilling program of 1998 closed with approximately 27%
higher subscriptions than the first program of 1997. The Company will close
its second drilling program of 1998 in September, 1998 and will drill the
wells during the third and fourth quarters of 1998. Additional programs are
scheduled to close in 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 Company has adequate capital to meet this funding obligation. 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 third or fourth 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.
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 $13 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.
On June 12, 1998 the Company purchased for $3.1 million a majority
interest in the assets of Pemco Gas, Inc., a Pennsylvania producing company.
The assets include 122 natural gas wells, 2,700 undeveloped acres, gathering
systems, natural gas compressors and other facilities. The Company estimates
that its interest includes 4.7 Bcf of natural gas reserves. 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.
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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.
Statement of Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS No. 133), was issued by the
Financial Accounting Standards Board in June, 1998. Statement 133 standardizes
the accounting for derivative instruments, including certain derivative
instruments embedded in other contracts. The Company must adopt SFAS No. 133
by January 1, 2000; however, early adoption is permitted. On adoption, the
provisions of SFAS No. 133 must be applied prospectively. The Company had
not determined the impact that SFAS No. 133 will have on its 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 June 30, 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: August 7, 1998 /s/ Steven R. Williams
Steven R. Williams
President
Date: August 7, 1998 /s/ Dale G. Rettinger
Dale G. Rettinger
Executive Vice President
and Treasurer
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