FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period
ended June 30, 1996
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number O-18667
GERRITY OIL & GAS CORPORATION
Delaware 84-1145802
(State or other jurisdiction of IRS Employer Identification No.)
incorporation or organization)
4100 E. Mississippi Avenue, Denver, Colorado 80222
(Address of principal executive offices) (Zip Code)
(303) 757-1110
(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.
[X] Yes [ ] No
As of August 13, 1996, the Registrant had 100 shares of Common Stock
outstanding.
PART I. FINANCIAL INFORMATION
The financial statements included herein have been prepared in conformity
with generally accepted accounting principles. The statements are unaudited but
reflect all adjustments which, in the opinion of management, are necessary to
fairly present the Company's financial position and results of operations.
2
GERRITY OIL & GAS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, June 30,
1995 1996
----------- -----------
(Unaudited)
ASSETS
Current assets
Cash and equivalents $ 1,433 $ 9,066
Accounts receivable 12,741 12,734
Inventory and other 941 1,024
-------- --------
15,115 22,824
-------- --------
Oil and gas properties, successful efforts method 390,135 217,461
Accumulated depletion, depreciation and amortization (105,023) (4,364)
-------- --------
285,112 213,097
-------- --------
Gas facilities and other 17,824 1,398
Accumulated depreciation (4,962) (29)
-------- --------
12,862 1,369
Note receivable from related party 1,000 -
Other assets, net 5,460 4,490
-------- --------
$319,549 $241,780
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable 12,884 10,213
Accrued liabilities 7,689 10,227
Payable to parent - 2,548
Current maturities of long-term debt 1,125 -
-------- --------
21,698 22,988
-------- --------
Senior debt, net 16,875 34,500
Senior subordinated notes 100,000 104,617
Payable to affiliate - 4,621
Other long-term liabilities 18,751 2,628
Commitments and contingencies
Stockholders' equity
Convertible preferred stock, par value $.01 per share;
500,000 shares authorized, 379,500 shares issued
and outstanding (liquidation preference of $75,900) 4 4
Common stock, par value $.01 per share; 40,000,000
shares authorized, 13,781,260 and 100 shares issued and
outstanding 138 -
Capital in excess of par value 160,524 73,829
Retained earnings (deficit) 1,559 (1,407)
-------- --------
162,225 72,426
-------- --------
$319,549 $241,780
======== ========
The accompanying notes are an integral part of these statements.
3
GERRITY OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
1995 1996 1995 1996
---- ---- ---- ----
(Unaudited)
Revenues
Oil and gas sales $13,949 $12,215 $28,245 $24,369
Other 641 371 1,138 684
------- ------- ------- -------
14,590 12,586 29,383 25,053
------- ------- ------- -------
Expenses
Direct operating 2,255 2,350 4,504 4,380
Exploration 3 331 6 372
General and administrative 1,861 1,112 3,691 2,790
Interest and other 3,716 3,589 7,256 7,015
Depletion, depreciation and amortization 8,069 7,326 16,131 14,003
Restructuring expenses - - 828 -
------- ------- ------- -------
Income (loss) before taxes (1,314) (2,122) (3,033) (3,507)
Provision (benefit) for income taxes
Current - - - -
Deferred (66) (243) (152) (713)
------- ------- ------- -------
(66) (243) (152) (713)
------- ------- ------- -------
Net income (loss) (1,248) (1,879) (2,881) (2,794)
======= ======= ======= =======
The accompanying notes are an integral part of these statements.
4
GERRITY OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share and per share amounts)
Convertible
Preferred Stock Common Stock Capital In
----------------- -------------------- Excess of Retained
Shares Amount Shares Amount Par Value Earnings Total
-------- ------ ---------- ------- --------- -------- --------
Balance, December 31, 1994 379,500 $ 4 13,781,260 $ 138 $160,524 $14,086 $174,752
Net loss - - - - - (7,973) (7,973)
Preferred dividends - - - - - (4,554) (4,554)
------- ------ ---------- ------- -------- ------- --------
Balance, December 31, 1995 379,500 4 13,781,260 138 160,524 1,559 162,225
Net loss through the Merger date - - - - - (1,387) (1,387)
Preferred dividends - - - - - (1,139) (1,139)
Revaluation of assets and liabilities
in Merger to fair value - - (13,781,160) (138) (86,695) 967 (85,866)
Net loss subsequent to the
Merger - - - - - (1,407) (1,407)
------- ------ ---------- ------- -------- ------- --------
Balance, June 30, 1996
(unaudited) 379,500 $ 4 100 $ - $73,829 $(1,407) $ 72,426
======= ====== ========== ======= ======== ======= ========
The accompanying notes are an integral part of these statements.
5
GERRITY OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Six Months Ended June 30,
-------------------------
1995 1996
---- ----
(Unaudited)
Operating activities
Net loss $(2,881) $(2,794)
Adjustments to reconcile net loss to net cash
provided by operations
Exploration expense 6 372
Depletion, depreciation and amortization 16,131 14,003
Restructuring expenses 194 -
Deferred taxes and other 177 (751)
Change in current and other assets and liabilities
Decrease (increase) in:
Accounts receivable 3,027 (58)
Inventory and other (379) (114)
Increase (decrease) in:
Accounts payable (839) (1,248)
Accrued liabilities (728) (329)
Ad valorem taxes payable (2,557) (2,449)
------ -----
Net cash provided by operations 12,151 6,632
------ -----
Investing activities
Acquisition, development and exploration (16,693) (4,613)
Merger expenses - (8,559)
------ ------
Net cash used in investing (16,693) (13,172)
------ ------
Financing activities:
Repayment of long-term debt - (36,188)
Proceeds from long-term debt 8,000 51,500
Preferred dividends (2,277) (1,139)
Other (41) -
------ ------
Net cash provided by financing 5,682 14,173
------ ------
Net increase in cash and equivalents 1,140 7,633
Cash and equivalents, beginning of period 110 1,433
------ ------
Cash and equivalents, end of period $1,250 $9,066
====== ======
Supplemental disclosure of cash flow information:
Cash paid for interest $7,637 $6,730
Cash paid for income taxes - -
The accompanying notes are an integral part of these statements.
6
GERRITY OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal
recurring items and a revaluation of assets and liabilities as a result
of accounting for the merger of the Company as a purchase by Patina)
necessary to present fairly the financial position of Gerrity Oil & Gas
Corporation and its wholly-owned subsidiaries (collectively, the
"Company") as of June 30, 1996 and the results of operations and cash
flows for the periods presented. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the Securities and Exchange Commission's
rules and regulations. The results of operations for the periods
presented are not necessarily indicative of the results to be expected
for the full year. Management believes the disclosures made are adequate
to ensure that the information is not misleading, and suggests that these
financial statements be read in conjunction with the Company's Annual
Report on Form 10-K, as amended, for the year ended December 31, 1995 and
the Company's Proxy Statement/Prospectus dated April 2, 1996 (SEC
Registration No. 333-572).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Recent Developments
On May 2, 1996, at a special meeting of the stockholders of the Company,
the Amended and Restated Agreement and Plan of Merger dated January 16,
1996 and amended and restated March 20, 1996 (the "Agreement") and the
transactions contemplated thereby, providing for the merger (the "Merger")
of a wholly owned subsidiary of Patina Oil & Gas Corporation ("Patina"),
which was a wholly owned subsidiary of Snyder Oil Corporation ("SOCO"),
with and into the Company, was approved by the Company's common
stockholders. In accordance with the Agreement, the shares of common stock,
par value $.01 per share, of the Company issued and outstanding immediately
prior to the effective time of the Merger were collectively converted into
an aggregate of 6,000,000 shares of common stock, par value $.01 per share
of Patina, and 3,000,000 five-year warrants initially to purchase one share
of Patina Common Stock at an exercise price of $12.50 per share. As a
result, SOCO owns 70% of the common stock and the former Gerrity common
shareholders own 30% of the common stock of Patina and warrants to purchase
additional shares of Patina common stock.
In conjunction with the Merger, Patina offered to exchange Patina's
preferred stock for Gerrity's preferred stock (the "Original Exchange
Offer"). A total of 1,204,847 shares were issued in exchange for
approximately 75% of Gerrity's preferred stock. Subsequent to the quarter
end, Patina announced that it intended to amend Gerrity's certificate of
incorporation to provide that all remaining shares of Gerrity's preferred
stock would be exchanged for Patina's preferred stock on the same terms as
the Original Exchange Offer. Additionally, the Company repurchased $1.2
million of Senior Subordinated Notes put to the Company in accordance with
the change of control provision within the indenture.
7
During the second quarter of 1996, the Company used the purchase method to
record the acquisition of the Company by Patina. In a purchase method
combination, the purchase price is allocated to the assets acquired and
liabilities assumed based on their fair values at the date of acquisition.
As a result of applying pushdown accounting, the assets and liabilities of
the Company were revalued to reflect the purchase price (the estimated
value of the Patina common shares and Patina warrants distributed to the
Company's common shareholders plus all liabilities assumed by Patina) to
acquire the Company. The Company's assets and liabilities were assigned
carrying amounts based on their relative fair market values.
The financial statements reflect the effects of Merger-related
transactions in the second quarter of 1996. The primary impact of applying
pushdown accounting was the revaluation of oil and gas properties and the
associated impact on depletion, depreciation and amortization. Periods
presented prior to the second quarter of 1996 are presented on a
pre-Merger basis and, therefore, are not comparable.
Risks and Uncertainties
Historically, the market for oil and gas has experienced significant price
fluctuations. Prices for natural gas in the Rocky Mountain region have
traditionally been particularly volatile and have been depressed since
1994. In large part, the decreased prices are the result of mild weather,
increased production in the region and limited transportation capacity to
other regions of the country. Increases or decreases in prices received
could have a significant impact on the Company's future results of
operations.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Producing Activities
The Company utilizes the successful efforts method of accounting for its
oil and gas properties. Consequently efforts, oil and gas leasehold costs
are capitalized when incurred. Unproved properties are assessed
periodically within specific geographic areas and impairments in value are
charged to expense. Exploratory expenses, including geological and
geophysical expenses and delay rentals, are charged to expense as
incurred. Exploratory drilling costs are initially capitalized, but
charged to expense if and when the well is determined to be unsuccessful.
Costs of productive wells, unsuccessful developmental wells and productive
leases are capitalized and amortized on a unit-of-production basis over
the life of the remaining proved or proved developed reserves, as
applicable. Gas is converted to equivalent barrels at the rate of 6 Mcf to
one barrel. Amortization of capitalized costs has generally been provided
over the entire DJ Basin as the wells are located in the same reservoir.
The Company expects to review the appropriateness of this policy in the
second half of 1996. No accrual has been provided for estimated
abandonment costs as management estimates that the salvage value of lease
and well equipment will approximate such costs.
8
During the first quarter of 1996, the Company adopted Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". SFAS 121 requires the Company to assess the need for an impairment of
capitalized costs of oil and gas properties on a field-by-field basis.
During the six months ended June 30, 1995 and 1996, the Company did not
provide for any impairments. Changes in the underlying assumptions or the
amortization units could, however, result in impairments in the future.
Other assets reflect the value assigned to a noncompete agreement entered
into as part of the Merger. The value is being amortized over five years
at a rate intended to approximate the decline in the value of the
agreement. Amortization expense for the two months ended June 30, 1996 was
$640,000. Scheduled amortization for the next five years is $1,924,000 for
the remainder of 1996, $1,540,000 in 1997, $513,000 in 1998, and $257,000
in each of 1999 and 2000.
Financial Instruments
The book value and estimated fair value of cash and equivalents was $1.4
million and $9.1 million at December 31, 1995 and June 30, 1996. The book
value approximates fair value due to the short maturity of these
instruments. The book value and estimated fair value of the Company's bank
debt and senior debt combined was $118 million and $139.1 million at
December 31, 1995 and June 30, 1996. The fair value of the bank debt is
presented at face value given its floating rate structure. The book value
of the senior subordinated notes was $104.6 million at June 30, 1996. The
estimated fair value was $104.1 million at that date. The fair value is
estimated based on the instruments price as quoted on the New York Stock
Exchange.
Other
All liquid investments with an original maturity of three months or less
are considered to be cash equivalents.
Certain amounts in prior periods consolidated financial statements have
been reclassified to conform with current classification.
3.INDEBTEDNESS
The following indebtedness was outstanding on the respective dates:
December 31, June 30,
1995 1996
---- ----
(In thousands)
11 3/4% Senior Subordinated Notes due 2004 $100,000 $ 104,617
Note payable, banks 18,000 34,500
-------- --------
Total long-term debt 118,000 139,117
Less current maturities (1,125) -
-------- --------
Long-term debt, net $116,875 $139,117
======== ========
9
The scheduled maturities of indebtedness for the next five years at June
30, 1996 were as follows:
Year Ending
December 31, (In thousands)
------------ --------------
1996 $ -
1997 -
1998 -
1999 34,500
2000 -
-------
Total $34,500
=======
Simultaneously with the Merger, the Company entered into a bank credit
agreement. The agreement consists of (a) a facility provided to Patina and SOCO
Wattenberg (the "Patina Facility") and (b) a facility provided to the Company
(the "Company Facility").
The Company Facility is a revolving credit facility in an aggregate amount up to
$51 million. The amount available for borrowing under the Company Facility will
be limited to a fluctuating borrowing base that equaled $51 million at June 30,
1996. At June 30, 1996, $34.5 million was outstanding under the Company
Facility. To date, the Company Facility has been used primarily to refinance the
previous bank credit facility and pay costs associated with the Merger.
The borrower may elect that all or a portion of the credit facilities bear
interest at a rate per annum equal to: (i) the higher of (a) prime rate plus a
margin equal to .25% and (b) the Federal Funds Effective Rate plus .5% plus the
Applicable Margin, or (ii) the rate at which eurodollar deposits for one, two,
three or six months (as selected by the applicable borrower) are offered in the
interbank eurodollar market in the approximated amount of the requested
borrowing (the "Eurodollar Rate") plus 1.25%. From May 2, 1996 through June 30,
1996, the average interest rate under the facilities approximated 7.0%.
The bank credit agreement contains certain financial covenants, including but
not limited to a maximum total debt to capitalization ratio, a maximum total
debt to EBITDA ratio and a minimum current ratio. The bank credit agreement also
contains certain negative covenants, including but not limited to restrictions
on indebtedness; certain liens; guaranties, speculative derivatives and other
similar obligations; asset dispositions; dividends, loans and advances; creation
of subsidiaries; investments; leases; acquisitions; mergers; changes in fiscal
year; transactions with affiliates; changes in business conducted; sale and
leaseback and operating lease transactions; sale of receivables; prepayment of
other indebtedness; amendments to principal documents; negative pledge clauses;
issuance of securities; and non-speculative commodity hedging.
On July 1, 1994, the Company received the net proceeds of approximately
$95,000,000 from its offering of $100,000,000 of 11 3/4% Senior Subordinated
Notes due July 15, 2004. In connection with the Merger, the Company repurchased
$1.2 million of the notes. As part of the purchase method of accounting, the
remaining notes have been reflected in the accompanying financial statements at
a market value of $104.6 million or 105.875% of their principal amount. Interest
is payable each January 15 and July 15, commencing January 15, 1995. The Notes
are redeemable at the option of the Company, in whole or in part, at any time on
or after July 15, 1999, initially at 105.875% of their principal amount,
declining to 100% on or after July 15, 2001. Upon the occurrence of a change of
control, as defined in the Notes, the Company would be obligated to make an
10
offer to purchase all outstanding Notes at a price of 101% of the principal
amount thereof. In addition, the Company would be obligated, subject to certain
conditions, to make offers to purchase Notes with the net cash proceeds of
certain asset sales or other dispositions of assets at a price of 101% of the
principal amount thereof. The Notes are unsecured general obligations of the
Company and are subordinated to all senior indebtedness of the Company and to
any existing and future indebtedness of the Company's subsidiaries. The Company
utilized the net proceeds from the Notes to pay down $85,000,000 of outstanding
debt under the Company's bank credit agreement and to prepay all $10,000,000 of
the then outstanding senior subordinated debt.
The Notes contain covenants that, among other things, limit the ability of the
Company to incur additional indebtedness, pay dividends, engage in transactions
with shareholders and affiliates, create liens, sell assets, engage in mergers
and consolidations and make investments in unrestricted subsidiaries.
Specifically, the Notes restrict the Company from incurring indebtedness
(exclusive of the Notes) in excess of approximately $51,000,000, if after giving
effect to the incurrence of such additional indebtedness and the receipt and
application of the proceeds therefrom, the Company's interest coverage ratio is
less than 2.5:1 or adjusted consolidated net tangible assets is less than 150%
of the aggregate indebtedness of the Company. The Company is currently in
compliance with the net tangible asset covenant. The Company currently does not
meet the interest coverage ratio necessary to incur indebtedness in excess of
approximately $51,000,000 primarily as a result of lower than anticipated
commodity prices.
4. STOCKHOLDER'S EQUITY
In 1993, the Company privately placed 3,036,000 Depositary Shares, each
representing a one-eighth interest in a share of $12.00 Convertible Preferred
Stock. The Company received $72,508,000 net proceeds from the offering. Each
share of the Convertible Preferred Stock is convertible at any time at the
option of the holder into 10.392 shares of Common Stock. Annual cumulative
dividends of $12.00 per share of Convertible Preferred Stock ($1.50 per
Depositary Share) are payable on each May 15, August 15, November 15, and
February 15, when, and if declared by the Board. Dividends at the rate of $12.00
per share, annually, were paid through February 15, 1996. Subsequent to that
date, no dividends have been declared or paid on the Company's preferred shares.
In the case of the voluntary or involuntary liquidation, dissolution or winding
up of the Company, holders of Convertible Preferred Stock are entitled to
receive a liquidation preference of $200.00 per share ($75,900,000 or $25 per
Depositary Share), plus accrued unpaid dividends. The shares of Convertible
Preferred Stock are redeemable at the option of the Company, in whole or in part
at any time at $208.40 per share, declining ratably to $200 per share in May
2003.
In conjunction with the Merger, Patina offered to exchange Patina's preferred
stock for Gerrity's preferred stock (the "Original Exchange Offer"). A total of
1,204,847 shares were issued in exchange for approximately 75% of Gerrity's
preferred stock. Subsequent to the quarter end, Patina announced that it
intended to amend Gerrity's certificate of incorporation to provide that all
remaining shares of Gerrity's preferred stock would be exchanged for Patina's
preferred stock on the same terms as the Original Exchange Offer.
In accordance with the Merger Agreement, the shares of common stock, par value
$.01 per share, of the Company issued and outstanding immediately prior to the
effective time of the Merger (13,781,260 common shares) were collectively
converted into an aggregate of 6,000,000 shares of common stock, par value $.01
per share of Patina, and 3,000,000 five-year warrants initially to purchase one
share of Patina Common Stock at an exercise price of $12.50 per share.
Immediately subsequent to this conversion, the authorized common shares of the
Company were reduced from 40,000,000 to 1,000 of which 100 are issued and
outstanding, all owned by Patina.
11
5. INCOME TAXES
The difference between the benefit from income taxes for the three and six
months ended June 30, 1995 and 1996, and the amount which would be determined by
applying statutory income tax rates to income before income taxes is due
primarily to a reduction of the effective tax rate as a result of the
anticipated realization of alternative minimum tax credits and utilization of
Section 29 tax credits, respectively.
6. COMMITMENTS AND CONTINGENCIES
In January 1996, Gerrity and three other producers were sued by five plaintiffs
purporting to represent all persons who, at any time since January 1, 1960, have
had agreements providing for royalties from gas production in Colorado to be
paid by the Company under a number of various lease provisions. The plaintiffs
allege that the Company improperly deducted unspecified "post-production" costs
incurred by the Company prior to calculating royalty payments in breach of the
relevant lease provisions and that the Company fraudulently concealed
that fact from the plaintiffs. The plaintiffs seek unspecified compensatory and
punitive damages and a declaratory judgment that the Company was not permitted
to deduct post-production costs prior to calculating royalties paid to the
class. The Company believes that costs deducted by it in calculating royalties
are and have been proper under the relevant lease provisions, and it intends to
defend this and any similar suits vigorously. At this time, the Company is
unable to estimate the range of potential loss, if any, from this uncertainty.
However, the Company believes the resolution of this uncertainty should not have
a material adverse effect upon the Company's financial position, although an
unfavorable outcome in any reporting period could have a material impact on the
Company's results of operations for that period.
In March 1996, a complaint was filed in the Court of Chancery for the State of
Delaware against the Company and each of the directors of the Company, Brickell
Partners v. Gerrity Oil & Gas Corporation, C.A. No. 14888 (Del. Ch.). The
complaint alleges that the "action is brought (a) to restrain the defendants
from consummating a merger which will benefit the holders of the Company's
common stock at the expense of the holders of the Preferred and (b) to obtain a
declaration that the terms of the proposed merger constitute a breach of the
contractual rights of the Preferred." The complaint seeks, among other things,
certification as a class action on behalf of all holders of the Company's
preferred stock, a declaration that the defendants have committed an abuse of
trust and have breached their fiduciary and contractual duties, an injunction
enjoining the Merger and money damages. Defendants believe that the complaint is
without merit and intend to vigorously defend against the action. At this time,
the Company is unable to estimate the range of potential loss, if any, from this
uncertainty. However, the Company believes the resolution of this uncertainty
should not have a material adverse effect upon the Company's financial position,
although an unfavorable outcome in any reporting period could have a material
impact on the Company's results of operations for that period.
The financial statements reflect favorable legal proceedings only upon receipt
of cash, final judicial determination or execution of a settlement agreement.
The Company is a party to various other lawsuits incidental to its business,
none of which are anticipated to have a material adverse impact on its financial
position or results of operations.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Gerrity Oil & Gas Corporation (the "Company") is an energy company primarily
engaged in the drilling of low risk oil and gas development wells. The following
discussion should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto.
Results of Operations
Revenue. Revenue for the three and six months ended June 30, 1996 was
$12,586,000 and $25,053,000, a decrease of $2,004,000, or 14% and $4,330,000, or
15%, respectively, as compared to the same periods in 1995. These changes were
primarily attributable to decreased average daily production partially offset by
higher average selling prices as summarized in the tables below:
Three months ended Six months ended
June 30, June 30,
--------------------- ----------------------
1995 1996 % 1995 1996 %
------ ------ ---- ------ ------ ----
Barrels of oil production
per day 4,752 3,441 (28) 5,008 3,481 (30)
Price per barrel $16.46 $20.28 23 $16.17 $19.41 20
Mcfs of gas production
per day 52,877 42,051 (20) 52,170 41,610 (20)
Price per Mcf $ 1.42 $ 1.53 8 $ 1.44 $ 1.59 10
Barrels of oil equivalent
production per day 13,565 10,449 (23) 13,703 10,415 (24)
Price per barrel equivalent $11.30 $12.85 14 $11.39 $12.86 13
Three months ended Six months ended
June 30 June 30
Decrease in oil and gas sales due to production volume $(3,362,000) $(7,104,000)
Increase in oil and gas sales due to selling price 1,628,000 3,228,000
----------- -----------
Decrease in oil and gas sales $(1,734,000) $(3,876,000)
=========== ===========
Oil and gas production may vary from period to period due to several
factors, including changes in weather, timing of new well hookups, timing of
recompletions, and the purchase or sale of producing properties. In response to
low commodity prices experienced throughout 1995 and 1996, the Company reduced
the level of its drilling and recompletion activity. More than half of a typical
Codell well's reserves are recovered in the first three years of production. As
a result, each well contributes significantly more production in the first year
than in subsequent years. The Company drilled and completed 860 wells and
performed 282 recompletions from January 1, 1992 to December 31, 1994. As of
January 1, 1995 to the present time, the Company has drilled and completed 81
wells and performed 85 recompletions. Production was lower during the three and
six months ended June 30, 1996 in comparison to 1995 as a result of all of the
aforementioned factors.
13
In March 1996, the Company entered into a crude oil swap agreement in
order to hedge against the volatility in crude oil prices during the summer
months. Although the Company entered into the agreement to minimize exposure to
price decreases, the agreement also limits the Company's ability to benefit from
any significant price increases on the contract volumes. The contract volume is
for 1,500 barrels of crude oil per day during the period from July 1, 1996
through September 30, 1996. The agreements involve the cash settlement of the
differential between the contract prices (an average of $18.34 per barrel) and
the average closing NYMEX crude oil price during each month. Any gain or loss
realized on these agreements will be included as a component of oil and gas
sales in the month of production.
Direct Operating Expenses. Direct operating expenses consist of lease
operating expenses and production taxes. The Company's costs for the three and
six months ended June 30, 1996 were $2,350,000 and $4,380,000, an increase of
$95,000, or 4%, and a decrease of $124,000, or 3%, respectively, compared to the
same periods in 1995. The overall increase for the three months ended June 30,
1996 is attributable to a reclassification of certain expenses for May and June
1996 to direct operating expenses to present these costs on a financial
reporting basis consistent with that of SOCO. The decrease for the six months
ended June 30, 1996 is due to a reduction in field personnel throughout 1995 as
well as lower production taxes in 1996, which reflects the decrease in oil and
gas sales.
General and Administrative Expenses. General and administrative
expenses, which are net of operator fees received by the Company, for the three
and six months ended June 30, 1996 were $1,112,000 and $2,790,000, a decrease of
$749,000, or 40% and $901,000, or 24%, respectively, compared to the same
periods in 1995. The decreases reflect the Company's cost reduction plan which
was implemented in January 1995 as well as additional cost savings realized as a
result of the Merger.
Interest and Other Expenses. Interest and other expenses for the three and
six months ended June 30, 1996 was $3,589,000 and $7,015,000, a decrease of
$127,000, or 3%, and $241,000, or 3%, respectively, as compared to the same
periods in 1995. These decreases are due primarily to a decrease in the average
outstanding borrowings between 1995 and 1996 as follows:
Three Months Ended Six Months Ended
June 30 June 30
------------------ -----------------
1995 1996 1995 1996
------ ------ ------ ------
Average interest rate 10.7% 11.1% 10.7% 11.0%
Average borrowings outstanding
(in thousands) $137,739 $125,383 $136,709 $123,283
14
Depletion, Depreciation and Amortization. Depletion, depreciation and
amortization for the three and six months ended June 30, 1996 were $7,326,000
and $14,003,000, a decrease of $743,000, or 9%, and a decrease of $2,128,000, or
13%, respectively, compared to the same periods in 1995. As depletion is
calculated using the units-of-production method, the decrease in the six months
ended June 30, 1996 was partially attributable to the decrease in oil and gas
production. The decrease for the three months ended June 30, 1996 also reflects
the reduction in the valuation of oil and gas properties from historical cost to
fair value as of the Merger date. Depletion costs per BOE increased from $6.24
for the first six months of 1995 to $6.79 for the first six months of 1996.
Restructuring expenses. Restructuring expenses for the six months ended
June 30, 1995 were $828,000. These expenses were a result of the Company's cost
reduction plan implemented in January 1995 and were comprised primarily of
severance benefits and to a lesser extent, office lease renegotiation costs and
the related abandonment of leasehold improvements.
Income Taxes. The difference between the benefit from income taxes for
the three and six months ended June 30, 1995 and 1996, and the amount which
would be determined by applying statutory income tax rates to income before
income taxes is due primarily to a reduction of the effective tax rate as a
result of the anticipated realization of alternative minimum tax credits and
utilization of Section 29 tax credits, respectively.
Liquidity and Capital Resources
In conjunction with the Merger, the Company entered into a new Bank Credit
Agreement dated as of May 2, 1996 with Texas Commerce Bank National Association,
as administrative agent, NationsBank of Texas, N.A., as documentary agent, Wells
Fargo Bank, N.A., CIBC, Inc. and Credit Lyonnais, as co-agents. The Company's
Credit Agreement currently includes commitments to lend up to $51,000,000 to the
Company. Borrowings under the Credit Agreement are secured by a pledge of the
stock of all of the Company's subsidiaries and a mortgage on substantially all
of the Company's oil and gas properties. As of June 30, 1996, the Company had
$34,500,000 of outstanding borrowings and $16,500,000 available for borrowing
under the Bank Credit Agreement. The average interest rate on outstanding
borrowings under the Bank Credit Agreement at June 30, 1996 was 7.19%.
The amount available to be drawn by the Company under the Credit
Agreement is subject to a borrowing base (the "Borrowing Base"), which is based
upon the Lenders' determination of the amount of Indebtedness (as defined in the
Credit Agreement) for borrowed money that can be supported by the Company's
proved oil and gas reserves. The Borrowing Base is generally determined
semi-annually, but may be redetermined, at the option of either the Company or
the
15
Lenders, one additional time each year, and will be redetermined on certain
sales of assets included in the Borrowing Base. Until the next scheduled
redetermination, the Borrowing Base has been set at $51,000,000.
The bank credit agreement contains certain financial covenants,
including but not limited to a maximum total debt to capitalization ratio, a
maximum total debt to EBITDA ratio and a minimum current ratio. The bank credit
agreement also contains certain negative covenants, including but not limited to
restrictions on indebtedness; certain liens; guaranties, speculative derivatives
and other similar obligations; asset dispositions; dividends, loans and
advances; creation of subsidiaries; investments; leases; acquisitions; mergers;
changes in fiscal year; transactions with affiliates; changes in business
conducted; sale and leaseback and operating lease transactions; sale of
receivables; prepayment of other indebtedness; amendments to principal
documents; negative pledge clauses; issuance of securities; and non-speculative
commodity hedging.
The Company's 11 3/4% Senior Subordinated Notes due July 15, 2004
contain covenants that, among other things, limit the ability of the Company to
incur additional indebtedness. Specifically, the Notes restrict the Company from
incurring indebtedness (exclusive of the Notes) in excess of approximately
$51,000,000, if after giving effect to the incurrence of such additional
indebtedness and the receipt and application of the proceeds therefrom, the
Company's interest coverage ratio is less than 2.5:1 or adjusted consolidated
net tangible assets is less than 150% of the aggregate indebtedness of the
Company. The Company is currently in compliance with the net tangible asset
covenant. The Company currently does not meet the interest coverage ratio
necessary to incur indebtedness in excess of approximately $51,000,000 primarily
as a result of lower than anticipated commodity prices. The Company is of the
opinion that this will have no materially adverse effect on its financial
condition.
The Company had working capital deficits of $6,583,000 and $164,000 at
December 31, 1995 and June 30, 1996, respectively. The Company has historically
maintained a working capital deficit as cash flows from operations have been
sufficient to meet its working capital needs. At June 30, 1996, the Company had
an additional $16,500,000 of available borrowings pursuant to the terms of its
Credit Agreement.
During the six months ended June 30, 1996, the Company performed 46
recompletions. Net cash used in investing activities was $13,172,000. These
capital expenditures were financed through cash provided by operating activities
of $6,632,000 and through net borrowings under the Credit Agreement totaling
$15,312,000. Net cash provided by financing activities was $14,173,000. As a
result of continued low Rocky Mountain natural gas prices, the Company's capital
expenditures for 1996, exclusive of acquisitions, are currently estimated to be
approximately $8,500,000 to $10,000,000. The Company continually evaluates the
drilling budget and may increase or decrease its development program in response
to market conditions.
The Company believes that its capital resources are adequate to meet the
requirements of its business. However, future cash flows are subject to a number
of variables including the level of production and oil and gas prices, and there
can be no assurance that operations and other capital resources will provide
cash in sufficient amounts to maintain planned levels of capital expenditures or
that increased capital expenditures will not be undertaken.
Inflation and Changes in Prices
While certain of its costs are affected by the general level of
inflation, factors unique to the petroleum industry result in independent price
fluctuations. Over the past five years, significant fluctuations have occurred
in oil and gas prices. Although it is particularly difficult to estimate future
prices of oil and gas, price fluctuations have had, and will continue to have, a
material effect on the Company.
16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Information with respect to this item is incorporated by reference from
Note 3 of the Notes to Consolidated Financial Statements in Part I of
this report.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
A special meeting of the Company's common stockholders was held on May
2, 1996. The holders of the common stock of the Company voted as
follows:
Adoption of the Amended and Restated Agreement and Plan of
Merger
Votes For Votes Against Abstentions
--------- ------------- ------------
9,018,630 193,750 38,195
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a.Exhibits required by Item 601 of Regulation S-K:
Exhibit
No. Description
- ------- -----------
10.73 - First Amendment to Credit Agreement dated June 28, 1996
by and among Gerrity, Patina Oil & Gas Corporation and
SOCO Wattenberg Corporation, as Borrowers, and Texas
Commerce Bank National Association, as Administrative
Agent, and certain commercial lending institutions.
27 - Financial Data Schedule
b. Report on Form 8-K:
On May 17, 1996, the Company filed with the Securities and Exchange
Commission a Current Report on Form 8-K. The Report disclosed under Item 1
information regarding the approval of the Amended Agreement and Plan of
Merger among Snyder Oil Corporation, Patina Oil & Gas Corporation, Patina
Merger Corporation and the Company.
17
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.
GERRITY OIL & GAS CORPORATION
(Registrant)
Date: August 13, 1996 By:/S/DAVID J. KORNDER
-----------------------
David J. Kornder
Vice President
Chief Financial Officer
18