FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997.
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO ____________
COMMISSION FILE NUMBER: 0-21663
OFFSHORE ENERGY DEVELOPMENT CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
76-0509791
(I.R.S. Employer
Identification No.)
1400 WOODLOCH FOREST DRIVE, SUITE 200
THE WOODLANDS, TEXAS 77380
(Address of principal executive offices)
(Zip Code)
(281) 364-0033
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of May 14, 1997, there were 8,701,885 shares of the registrant's Common
Stock, par value $.01 per share, outstanding.
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
OFFSHORE ENERGY DEVELOPMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
1996 1997
------------ ------------
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents ................................................................ $ 18,407,768 $ 13,233,067
Accounts receivable - trade, net ......................................................... 2,308,439 1,466,790
Accounts receivables - affiliate ......................................................... 87,979 131,040
Accounts receivable - other .............................................................. 1,788,284 2,205,200
Prepaids and other assets ................................................................ 45,491 47,018
------------ ------------
Total current assets ..................................................................... 22,637,961 17,083,115
Oil and gas properties - at cost (successful efforts method) ............................. 36,769,166 40,502,310
Other property and equipment ............................................................. 372,946 564,565
Accumulated depreciation, depletion and amortization ..................................... (11,439,301) (12,260,491)
25,702,811 28,806,384
Investments in affiliates and others ..................................................... 729,784 924,609
Investments in certificates of deposits, restricted ...................................... 1,445,442 1,457,264
Deferred and other assets ................................................................ 424,855 304,251
------------ ------------
$ 50,940,853 $ 48,575,623
============ ============
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities:
Accounts payable ......................................................................... $ 6,392,031 $ 7,431,048
Capital lease payable - current .......................................................... 187,444 192,450
Accrued liabilities ...................................................................... 404,138 665,114
------------ ------------
6,983,613 8,288,612
Deferred tax liability ................................................................... 1,442,844 196,799
Capital lease payable - noncurrent ....................................................... 462,380 412,130
Reserve for abandonment .................................................................. 480,906 525,766
------------ ------------
9,369,743 9,423,307
Stockholders' Equity:
Preferred stock, $.01 par value, authorized
1,000,000 shares, none issued or outstanding ............................................. -- --
Common stock - Offshore Energy Development
Corporation $.01 par value; authorized 10,000,000 shares; ................................ 87,019 87,019
issued and outstanding 8,701,885 at December 31, 1996 and March 31, 1997
Additional paid-in capital ............................................................... 42,645,778 42,645,778
Accumulated deficit ...................................................................... (1,161,687) (3,580,481)
------------ ------------
Total stockholders' equity ............................................................... 41,571,110 39,152,316
Commitments and contingencies
------------ ------------
Total Liabilities and Stockholders' Equity ............................................... $ 50,940,853 $ 48,575,623
============ ============
See accompanying notes to consolidated financial statements.
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OFFSHORE ENERGY DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Three Months Ended
March 31, March 31,
1996 1997
(Predecessors) (Company)
(Unaudited) (Unaudited)
------------ -----------
Income:
Exploration and production .................................................. $ 3,287,287 $ 2,186,248
Pipeline operating and marketing ............................................ 266,014 284,595
Equity in earnings (loss) of equity investments ............................. 3,766 10,972
Gain on sales of oil and gas properties
or partnership investments, net ..................................... 10,686,623 3,260
------------ -----------
Total Income .................................................... 14,243,690 2,485,075
------------ -----------
Expenses:
Operations and maintenance .................................................. 474,943 512,825
Exploration charges ......................................................... 89,946 3,932,334
Depreciation, depletion and amortization .................................... 1,550,066 1,030,762
Abandonment expense ......................................................... 181,799 36,113
General and administrative .................................................. 541,545 765,971
------------ -----------
Total Expenses ................................................... 2,838,299 6,278,005
------------ -----------
Earnings (loss) before interest and taxes ........................................... 11,405,391 (3,792,930)
Interest Income (Expense) and Other:
Interest expense ............................................................ (360,365) (71,871)
Interest income and other, net .............................................. 5,055 199,962
------------ -----------
Total Interest Income (Expense) and Other ........................ (355,310) 128,091
------------ -----------
Income (Loss) Before Income Taxes ................................................... 11,050,081 (3,664,839)
Income Tax Benefit (Expense) ........................................................ (14,023) 1,246,045
------------ -----------
Net Income (Loss) ................................................................... 11,036,058 (2,418,794)
Preference unit payments and accretion of discount .......................... (446,619) --
------------ -----------
Income (loss) available to common unit holders and
stockholders ................................................................ $ 10,589,439 $(2,418,794)
============ ===========
Income (loss) available to common unit holders and
stockholders per common share ............................................... $ 2.10 $ (0.28)
============ ===========
Weighted average number of common shares and
common share equivalents outstanding ........................................ 5,051,882 8,701,885
============ ===========
See accompanying notes to consolidated financial statements.
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OFFSHORE ENERGY DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended Three Months Ended
March 31, 1996 March 31, 1997
(Predecessors) (Company)
(Unaudited) (Unaudited)
------------ ------------
Operating Activities
Net income (loss) .................................................................. $ 11,036,058 $ (2,418,794)
Adjustments to reconcile net income (loss)
to cash provided by (used in) operations
Depreciation, depletion and amortization ........................................... 1,577,350 1,051,480
Abandonment expense ................................................................ 34,322 36,113
Gain on sales ...................................................................... (10,686,623) 3,260
Dry hole expense ................................................................... -- 3,657,115
Equity in (earnings) loss of equity investments .................................... (3,766) (10,972)
Change in interest of oil and gas partnerships ..................................... (26,580) 3,788,520
Deferred taxes ..................................................................... 14,023 (1,246,045)
Changes in assets and liabilities:
Accounts receivable ................................................................ 494,493 235,966
Deferred and other assets .......................................................... (140,680) (407,087)
Accounts payable ................................................................... (2,229,990) 2,147,081
Accrued liabilities ................................................................ 39,255 280,374
------------ ------------
Total adjustments .................................................................. (10,928,196) 9,535,805
------------ ------------
Net cash provided by operating activities .......................................... 107,862 7,117,011
Investing Activities
Investment in equity interests ..................................................... (242,626) (183,853)
Proceeds from the sales of properties and other investments ........................ 11,340,093 50,000
Restricted investments in certificates of deposit .................................. (17,046) (11,822)
Sale of property and equipment ..................................................... 663,368 --
Capital expenditures for property and equipment .................................... (541,729) (12,100,793)
------------ ------------
Net cash provided by (used in) investing activities ................................ 11,202,060 (12,246,468)
Financing Activities
Principal payments on borrowings ................................................... (9,787,818) --
Principal payments on capital lease ................................................ (51,509) (45,244)
------------ ------------
Net cash used in financing activities .............................................. (9,839,327) (45,244)
Increase (decrease) in cash and cash equivalents ................................... 1,470,595 (5,174,701)
Cash and cash equivalents balance, beginning of period ............................. 710,306 18,407,768
------------ ------------
Cash and cash equivalents balance, end of period ................................... $ 2,180,901 $ 13,233,067
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ........................................... $ 384,247 $ 26,736
============ ============
Cash paid during the period for income taxes ....................................... $ -- $ --
============ ============
Supplemental disclosure of non-cash activity:
Accretion of discount on preference units .......................................... $ 176,619 $ --
See accompanying notes to consolidated financial statements.
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OFFSHORE ENERGY DEVELOPMENT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements include, in
the opinion of management, all adjustments necessary to present fairly the
consolidated financial position of Offshore Energy Development Corporation
("OEDC" or the "Company") at March 31, 1997 and its results of operations and
cash flows for the three months ended March 31, 1997 and 1996. The financial
statements should be read in conjunction with the historical financial
statements and notes to the consolidated historical financial statements of
Offshore Energy Development Corporation as of and for the period ended December
31, 1996.
2. PRINCIPLES OF PRESENTATION AND ORGANIZATION
OEDC is a Delaware corporation formed on July 24, 1996 for the purpose of
acquiring the common stock of OEDC, Inc. and the partners' interest in OEDC
Partners, L.P. (the "Combination"). At formation, OEDC issued a share of stock
to three of its officers.
The Combination was consummated on November 6, 1996 and OEDC issued
5,051,882 shares of common stock to the stockholders of OEDC, Inc. ("Inc.") and
the partners of OEDC Partners, L.P. ("Partners"), collectively (the
"Predecessors). The Combination was accounted for by assigning the Predecessors'
carryover basis to the acquired assets. In conjunction with the Combination, the
Company completed a public issuance of 3,650,000 shares of common stock.
The Predecessors were formed on August 31, 1992 for the purpose of
investing in certain partnerships involved in drilling, producing, marketing,
gathering and storing oil and gas. Upon completion of the Combination, all of
Partners' assets and liabilities were transferred to OEDC, the partners of
Partners were issued common stock in exchange for their interests and Partners
was dissolved. The shareholders of Inc. exchanged their Inc. common stock for
OEDC common stock and Inc. became a wholly-owned subsidiary of OEDC.
Prior to the Combination, Partners was a limited partnership. As such, it
was not subject to federal income taxes; the taxable income or loss was passed
through to the partners.
PRINCIPLES OF CONSOLIDATION
The Company's investments in associated oil and gas partnerships are
accounted for using the proportionate consolidation method, whereby the
Company's proportionate share of each oil and gas partnerships' assets,
liabilities, revenues, and expenses is included in the appropriate
classifications in the Company's financial statements. Investments in non-oil
and gas partnerships where the Company has ownership interest of less than 50%
are accounted for on the equity method, all investments with an ownership
interest of less than 20% are accounted for on the cost method. All of the
Company's material intercompany accounts and transactions have been eliminated
in the consolidation.
The consolidated financial statements include the consolidated accounts of
Inc. and Partners prior to the Combination. The consolidated financial
statements are presented due to Inc.'s sole general partner interest and control
over Partners.
3. CREDIT FACILITY
In 1996, the Company entered into a two-year $10,000,000 line of credit
with Union Bank of California, N.A. At March 31, 1997, the borrowing base was
$4,062,500 with no amounts outstanding under this facility. The borrowing base
is reduced by $312,500 per month through August 31, 1997, by $250,000 per month
for the succeeding six months and by $166,667 per month for the final six months
of the agreement, unless changed by the bank at the time of a borrowing base
redetermination. The borrowing base is to be redetermined every six months.
Borrowings under this facility bear interest at a rate equal to, at the
Company's option, either the bank's reference rate plus 1% or LIBOR plus 2.5%.
4. SALE OF INVESTMENT IN PARTNERSHIP AND OIL AND GAS PROPERTIES
During the quarter ended March 31, 1996, the Company sold approximately
96% of its interest in Dauphin Island Gathering Partners ("DIGP") to a
subsidiary of MCN Investment Corporation ("MCN"). The Company received net
proceeds of approximately $10,800,000 from MCN resulting in a gain of
approximately $10,800,000. The Company continued to operate DIGP and retained a
1% ownership interest.
Also, during the first quarter of 1996, the Company sold its interest in a
non-producing oil and gas property for approximately $500,000 resulting in a
loss of $166,000.
5. ABANDONMENT OF OIL AND GAS PROPERTIES
The Company's oil and gas properties are accounted for on the successful
efforts method. The successful efforts method requires that exploratory dry
holes be expensed as incurred. During the quarter ended March 31, 1997,
approximately $3,650,000 was charged to operations for exploratory dry holes; no
such charge was recorded for the quarter ended March 31, 1996.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
Under the terms of the Combination, which was consummated on November 6,
1996, the Company (i) acquired all of the outstanding capital stock of OEDC,
Inc. previously owned by Company management and by Natural Gas Partners, L.P.
("NGP"), (ii) acquired by merger 50% of the common limited partnership units of
OEDC Partners, L.P. from the Texas corporation having the same name as the
company, and (iii) acquired 50% of the common units of OEDC Partners, L.P. held
by NGP and certain of its employees. The Company completed an initial public
offering (the "Offering") of shares of its common stock contemporaneously with
the consummation of the Combination.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31,
1996.
INCOME. Total income for the Company decreased by $11,759,000 (83%) from
$14,244,000 in the three months ended March 31, 1996 to $2,485,000 in the three
months ended March 31, 1997. The higher income amount in the first quarter of
1996 was primarily attributable to the Company's sale of all but a 1% general
partnership interest in Dauphin Island Gathering Partners ("DIGP") which
resulted in a gain of $10,827,000.
Exploration and production revenue decreased $1,101,000 (33%) from
$3,287,000 in the first quarter of 1996 compared to $2,186,000 in the first
quarter of 1997 in part as a result of a 21% decrease in production volumes from
1.33 Bcf to 1.05 Bcf in the first quarters of 1996 and 1997, respectively. The
production decrease was attributable to expected production declines at the
Company's Mobile area 959 cluster, which was partially offset by increased
production volumes from the Company's successful Viosca Knoll block 24 sidetrack
drilling operation in the fourth
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quarter of 1996. The decrease in exploration and production revenue was also
attributable to lower natural gas prices in the first quarter of 1997. Average
natural gas prices received (inclusive of hedging) were $2.47 per Mcf compared
to $2.08 per Mcf (a 16% decrease) in the three months ended March 31, 1996 and
1997, respectively.
Pipeline operating and marketing income increased slightly by $19,000 (7%)
from $266,000 for the three month period ended March 31, 1996 to $285,000 for
the three month period ended March 31, 1997. The Company receives a monthly
management fee of $188,000 per quarter for operating the Dauphin Island
Gathering System. The Company also markets third-party gas on a limited basis.
Marketing revenue received in the first quarter of 1997 was $97,000 as compared
to $119,000 in the first quarter of 1996.
EXPENSES. Total expenses increased by $3,440,000 (121%) from $2,838,000
for the first quarter of 1996 compared to $6,278,000 for the first quarter of
1997.
Operations and maintenance expense remained relatively stable for the
first quarter of 1997 at $513,000 compared to $475,000 for the first quarter of
1996 (an 8% increase). In general, a significant portion of operations expense
does not fluctuate from period to period as changes occur in production volumes
and prices received for those volumes, provided that new production facilities
are not brought on-line, as was the case for the first quarters of 1996 and
1997. Therefore, such expenses do not always change proportionately with changes
in exploration and production income.
Exploration charges increased $3,842,000 from $90,000 in the first three
months of 1996 to $3,932,000 in the first three months of 1997. The major
component of the first quarter 1997 charge relates primarily to dry hole
expenses of $3,657,000 of which, $3,437,000 relates to the Company's
unsuccessful attempts to repair and side track out of the existing South
Timbalier 162 B6 non-producing wellbore. An additional $220,000 in dry hole
expense relates to the Viosca Knoll block 80 dry hole that was drilled in fourth
quarter of 1996. The Company received additional invoices in the first quarter
of 1997 relating to the drilling of that well.
The Company also incurred geological and seismic charges of $268,000 in
the first quarter of 1997 compared to charges of $42,000 in the comparable
quarter in 1996. The 1997 expenditures consisted of geological consulting and
seismic data acquisition and processing for areas offshore Texas, Louisiana and
Alabama. As a result of the Company's use of the successful efforts method of
accounting, the Company expenses unsuccessful exploration efforts as well as
geological and seismic costs.
As a result of natural gas production volumes decreasing by 21% for the
three months ended March 31, 1997 compared to the same period in 1996, the
Company's depreciation, depletion and amortization ("DD&A") decreased by
$519,000 (34%). The Company's average DD&A rate per
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Mcf of production was $1.16 per Mcf and $.98 per Mcf for the first quarters of
1996 and 1997 respectively. The decline in average DD&A rate per Mcf was due to
decreased production, as expected, from the Company's Mobile Area 959 cluster,
which had a higher finding cost per Mcf as compared to other Company production.
Abandonment expense decreased 80% from $182,000 to $36,000 in the first
three months of 1996 and 1997, respectively. The Company incurred cash
abandonment charges of $148,000 and abandonment accruals of $34,000 in the first
quarter of 1996 compared to abandonment accruals of $36,000 in the first quarter
of 1997.
General and administrative expenses increased $224,000 (41%) from $542,000
for the three months ended March 31, 1996 to $766,000 for the three months ended
March 31, 1997. The increase was attributable to additional staffing in
anticipation of increased development and exploration activities combined with
annual compensation increases.
INTEREST INCOME (EXPENSE). The Company incurred net interest expense (net
of interest income) of $355,000 for the first quarter of 1996 compared to net
interest income of $128,000 for the first quarter of 1997. The net interest
expense in 1996 primarily represented interest paid to an affiliate of Enron
Corp. ("Enron") relating to a combination term and revolving credit facility.
The term portion of the credit facility bore interest at 15% per annum and the
revolving portion bore interest at a floating rate equal to 2.5% above the
applicable prime rate. During the first quarter of 1996, the Company repaid all
amounts outstanding under the term portion and one-half of the amount
outstanding under the revolving portion. The Company subsequently replaced the
Enron revolving credit facility in the third quarter of 1996 with a revolving
credit facility from Union Bank of California N.A. ("Union Bank") with an
interest rate of LIBOR plus 2.5%. The reason the Company received net interest
income in the first quarter of 1997 compared to a net interest expense in the
first quarter of 1996 was the result of paying off all outstanding debt after
the Offering in November, 1996 coupled with increased interest income from
increased cash balances following the Offering.
NET INCOME (LOSS). The Company had income before income taxes of
$11,050,000 in the first quarter of 1996 compared to a loss of $3,665,000 in the
first quarter of 1997. The net income for the first three months of 1996 was
primarily attributable to the gain realized on the previously discussed sale of
the Company's interest in DIGP. Net income (loss) after giving effect to income
taxes and tax benefits was income of $11,036,000 in the first quarter of 1996
compared to a net loss of $2,419,000 for the first quarter of 1997, as a
$1,246,000 tax benefit was generated as a result of the first quarter 1997 net
loss before taxes.
Income (loss) available to common unit holders and stockholders, which
gives effect to preference unit payments and accretion of discount on preference
units outstanding, was income of
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$10,589,000 in the three month period ended March 31, 1996. In the fourth
quarter of 1996, the Company redeemed all of the outstanding preference units of
OEDC Partners, L.P. with proceeds of the Offering. Therefore, in future periods
all income is available to common stockholders.
During the first quarter of 1996, the Company made preference payments to
NGP totaling $270,000. The Company began accreting the $2 million discount of
preference units following the purchase of additional preference units by NGP in
1995. The accretion of discount was $177,000 in the first quarter of 1996. As
the Company redeemed all preference units outstanding following the Offering, in
future periods the Company will not incur accretion of discount charges nor will
preference payments have to be made.
LIQUIDITY AND CAPITAL RESOURCES
SUMMARY
The Company's cash position decreased by $5,175,000 during the first
quarter of 1997. This decrease is primarily the result of the Company's ongoing
investment in oil and gas drilling and development activities.
Net cash provided by operating activities was $7,117,000 for the three
months ended March 31, 1997, as compared to $108,000 for the same period in
1996. The cash provided by operating activities was significantly greater in the
first quarter of 1997 as compared to the first quarter of 1996 primarily as a
result of ordinary changes in current assets and liabilities creating a source
of cash of $2,383,000, a change in oil and gas partnership interest, primarily
the SDP II partnership, providing a source of cash of $3,789,000 (which was
offset by a similar amount as investment in oil and gas properties) and
$3,657,000 in dry hole expense, primarily relating to the Company's South
Timbalier 162 B-6 well, which is added back to net income for calculating cash
provided by operating activities, but is ultimately a use of cash as dry hole
expense is considered a capital expenditure.
Net cash utilized in investing activities was $12,246,000 in the three
months ended March 31, 1997 compared to $11,202,000 of cash that was provided
from investing activities in the three months ended March 31, 1996. The first
quarter 1997 use of cash represents the Company's continued investment in
various oil and gas projects. The cash provided in the first quarter of 1996 was
the result of selling all but one percent of the Company's general partnership
interest in DIGP and selling a non-strategic lease block and generating
$11,340,000 from these transactions. The Company has no present plans to sell
any of its properties and does not anticipate that sales of properties will be a
significant source of liquidity to the Company in the foreseeable future.
-9-
Financing activities consumed $45,000 of cash in the first quarter of 1997
as a result of principal payments on a leased compressor utilized by the
Company. During the comparable period in 1996, the Company utilized $9,839,000
which primarily consisted of principal repayment to Enron on outstanding loans.
In the event the cash flows from the Company's operating activities,
credit available under its credit facility with Union Bank and the proceeds from
the Offering are not sufficient to fund development costs, or results from
drilling are not as successful as anticipated, the Company will either curtail
its drilling or seek additional financing to assist in its drilling activities.
No assurance may be given that the Company will be able to obtain such
additional financing. If the Company is required to curtail its drilling
activities, its ability to develop and expand its prospect inventory, as well as
its earnings and cash flow from exploration and production activities, will be
adversely affected.
The Company intends to continue its efforts to acquire additional acreage
if and when these opportunities become available. Any such acquisition or
related drilling on such acquisition could require additional borrowings under
the credit facility with Union Bank, or additional debt or equity financing. No
assurance may be given that the Company will be able to obtain such additional
funds.
WORKING CAPITAL
The Company had net working capital of $8,795,000 as of March 31, 1997. The
March 31, 1997 working capital surplus is primarily the result of the Offering
less amounts used to redeem outstanding preference units and to invest in oil
and gas properties. At March 31, 1996, the Company had a working capital surplus
of $49,000. The Company periodically has experienced substantial working capital
deficits. The Company has incurred substantial expenditures for the acquisition
and development of capital assets either on vendor open accounts payable or
under short-term financings. The Company has been able to refinance the accounts
payable balances by including them in longer-term project financings. The
operation of the Company's properties, when combined with property-based credit
facilities, has usually generated sufficient cash within 12 months to repay the
investments therein. Thus, capital investments in properties have converted to
cash or generated borrowing capacity rapidly enough to finance the Company's
working capital deficits. No assurance may be given that the Company will be
able to utilize such sources to finance any working capital deficits that may
occur in the future.
FINANCING ACTIVITIES
Total Company capital expenditures budgeted for 1997 are estimated at
$38.6 million. Given the dynamic nature of the Company's business, management
considers it possible that actual capital
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expenditures in 1997 could exceed the previously budgeted amount. The Company
believes that the proceeds from the Offering, borrowings under the existing
credit facility described below, projected increases in the borrowing capacity
of the Company and cash flows generated from operations will be sufficient to
fund these expenditures. However, no assurance may be given as to the adequacy
of these sources.
CREDIT FACILITY
The Company has a two-year line of credit with Union Bank. Borrowing under
the line of credit may not exceed at any time the lesser of $10 million or a
borrowing base (computed with reference to the Company's oil and gas reserves)
as determined by the bank in its sole discretion. The borrowing base will be
determined at least semiannually. On March 31, 1997, the borrowing base was
$4,063,000 and there were no outstanding amounts under this facility. The
borrowing base will be reduced by $312,500 per month through August 31, 1997, by
$250,000 per month for the succeeding six months and by $166,667 per month for
the final six months of the agreement, unless changed by the bank at the time of
a borrowing base redetermination. Borrowings under this facility bear interest
at a rate equal to, at the Company's option, either the bank's reference rate
plus 1% or LIBOR plus 2.5%, with an effective rate of interest on March 31, 1997
of 8.19%.
The credit facility contains restrictive covenants imposing limitations of
the incurrence of indebtedness, the sale of properties, payment of dividends,
mergers or consolidations, capital expenditures, transactions with affiliates,
making loans, and investments outside the ordinary course of business. The
facility requires that the Company maintain at the subsidiary level certain
minimum financial ratios, including a current ratio of at least 1:1 and interest
coverage ratio of 2.5:1. In addition, the weighted average maturity of
indebtedness incurred on ordinary terms to vendors, suppliers and others
supplying goods and services to the Company in the ordinary course of business
may not exceed 60 days. The loan agreement, in addition to customary default
provisions, provides that it is an event of default if either (i) a person or
group (other than Messrs. Strassner, Kiesewetter, Anderson and Bradshaw and
their respective family members, and NGP) owns beneficially more than 50% of the
Company's voting capital stock outstanding, or (ii) any two of Messrs.
Strassner, Kiesewetter, Anderson and Bradshaw cease to be actively involved in
the management and operation of the Company for any reason other than death or
disability. The credit facility requires the Company to maintain a certain
volume of hedging contracts in effect during the term of the credit facility.
Indebtedness under the credit facility is secured by a first lien upon
substantially all of the properties owned by OEDC Exploration and Production,
L.P. and by the pledge of the Company's partnership interests in South Dauphin
II Limited Partnership ("SDP II") and DIGP. All assets not subject to a lien in
favor of the lender are subject to a negative pledge, with certain exceptions.
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As of May 1997, the Company is in the process of negotiating with Union
Bank for a new credit facility with an initial borrowing base of $11,000,000.
There can be no assurance, however, that the Company and Union Bank will reach
final agreement on the new facility.
SOUTH DAUPHIN II LIMITED PARTNERSHIP. The Company and an affiliate of
Enron Capital & Trade Resources Corp. ("ECT") formed SDP II to fund drilling and
development, with the Company generally responsible for costs in excess of
budgeted amounts. The financing of SDP II is non-recourse to the Company's other
assets. Pursuant to the terms of the partnership agreement, the ECT affiliate
receives 85% of the net cash flows from the subject wells (provided a minimum
payment schedule is met) until it has been repaid all of its original investment
plus a 15% pre-tax rate of return ("Payout"). Once Payout has occurred, the ECT
affiliate's interest will decrease to 25% and the Company's interest will
increase to 75%. SDP II has the option to prepay the ECT affiliate's investment
and accelerate the ownership change. If such prepayment is from financing
activities instead of cash flow from operations, the Company is required to make
an additional payment to the ECT affiliate equal to 10% of the ECT affiliate's
net investment (funds advanced less distributions received) and five percent of
the unfunded portion of the ECT affiliate's commitment.
In the Prospectus relating to the Offering, the Company undertook to use
up to $14 million contributed from the proceeds of the Offering to prepay the
ECT affiliate once the wells in the SDP II program commenced production. As a
result of permitting, weather and equipment delays and uncertainties in the SDP
II program, management has recommended to the Company's Board of Directors that
the Company not make the contribution to SDP II at this time. See Item 5, "Other
Information." Once a production history has been established from the wells,
management will be able to make an informed decision regarding the prudence of
accelerating the increase in the Company's interest in SDP II. If advisable at
that time, the Company may use available cash or borrowings under its credit
facility to cause the increase in the Company's interest in SDP II. As of March
31, 1997, the ECT affiliate had contributed (inclusive of income (loss)
allocations) $7,453,000 and the Company had contributed $7,547,000 (of which
$2,472,000 represents a short term loan to the partnership and will be repaid by
the ECT affiliate).
HEDGING ACTIVITIES
The Company continues to utilize financial futures to hedge its natural
gas production. In the first quarter of 1996, total natural gas revenue
decreased by $545,000 compared to a decrease of $541,000 for the first quarter
of 1997 as a result of its hedging position. As of March 31, 1997, the Company
had 2.28 Bcf hedged from April, 1997 through December, 1997 at an average price
of $2.06 per Mcf. The Company estimates that as of March 31, 1997, the value of
its hedged position was approximately $380,000. Although hedging reduces the
Company's susceptibility to declines in the sales prices of its natural gas
production, it also prevents the Company from receiving the full benefit of any
increases in the sales prices of such production. Further, significant
reductions in
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production at times when the Company's production is hedged could require the
Company to make payments under the hedge agreements in the absence of offsetting
income.
EFFECTS OF INFLATION
The Company's results of operations and cash flow are affected by changing
oil and gas prices. Increases in oil and gas prices often result in increased
drilling activity, which in turn increases the demand for and cost of
exploration and development. Thus, increased prices may generate increased
revenue without necessarily increasing profitability. These industry market
conditions have been far more significant determinants of Company earnings than
have macroeconomic factors such as inflation, which has had only minimal impact
on Company activities in recent years. While it is impossible to predict the
precise effect of changing prices and inflation on future Company operations,
the short-lived nature of the Company's gas reserves makes it more possible to
match development costs with predictable revenue streams than would long-lived
reserves. No assurance can be given as to the Company's future success at
reducing the impact of price changes on the Company's operating results.
ACCOUNTING PRONOUNCEMENTS
Effective December 1997, the Company will be required to adopt Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
SFAS 128 introduces the concept of basic earnings per share, which represents
net income divided by the weighted average common shares outstanding without the
dilutive effects of common stock equivalents (options, warrants, etc.). Diluted
earnings per share, giving effect for common stock equivalents, will be reported
when SFAS 128 is adopted in the fourth quarter of 1997.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is a defendant in a suit styled H.E. (GENE) HOLDER, JR. AND
DAN H. MONTGOMERY V. OFFSHORE ENERGY DEVELOPMENT CORPORATION, which was filed in
1995 alleging that the idea, design, and location of the Dauphin Island
Gathering System, which the Company developed and operates, as an intrastate gas
gatherer regulated by the Federal Energy Regulatory Commission under Section 311
of the Natural Gas Policy Act of 1978 was a confidential trade secret owned by
the plaintiffs which had been revealed to the Company during confidential
discussions in furtherance of a proposed joint venture. The plaintiffs further
alleged that the Company made misrepresentations regarding its intention to form
a joint venture with the plaintiffs in order to obtain the confidential
information and to induce the plaintiffs into executing a confidentiality
agreement which thereafter prevented the plaintiffs from further pursuing the
project independently. The plaintiffs also alleged that the Company orally
agreed to form a joint venture and that the Company breached its fiduciary
duties to the plaintiffs. As a consequence, the plaintiffs alleged "millions of
dollars in profits" as actual damages and also sought the award of unspecified
punitive damages, attorneys' fees, pre- and post-judgment interest and costs of
suit.
On March 10, 1997, the Company filed a motion for summary judgment as to
all of the plaintiffs' claims. Subsequently, the plaintiffs amended their
petition, dropping their claims of misrepresentation and conversion of trade
secrets and adding a claim of alleged fraudulent inducement to execute a
covenant not to compete. Further, the plaintiffs specified that they seek $6.5
million in actual damages and punitive damages of five times the amount of
actual damages. The Company denies the plaintiffs' claims. Oral argument on the
Company's motion for summary judgment will be heard in May 1997, and trial is
set for September 29, 1997. Although a decision adverse to the Company in this
litigation could have a material adverse effect on the Company's financial
condition and results of operation, the Company does not believe that the final
resolution of this case will result in a material liability to the Company.
ITEM 2. CHANGES IN SECURITIES.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
On April 18, 1997, the Company confirmed that its results of operations
for 1997 will be adversely affected by the cumulative effect of a number of
developments in its exploration and development activities during the preceding
several months, but that none of such developments would affect the Company's
total proved natural gas reserves as of December 31, 1996 as reflected in the
Company's Annual Report on Form 10-K for 1996 (the "Annual Report").
In early 1997, the Company was unsuccessful in its attempts to restore
production on its B-6 well in Block 162 of the South Timbalier area of the Gulf
of Mexico. The Company had drilled, completed and commenced production from this
well in 1990, but production ceased in 1993 because of mechanical problems. In
the first quarter of 1997, the Company attempted to repair the problems in the
lower of the two completions of this well. These efforts proved unsuccessful,
however, and a side track drilled from this wellbore was not productive.
Accordingly, the Company does not expect additional production from this well
and the Company's results for the first quarter of 1997 reflect an approximately
$3.6 million charge. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." No reserves were previously booked from
the B-6 well in the Company's Annual Report.
In addition, as reflected in the Annual Report, the early results from the
wells in the Company's drilling and development partnership with an affiliate of
Enron Capital & Trade Resources Corp., South Dauphin II Limited Partnership
("SDP II"), have been disappointing. The wells in the SDP II program consisted
of one well on South Timbalier Block 162, offshore Louisiana, and four wells on
four blocks in the Viosca Knoll area, offshore Alabama. The South Timbalier
well, known as the B-8, was drilled and commenced production in September 1996.
However, as a result of excessive water production, the B-8 well ceased
production in February of 1997, having produced less than 25% of the reserves
attributed to it by the Company's independent reservoir engineers. Although the
Company believes that drilling a side track from this wellbore at some point in
the future could restore production, there can be no assurance that this
approach would be successful or economic, and the Company has no current plans
to perform such operations at this time. In any event, 1997 results of
operations will not reflect expected production from this well.
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The four wells in the Viosca Knoll area were drilled during the third and
fourth quarters of 1996; the Company successfully encountered reservoir sand
thickness consistent with expectations in all four wells. One of these wells was
expected to commence production in January 1997 with the others by early April;
however, weather problems and regulatory delays have postponed projected first
production on all the wells until at least May. During this delay period, the
Company performed flow tests on the four wells. Two of the well test results
were below expectations and below average compared to almost twenty other
Miocene wells the Company has drilled in the region. Although this may indicate
correctable well completion problems, it is uncertain whether flow rates from
these wells will meet the Company's original expectations.
Additionally, the SDP II program has experienced cost overruns of
approximately 20%. The South Timbalier well encountered mechanical problems in
connection with attempts to complete a secondary sand, and SDP II expended funds
attempting to stop the water production from the primary sand of the B-8 well.
The initial flow test problems on Viosca Knoll 123 led SDP II to side track that
well.
In the prospectus relating to the Company's initial public offering in
November 1996, the Company earmarked approximately $14 million of the net
proceeds of the offering for a contribution to SDP II in order to accelerate an
increase in the Company's interest in that partnership. Based on management's
ongoing analysis of the disappointing well completion results to date in that
partnership and other factors, management has recommended to the Company's Board
of Directors that the Company not make the contribution to SDP II but use the
$14 million to pursue other exploration and development opportunities that
management considers more attractive.
The Company also has engaged a financial advisor for the purpose of
identifying and evaluating potential transactions to access capital for the
exploitation of the Company's increasing inventory of what the Company believes
to be high quality exploration and development prospects. Any such transaction
could take a variety of forms including, without limitation, a partnership,
joint venture, equity financing or business combination.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed with this report:
Exhibit
NUMBER DESCRIPTION OF EXHIBIT
27 - Financial Data Schedule.
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(b) The Company filed a report on Form 8-K dated December 31, 1997 to
report the merger of Dauphin Island Gathering Partners with Main
Pass Gas Gathering Company.
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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.
OFFSHORE ENERGY DEVELOPMENT
CORPORATION
Date: May 14, 1997 By: /S/ DOUGLAS H. KIESEWETTER
Douglas H. Kiesewetter
Executive Vice President and Chief Operating
Officer (for the registrant and as its principal
financial officer)
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