THE MERIDIAN RESOURCE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
INDEX
PAGE
NUMBER
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations (unaudited) for the
Three Months and Six Months Ended June 30, 1998 and 1997 3
Consolidated Balance Sheets as of June 30, 1998 (unaudited)
and December 31, 1997 4
Consolidated Statements of Cash Flows (unaudited) for the
Six Months Ended June 30, 1998 and 1997 6
Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURE 23
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30,
--------------------- --------------------
1998 1997 1998 1997
--------- -------- --------- -------
(in thousands, except for per share information)
REVENUES:
Oil and natural gas ........... $ 11,508 $ 13,107 $ 23,274 $29,528
Interest and other ............ 234 132 365 371
--------- -------- --------- -------
11,742 13,239 23,639 29,899
--------- -------- --------- -------
COSTS AND EXPENSES:
Oil and natural gas operating . 1,808 1,359 3,326 2,492
Severance and ad valorem taxes 375 471 835 1,133
Depletion and depreciation .... 6,280 6,864 12,539 13,095
General and administrative .... 2,139 1,522 4,116 3,636
Interest ...................... 2,692 1,007 5,023 1,883
Impairment of long-lived assets 108,848 0 149,126 0
--------- -------- --------- -------
122,142 11,223 174,965 22,239
--------- -------- --------- -------
NET INCOME (LOSS) BEFORE
INCOME TAXES .................. (110,400) 2,016 (151,326) 7,660
INCOME TAX BENEFIT .............. (10,000) -- (10,000) --
--------- -------- --------- -------
NET INCOME (LOSS) ............... ($100,400) $ 2,016 ($141,326) $ 7,660
--------- -------- --------- -------
NET INCOME (LOSS) PER SHARE:
Basic ......................... ($ 2.97) $ 0.06 ($ 4.20) $ 0.23
========= ======== ========= =======
Diluted ....................... ($ 2.97) $ 0.06 ($ 4.20) $ 0.22
========= ======== ========= =======
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES:
Outstanding ................... 33,801 33,365 33,627 33,365
========= ======== ========= =======
Assuming dilution ............. 33,801 35,430 33,627 35,432
========= ======== ========= =======
See notes to consolidated financial statements.
3
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, ECEMBER 31,
1998 1997
--------- ---------
(unaudited)
(in thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................... $ 5,897 $ 8,083
Accounts receivable ................................ 15,801 10,920
Due from affiliates ................................ 4,235 3,038
Prepaid expenses and other ......................... 1,304 1,130
--------- ---------
Total current assets ................... 27,237 23,171
--------- ---------
PROPERTY AND EQUIPMENT:
Oil and natural gas properties, full cost method
(including $103,647,000 [1998] and
$51,883,000 [1997] not subject to depletion) ... 769,364 409,310
Land ............................................... 478 478
Equipment .......................................... 5,830 4,618
--------- ---------
775,672 414,406
Less accumulated depletion and depreciation ........ (307,384) (145,719)
--------- ---------
468,288 268,687
--------- ---------
OTHER ASSETS ......................................... 2,111 700
--------- ---------
$ 497,636 $ 292,558
========= =========
See notes to consolidated financial statements.
4
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
JUNE 30, DECEMBER 31,
1998 1997
--------- ---------
(unaudited)
(in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ..................................................... $ 33,468 $ 7,735
Revenues and royalties payable ....................................... 5,101 5,991
Accrued liabilities .................................................. 15,571 20,330
Current maturities of long-term debt ................................. 115 110
--------- ---------
Total current liabilities ........................................ 54,255 34,166
--------- ---------
LONG-TERM DEBT ............................................................ 181,918 107,085
--------- ---------
DEFERRED TAX LIABILITY .................................................... 18,052 --
--------- ---------
LITIGATION LIABILITIES .................................................... 6,205 6,205
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value (25,000,000 shares authorized, issued
Series A convertible 3,982,906 [1998] and none [1997]
shares at stated value) .......................................... $ 135,000 --
Common stock, $0.01 par value (200,000,000 shares
authorized, 45,803,417 [1998] and
33,481,261 [1997] issued) ........................................ 461 336
Additional paid-in capital ........................................... 269,808 172,023
Accumulated deficit .................................................. (167,432) (26,106)
Unamortized deferred compensation .................................... (330) (309)
--------- ---------
237,507 145,944
Treasury stock, at cost (16,703 [1998] and
46,792 [1997] shares) ................................................ (301) (842)
--------- ---------
Total stockholders' equity ................................................ 237,206 145,102
--------- ---------
$ 497,636 $ 292,558
========= =========
See notes to consolidated financial statements.
5
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
SIX MONTHS ENDED JUNE 30,
1998 1997
--------- --------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................................... ($141,326) $ 7,660
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depletion and depreciation ............................................. 12,539 13,095
Amortization of other assets ........................................... 58 317
Non-cash compensation .................................................. 964 871
Impairment of long-lived assets ........................................ 149,126 --
Deferred income taxes .................................................. (10,000) --
Changes in assets and liabilities excluding effects of acquisition of oil and
gas properties:
Accounts receivable .................................................... (4,881) (2,573)
Due from affiliates .................................................... (1,197) (813)
Accounts payable ....................................................... 25,733 5,555
Revenues and royalties payable ......................................... (1,560) 280
Accrued liabilities and other .......................................... (5,596) (456)
--------- --------
Net cash provided by operating activities ................................... 23,860 23,936
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties and other .......................... (65,746) (54,628)
Acquisition of oil and gas properties .................................. (37,078) --
Sales of oil and gas properties ........................................ 2,100 --
--------- --------
Net cash used in investing activities ....................................... (100,724) (54,628)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt ........................................... 74,896 14,500
Reductions in long-term debt ........................................... (58) --
Exercise of stock options .............................................. 1,292 --
Deferred loan costs .................................................... (1,452) (336)
--------- --------
Net cash provided by financing activities ................................... 74,678 14,164
--------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS ..................................... (2,186) (16,528)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD ................................................. 8,083 23,705
--------- --------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD ....................................................... $ 5,897 $ 7,177
========= ========
See notes to consolidated financial statements.
6
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements reflect the accounts of The Meridian
Resource Corporation and its subsidiaries (the "Company") after elimination of
all significant intercompany transactions and balances. On November 5, 1997,
Cairn Energy USA, Inc. ("Cairn") merged with a subsidiary of the Company. The
merger was accounted for as a pooling of interests and accordingly, the
accompanying June 30, 1997 financial statements have been restated to include
the financial position and results of operations of Cairn. The financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997, as filed with the Securities and
Exchange Commission.
Certain items in the prior year statements have been reclassified to conform
with the current year presentation.
The Shell Transactions were accounted for utilizing the purchase method of
accounting for financial accounting purposes. Therefore, excluding the
write-down disclosed in Note 3, no operations relating to the Shell Properties
are included in the Company's results of operations for the three months or six
months ended June 30, 1998. Operations relating to the Shell Properties will be
included in the Company's results of operations beginning during the third
quarter of 1998.
The financial statements included herein as of June 30, 1998, and for the three
and six month periods ended June 30, 1998 and 1997 are unaudited, and, in the
opinion of management, the information furnished reflects all material
adjustments, consisting of normal recurring adjustments, necessary for a fair
statement of the results for the interim periods presented.
2. SHELL TRANSACTIONS
On June 30, 1998, the Company acquired (the "LOPI Transaction") Louisiana
Onshore Properties Inc. ("LOPI"), an indirect subsidiary of Shell Oil Company
("Shell"), pursuant to a merger of a wholly-owned subsidiary of the Company with
LOPI. The consideration paid in the LOPI Transaction consisted of 12,082,030
shares of the Company's common stock, $.01 par value ("Common Stock"), and a new
issue of convertible preferred stock of the Company (the "Preferred Stock") that
is convertible into 12,837,428 shares of Common Stock, which together provided
Shell Louisiana Onshore Properties Inc., an indirect subsidiary of Shell and
parent of LOPI ("SLOPI"), with beneficial ownership of 39.9% of the outstanding
shares of Common Stock as of the closing of the LOPI Transaction, assuming
exercise of all outstanding options and warrants and the conversion of the
Preferred Stock. In a transaction separate from the LOPI Transaction, the
Company also acquired on June 30, 1998 from Shell Western E&P, Inc., an indirect
subsidiary of Shell ("SWEPI"), various other oil and gas property interests
located onshore in south Louisiana for a total cash consideration of $38.6
million, (the "SWEPI Acquisition").
7
The purchase price of $303.5 million in connection with the merger of LOPI and
the acquisition of the SLOPI Properties, was allocated as follows ($ in
thousands, except per share data):
Net cash paid ......................................................... $ 37,078
Issuance of 3,982,906 shares of Preferred Stock (stated value) ........ 135,000
Issuance of 12,082,030 shares of Common Stock valued at $7.96 per share 96,173
Assumption of certain liabilities ..................................... 3,441
Deferred income taxes related to the acquired properties .............. 28,052
Acquisition costs ..................................................... 3,771
--------
Total purchase price .................................................. $303,515
========
The following summarized unaudited proforma financial information assumes the
transaction has occurred on January 1 of each year:
PROFORMA INFORMATION
SIX MONTHS ENDED JUNE 30,
1998 1997
--------- ---------
(in thousands, except per share data)
Revenues .................................. $ 55,316 $ 79,765
Net income (Loss) ......................... ($122,302) ($ 1,787)
Earnings (Loss) per share ................. ($ 2.68) ($ 0.04)
The pro forma results do not necessarily represent results which would have
occurred if the transaction had taken place on the basis assumed above, nor are
they indicative of the results of future combined operations.
3. IMPAIRMENT OF LONG-LIVED ASSETS
Due to prevailing market conditions as of March 31, 1998, the average prices
utilized by the Company in determining the net carrying value of its oil and
natural gas properties were $2.44 per Mcf and $14.38 per Bbl, compared to $2.53
per Mcf and $17.31 per Bbl utilized to calculate such value at December 31,
1997. As a result of this significant decline in oil and natural gas prices, the
Company recognized a $40.3 million non-cash write-down of its oil and natural
gas properties under the full cost method of accounting during the first quarter
of 1998.
Prices of oil and natural gas, however, continued to decline during the second
quarter of 1998, and due to prevailing market conditions as of June 30, 1998,
the average prices utilized by the Company in determining the net carrying value
of its oil and natural gas properties, including the Shell Properties, were
$2.25 per Mcf and $12.65 per Bbl. Such decline resulted in the Company
recognizing a $108.8 million non-cash write-down of its oil and natural gas
properties under the full cost method of accounting during the second quarter,
including $41 million ($31 million tax benefit) relating to the Shell
Properties, reflecting the impairment on the Company's oil and gas properties
(including the Shell Properties) utilizing prices in effect on June 30, 1998.
Consistent with Accounting Series Release No. 258, the Company has requested a
waiver from the Securities and Exchange Commission for a portion of the
full-cost ceiling write-down for a portion of the charge taken relating to the
acquired
8
Shell Properties, and the Company's results of operations reported in this Form
10-Q assume such waiver will be granted. In the event such waiver is not
granted, the Company will be required to restate its financial statements for
the second quarter ended June 30, 1998 and recognize an additional impairment
charge of approximately $47 million ($35 million after taxes) during the second
quarter of 1998.
Because the carrying value of oil and natural gas properties have been reduced
due to the full cost ceiling limitation such that the present value of the
Company's proved oil and natural gas reserves do not exceed the Company's net
oil and natural gas properties recorded on its balance sheet, there is an
increased risk of future write-downs due to factors which may negatively affect
the present value of proved oil and natural gas reserves and the carrying value
of oil and natural gas properties, including volatile oil and natural gas
prices, downward revisions in estimated proved oil and natural gas reserve
quantities and unsuccessful drilling activities.
4. LONG-TERM DEBT
In May 1998, the Company amended and restated its existing credit facility (the
"Credit Facility") to provide for maximum borrowings, subject to borrowing base
limitations, of up to $250 million. The Credit Facility currently provides for a
borrowing base of $200 million and a maximum borrowing base of $250 million. The
borrowing base is scheduled to be redetermined no later than April 15, 1999;
however, the lenders under the Credit Facility have the right to redetermine the
borrowing base at any time once during each calendar year and the Company has
the right to redetermine the borrowing base at any time. Borrowings under the
Credit Facility are secured by pledges of the outstanding capital stock of the
Company's material subsidiaries and a mortgage of the Company's offshore oil and
gas properties. The Credit Facility contains various restrictive covenants,
including, among other things, maintenance of certain financial ratios and
restrictions on cash dividends on the Common Stock. Borrowings under the Credit
Facility mature on May 22, 2003. Under the Credit Facility, the Company may
secure either an alternative base rate loan, which bears interest at a rate per
annum equal to (i) the greater of the administrative agent's prime rate, a
CD-based rate or federal funds based rate, or (ii) a Eurodollar based rate loan
that bears interest, generally, at a rate per annum equal to the London
interbank offered rate (determined by reference to an automated quotation
system) plus 1.0% to 1.5%, depending on the Company's ratio of the aggregate
outstanding loans and letters of credit to the borrowing base. The Credit
Facility also provides for commitment fees ranging from .3% to .375% per annum.
5. PREFERRED STOCK
The Company has issued 3,982,906 shares of Preferred Stock as part of the
consideration in the Shell Transactions (see Note 2). The following is a summary
of the material terms and conditions of the Preferred Stock.
DESIGNATION AND RANK. The Preferred Stock has an aggregate stated value of $135
million and ranks prior to the Common Stock as to distribution of assets and
payment of dividends.
DIVIDENDS. Holders of the Preferred Stock are entitled to receive, when and as
declared by the Board of Directors, a cash dividend at the rate of 4% per annum
on the stated value per share; provided, however, dividends shall cease to
accrue on an incremental one-third of the shares of Preferred Stock
9
on June 30, 2001; June 30, 2002; and June 30, 2003, so that no dividends will
accrue on any shares of Preferred Stock after June 30, 2003. Until paid in full,
any dividend arrearages also shall accrue dividends at the rate of 4% per annum.
No dividends may be declared or paid on the Common Stock until full cumulative
dividends on the Preferred Stock have been contemporaneously declared and paid
or a sum sufficient for such payment is set apart for payment to holders of the
Preferred Stock.
VOTING. Each share of Preferred Stock is entitled to one vote per share on all
matters submitted to the shareholders of the Company for their approval. In
addition, the affirmative vote or consent of the holders of a majority of the
shares of Preferred Stock is required in order for the Company to effect any of
the following: (i) the authorization, creation or issuance, or any increase in
the authorized or issued amount, of any class of senior stock or parity stock or
(ii) the amendment, restatement, modification, alteration or repeal of any of
the provisions of the Certificate of Designation for Preferred Stock.
ELECTION OF DIRECTORS. Until the earlier of (i) the termination of the Stock
Rights and Restrictions Agreement and (ii) SLOPI and its affiliates beneficially
own less than 21% of the outstanding Common Stock, the holders of the Preferred
Stock shall be entitled to elect a number of directors, such that after giving
effect to election of such persons, the number of directors elected by the
holders of Preferred Stock shall equal the product (rounded downward in the
event of a fractional number, but in no event less than one) of (x) the total
number of directors constituting the entire Board of Directors multiplied by (y)
20%. So long as there is a director elected by the holders of Preferred Stock on
the Company's Board of Directors, as least one director elected by the holders
of Preferred Stock is required to be a member of the Company's audit committee.
CONVERSION. The Preferred Stock may be converted into Common Stock at any time
by the holder thereof. In addition, on or after June 30, 2001, the Preferred
Stock will automatically convert into Common Stock if the mean per share market
value of the Common Stock exceeds 150% of the conversion price for 75
consecutive trading days; provided that SLOPI has the right to withhold
conversion on one share of Preferred Stock. The number of shares of Common Stock
into which the Preferred Stock is convertible is 12,837,428. The conversion
price is $10.516125 per share of Common Stock.
10
6. NET INCOME PER SHARE
The following tables set forth the computation of basic and diluted net income
(loss) per share:
THREE MONTHS ENDED JUNE 30,
1998 1997
-------------- -------
(in thousands, except per share)
Numerator:
Net income (loss) ............................. ($ 100,400) $ 2,016
Denominator:
Denominator for basic net income (loss) per
share - weighted-average shares outstanding 33,801 33,365
Effect of potentially dilutive common shares:
Employee and director stock options ........... N/A 680
Warrants ...................................... N/A 1,385
-------------- -------
Denominator for diluted net income (loss) per
share - weighted average shares outstanding
and assumed conversions ................... 33,801 35,430
============== =======
Basic net income (loss) per share .................. ($ 2.97) $ 0.06
============== =======
Diluted net income (loss) per share ................ ($ 2.97) $ 0.06
============== =======
SIX MONTHS ENDED JUNE 30,
1998 1997
-------------- -------
(in thousands, except per share)
Numerator:
Net income (loss) ............................. ($ 141,326) $ 7,660
Denominator:
Denominator for basic net income (loss) per
share - weighted-average shares outstanding 33,627 33,365
Effect of potentially dilutive common shares:
Employee and director stock options ........... N/A 682
Warrants ...................................... N/A 1,385
-------------- -------
Denominator for diluted net income (loss) per
share - weighted average shares outstanding
and assumed conversions ................... 33,627 35,432
============== =======
Basic net income (loss) per share .................. ($ 4.20) $ 0.23
============== =======
Diluted net income (loss) per share ................ ($ 4.20) $ 0.22
============== =======
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following is a discussion of the Company's financial operations for the six
months ended June 30, 1998 and 1997. The notes to the Company's consolidated
financial statements included in this report, as well as the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 (and the notes attached
thereto), should be read in conjunction with this discussion.
GENERAL
SHELL TRANSACTIONS. On June 30, 1998, the Company acquired (the "LOPI
Transaction") Louisiana Onshore Properties Inc. ("LOPI"), an indirect subsidiary
of Shell Oil Company ("Shell"), pursuant to a merger of a wholly-owned
subsidiary of the Company with LOPI. The consideration paid in the LOPI
Transaction consisted of 12,082,030 shares of the Company's common stock, $.01
par value ("Common Stock"), and a new issue of convertible preferred stock of
the Company (the "Preferred Stock") that is convertible into 12,837,428 shares
of Common Stock, which together provided Shell Louisiana Onshore Properties
Inc., an indirect subsidiary of Shell and parent of LOPI ("SLOPI"), with
beneficial ownership of 39.9% of the outstanding shares of Common Stock as of
the closing of the LOPI Transaction, assuming exercise of all outstanding
options and warrants and the conversion of the Preferred Stock. In a transaction
separate from the LOPI Transaction, the Company also acquired on June 30, 1998
from Shell Western E&P Inc., an indirect subsidiary of Shell ("SWEPI"), various
oil and gas property interests located onshore in south Louisiana for a total
cash consideration of $42.5 million, subject to adjustment for production,
expenses and other items since October 1, 1997 (the "SWEPI Acquisition").
The LOPI Transaction and the SWEPI Acquisition (together, the "Shell
Transactions") were effected to increase the Company's reserves, lease acreage
positions and exploration prospects in Louisiana and are expected to
substantially increase the Company's production and cash flow. The property
interests held by LOPI and the property interests acquired from SWEPI
(collectively, the "Shell Properties") represented substantially all of Shell's
and its direct and indirect subsidiaries' onshore oil and gas property interests
in south Louisiana, excluding offshore interests and certain interests in
Louisiana state waters and the onshore areas adjacent to such waters owned by
Shell Offshore Inc., a subsidiary of Shell, and its direct and indirect
subsidiaries. The Shell Properties include interests in approximately 210,000
gross (98,000 net) acres either held by production or under lease or option for
exploration, access to approximately 1,400 square miles of 3-D seismic data
covering onshore south Louisiana either currently held or now being acquired by
Shell and its direct and indirect subsidiaries, and access to substantially all
of Shell's and its direct and indirect subsidiaries' existing geological data
and field studies, and geophysical 2-D seismic grid covering onshore south
Louisiana. On a pro forma basis, the Shell Properties would have represented
more than 40% of the Company's proved reserves as of December 31, 1997, and
would have represented more than 60% of both the Company's total production on a
natural gas equivalent basis and operating cash flow for 1997.
12
The Shell Transactions were accounted for utilizing the purchase method of
accounting for financial accounting purposes. Therefore, excluding the
write-down disclosed in Note 3, no operations relating to the Shell Properties
are included in the Company's results of operations for the three months or six
months ended June 30, 1998. Operations relating to the Shell Properties will be
included in the Company's results of operations beginning during the third
quarter of 1998.
CAIRN MERGER. On November 5, 1997, the Company consummated a merger (the "Cairn
Merger") with Cairn Energy USA, Inc. ("Cairn"). In connection with the Cairn
Merger, the Company issued approximately 19.0 million shares of Common Stock.
The Cairn Merger more than doubled the Company's then-existing proved reserves
and substantially increased the production and cash flow of the Company. The
Cairn Merger was accounted for as a pooling of interests and the Company's
historical financial statements and operating results and the discussion of such
results in this Management's Discussion and Analysis of Financial Condition and
Results of Operations have been restated to reflect the combined operations of
the Company and Cairn for the periods presented. The Company recorded a one-time
charge in the fourth quarter of 1997 of approximately $10 million for costs
associated with the Cairn Merger.
INDUSTRY CONDITIONS. The Company's revenues, profitability and future rate of
growth are substantially dependent upon prevailing prices for natural gas and,
to a lesser extent, oil. Oil and natural gas prices have been extremely volatile
in recent years and are affected by many factors outside the control of the
Company. In this regard, worldwide oil and natural gas prices average have
decreased substantially from levels existing during 1997. As a result of these
declines, the price received by the Company during the six months ended June 30,
1998 was $2.29 per Mcfe compared to $2.86 per Mcfe during the six months ended
June 30, 1997, which has negatively impacted the Company's revenues and cash
flow during 1998. These industry conditions, and any continuation thereof, will
have several important consequences to the Company, including decreasing the
level of cash flow received from the Company's producing properties and delaying
the timing of certain prospects which could adversely effect the Company's
revenues, profitability and ability to maintain or increase its exploration and
development program.
CEILING WRITEDOWN. The Company follows the full cost method of accounting for
its investments in oil and natural gas properties, which requires that the net
carrying value of oil and natural gas properties is limited to the sum of the
present value (10% discount rate) of the estimated future net cash flows from
proved reserves, based on the current prices and costs, plus the lower of cost
or estimated value of unproved properties. Due to prevailing market conditions
as of March 31, 1998, the average prices utilized by the Company in determining
the net carrying value of its oil and natural gas properties were $2.44 per Mcf
and $14.38 per Bbl, compared to $2.53 per Mcf and $17.31 per Bbl utilized to
calculate such value at December 31, 1997. As a result of this significant
decline in oil and natural gas prices, the Company recognized a $40.3 million
non-cash write-down of its oil and natural gas properties under the full cost
method of accounting during the first quarter of 1998.
Prices of oil and natural gas, however, continued to decline during the second
quarter of 1998, and due to prevailing market conditions as of June 30, 1998,
the average prices utilized by the Company in determining the net carrying value
of its oil and natural gas properties, including the Shell Properties, were
$2.25 per Mcf and $12.65 per Bbl. Such decline resulted in the Company
recognizing a $108.8 million non-cash write-down of its oil and natural gas
properties under the full
13
cost method of accounting during the second quarter, including $41 million ($31
million tax benefit) relating to the Shell Properties, reflecting the impairment
on the Company's oil and gas properties (including the Shell Properties)
utilizing prices in effect on June 30, 1998. Consistent with Accounting Series
Release No. 258, the Company has requested a temporary waiver from the
Securities and Exchange Commission for a portion of the full-cost ceiling
write-down for the charge taken relating to the acquired Shell Properties, and
the Company's results of operations reported in this Form 10-Q assume such
waiver will be granted. In the event such waiver is not granted, the Company
will be required to restate its financial statements for the second quarter
ended June 30, 1998 and recognize an additional impairment charge of
approximately $47 million ($35 million after taxes) during the second quarter of
1998.
Since the net carrying value of the Company's oil and natural gas properties has
been reduced due to the full cost ceiling limitation such that the present value
of the Company's proved oil and gas reserves does not exceed the Company's net
oil and natural gas properties recorded on its balance sheet, there is an
increased risk of future property write-downs due to factors that negatively
affect the present value of proved oil and gas reserves, including volatile oil
and natural gas prices, downward revisions in estimated proved oil and natural
gas quantities and unsuccessful exploratory operations.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
OPERATING REVENUES. Second quarter 1998 oil and natural gas revenues decreased
$1.6 million as compared to second quarter 1997 revenues primarily due to a
decrease in average prices. Oil and natural gas production on an equivalent
basis was essentially the same as production from new wells was offset by normal
production declines in older wells and delays in repairs on production platforms
and pipelines that reduced production from certain of the Company's offshore
wells. Oil prices in the second quarter of 1998 decreased by 33% compared to
prices for the second quarter of 1997. These effects were partially offset by a
5% increase in average natural gas prices in the second quarter of 1998 compared
to the second quarter of 1997.
14
The following table summarizes production volumes, average sales prices and
gross revenues for the three months ended June 30, 1998 and 1997.
1998
THREE MONTHS ENDED 1998 PERCENTAGE
JUNE 30, INCREASE INCREASE
1998 1997 (DECREASE) (DECREASE)
------- ------- ------- ---
Production Volumes:
Oil (Mbbl) ................. 244 231 13 6%
Natural gas (Mmcf) ......... 3,573 3,890 (317) (8%)
MMCFE ...................... 5,037 5,276 (239) (5%)
Average Sales Prices:
Oil (Bbl) .................. $ 12.72 $ 19.12 ($ 6.40) (33%)
Natural gas (Mcf) .......... $ 2.34 $ 2.22 $ 0.12 5%
MMCFE ...................... $ 2.28 $ 2.47 ($ 0.19) (8%)
Gross Revenues (000's):
Oil ........................ $ 3,104 $ 4,417 ($1,313) (30%)
Natural gas ................ 8,370 8,641 (271) (3%)
Pipeline ................... 34 49 (15) (29%)
------- ------- ---
Total .................. $11,508 $13,107 ($1,599) (12%)
======= ======= ===
OPERATING EXPENSES. Oil and natural gas operating expenses increased $.4 million
to $1.8 million for the three months ended June 30, 1998, compared to $1.4
million for the three months ended June 30, 1997. The increase was primarily due
to added operating expenses related to the additional wells brought on
production during the last twelve months, including somewhat higher costs
associated with offshore wells recently brought on production. Overall operating
expense remained relatively low at $0.36 per MCFE.
SEVERANCE AND AD VALOREM TAXES. Severance and ad valorem taxes decreased $.1
million for the second quarter of 1998 as compared to the same period in 1997.
This decrease was primarily the result of the lower oil and natural gas prices.
INTEREST AND OTHER INCOME. Interest and other income during the second quarter
of 1998 increased $.1 million from the comparable period in 1997. This increase
was primarily due to interest income from notes receivable which were not in
place during 1997.
DEPLETION AND DEPRECIATION. Depletion and depreciation expense decreased during
the second quarter of 1998 to $6.3 million from $6.9 million for the same period
of 1997. This decrease was primarily a result of decreased production volumes
during the second quarter of 1998 compared to the second quarter of 1997.
15
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense of $2.1
million reflects an increase of $.6 million for the second quarter of 1998 as
compared to the second quarter of 1997. This increase is due primarily to an
increase in employees and salary increases for existing employees.
INTEREST EXPENSE. Interest expense increased to $2.7 million for the second
quarter of 1998 compared to $1.0 million during the same period in 1997. This
increase was primarily due to increased borrowings under the Company's credit
facility to finance the Company's ongoing exploration and development
activities. The Company expects interest expense to increase due to additional
borrowings utilized to pay the purchase price in the SWEPI Acquisition and
related capital expenditures.
IMPAIRMENT OF LONG-LIVED ASSETS. As previously described, the Company recognized
a $108.8 million non-cash write-down of its oil and natural gas properties under
the full cost method of accounting during the second quarter of 1998.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
OPERATING REVENUES. Oil and natural gas revenues during the six months ended
June 30, 1998, decreased $6.3 million as compared to revenues during the six
months ended June 30, 1997, due to a 20% decrease in average prices. Oil and
natural gas production on an equivalent basis remained flat compared to the
comparable prior period as production increases from wells brought on line were
offset by normal production declines from older wells and pipeline interruptions
that took wells off production. Natural gas prices were lower by 12% during the
same time period due to, among other things, lower demand and higher storage
levels to satisfy supply needs. Oil prices during the six months ended June 30,
1998, decreased by 37% compared to prices for the first six months of 1997.
16
The following table summarizes production volumes, average sales prices and
gross revenues for the six months ended June 30, 1998 and 1997.
1998
SIX MONTHS ENDED 1998 PERCENTAGE
JUNE 30, INCREASE INCREASE
1998 1997 (DECREASE) (DECREASE)
------- ------- ------- ---
Production Volumes:
Oil (Mbbl) ................. 454 454 -- --
Natural gas (Mmcf) ......... 7,431 7,559 (128) (2%)
MMCFE ...................... 10,155 10,283 (128) (1%)
Average Sales Prices:
Oil (Bbl) .................. $ 13.15 $ 20.75 ($ 7.60) (37%)
Natural gas (Mcf) .......... $ 2.32 $ 2.65 ($ 0.33) (12%)
MMCFE ...................... $ 2.29 $ 2.86 ($ 0.57) (20%)
Gross Revenues (000's):
Oil ........................ $ 5,971 $ 9,421 ($3,450) (37%)
Natural gas ................ 17,220 20,001 (2,781) (14%)
Pipeline ................... 83 106 (23) (21%)
------- ------- ------- ---
Total .................. $23,274 $29,528 ($6,254) (21%)
======= ======= ======= ===
OPERATING EXPENSES. Oil and natural gas operating expenses increased $.8 million
to $3.3 million for the six months ended June 30, 1998, compared to $2.5 million
for the six months ended June 30, 1997. The increase was primarily due to added
operating expenses related to the additional wells brought on production during
the last twelve months, including somewhat higher costs associated with certain
offshore wells recently brought on production. Overall operating expense
remained relatively low at $0.33 per MCFE.
SEVERANCE AND AD VALOREM TAXES. Severance and ad valorem taxes decreased $.3
million for the first six months of 1998 as compared to the same period in 1997.
This decrease was primarily the result of the lower oil and natural gas
revenues.
INTEREST AND OTHER INCOME. Interest and other income during the first six months
of 1998 decreased $6,000 from the comparable period in 1997. This decrease was
the result of lower average cash balances resulting primarily from capital
expenditures made during 1997 and 1998 which was partially offset by interest
income from notes receivable.
DEPLETION AND DEPRECIATION. Depletion and depreciation expense decreased during
the first six months of 1998 to $12.5 million from $13.1 million for the same
period of 1997. This decrease was primarily a result of write-downs of oil and
natural gas properties in prior periods.
17
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense increased
$.5 million to $4.1 million for the first six months of 1998 as compared to the
first six months of 1997. This increase is due primarily to additional personnel
and salary increases for existing personnel.
INTEREST EXPENSE. Interest expense increased to $5.0 million for the first six
months of 1998 compared to $1.9 million during the same period in 1997. This
increase was primarily due to increased borrowings under the Company's credit
facility to finance the Company's ongoing exploration and development
activities. The Company expects interest expense to increase due to additional
borrowings utilized to pay the purchase price in the SWEPI Acquisition and
related capital expenditures.
IMPAIRMENT OF LONG-LIVED ASSETS. As previously described, the Company recognized
a $149.1 million non-cash write-down of its oil and natural gas properties under
the full cost method of accounting during the first six months of 1998.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL. During the second quarter of 1998, the Company's liquidity
needs were met from cash from operations and borrowings under the Company's
credit facility. As of June 30, 1998, the Company had a cash balance of $5.9
million and negative working capital of $27.0 million. The decrease in both the
cash balance and working capital from levels existing at March 31, 1998,
reflects capital expenditures related to the Company's increasing exploration
and development activities and reduced operating cash flows resulting from lower
oil and natural gas prices and lower production levels.
AMENDED CREDIT FACILITY. In May 1998, the Company amended and restated its
existing credit facility (the "Credit Facility") to provide for maximum
borrowings, subject to borrowing base limitations, of up to $250 million. The
Credit Facility currently provides for a borrowing base of $200 million and a
maximum borrowing base of $250 million. The borrowing base is scheduled to be
redetermined on March 1, 1999; however, the lenders under the Credit Facility
have the right to redetermine the borrowing base at any time once during each
calendar year and the Company has the right to redetermine the borrowing base at
any time. Borrowings under the Credit Facility are secured by pledges of the
outstanding capital stock of the Company's material subsidiaries and a mortgage
of the Company's offshore oil and gas properties. The Credit Facility contains
various restrictive covenants, including, among other things, maintenance of
certain financial ratios and restrictions on cash dividends on the Common Stock.
Borrowings under the Credit Facility mature on May 22, 2003. Under the Credit
Facility, the Company may secure either an alternative base rate loan, which
bears interest at a rate per annum equal to (i) the greater of the
administrative agent's prime rate, a CD-based rate or federal funds based rate,
or (ii) a Eurodollar based rate loan that bears interest, generally, at a rate
per annum equal to the London interbank offered rate (determined by reference to
an automated quotation system) plus 1.0% to 1.5%, depending on the Company's
ratio of the aggregate outstanding loans and letters of credit to the borrowing
base. The Credit Facility also provides for commitment fees ranging from .3% to
.375% per annum. At August 12, 1998, the Company had outstanding borrowings of
$194 million under the Credit Facility.
18
CAPITAL EXPENDITURES. Capital expenditures during the three months ended June
30, 1998 consisted of $65.7 million for property and equipment additions related
to exploration and development of various prospects, (including leases), seismic
data acquisitions, and drilling and completion costs. The Company currently
expects capital expenditures for the remainder of 1998 to be approximately $60
million. The Company anticipates that such capital expenditures will be funded
from cash flows from its producing properties (including the Shell Properties),
borrowings under the Credit Facility and additional third-party financings.
Although the Company currently does not have any written understandings with any
third parties regarding additional financing, the Company currently is
negotiating with several third parties regarding potential financings
arrangements, which will enable the Company to fully fund its exploration and
development program for the remainder of 1998. No assurance can be given that
any third party financing will be available upon terms reasonably acceptable to
the Company, and in the event the Company is unable to obtain such financing, it
anticipates that it will have to reduce the level of planned capital
expenditures for the remainder of 1998. Availability of capital to fund the
Company's 1999 exploration and development program will depend upon the success
of the Company's drilling program, the nature and extent of capital expenditures
required for development of discoveries and the availability of additional
financing, if necessary. In that regard, the Company anticipates that it may
seek to obtain additional capital through the issuance of debt, equity or
convertible securities to fund its 1999 exploration and development program, and
in the event such financings are not available on terms reasonably satisfactory
to the Company, capital expenditures in 1999 will be limited to funding entirely
from cash flow from operations.
DIVIDENDS. It is the policy of the Company to retain its existing cash for
reinvestment in the businesses of the Company, and therefore, the Company does
not anticipate that it will pay dividends with respect to the Common Stock in
the foreseeable future. The Preferred Stock issued upon closing of the LOPI
Transaction accrues an annual cash dividend of 4% of its stated value with the
dividend ceasing to accrue incrementally on one-third of the shares of Preferred
Stock on June 30, 2001, 2002 and 2003 so that no dividends will accrue on any
shares of Preferred Stock after June 30, 2003.
STOCK RIGHTS AND RESTRICTIONS AGREEMENT. In light of the large ownership
position issued to SLOPI in the LOPI Transaction and in recognition of both the
Company's and SLOPI's desire that the Company function as an independent oil and
gas company, SLOPI and the Company entered into a Stock Rights and Restrictions
Agreement (which is filed as an exhibit to this Form 10-Q) that define and limit
SLOPI's and the Company's respective rights and obligations. These agreements
will limit SLOPI's and its affiliates' control of the Company while protecting
their interests in the context of certain extraordinary transactions by (i)
allowing SLOPI to maintain representation on the Company's Board of Directors,
(ii) restricting SLOPI's and its affiliates' ability to effect certain business
combinations with the Company or to propose certain business combinations with
the Company, (iii) restricting the ability of SLOPI and its affiliates to sell
certain portions of their shares of Common Stock and Preferred Stock, subject to
certain exceptions designed to permit them to sell such shares over time and to
sell such shares in the event of certain business combinations involving the
Company, (iv) limiting SLOPI's and its affiliates' discretionary voting rights
to 23% of the total voting shares, except with respect to certain extraordinary
events and in situations in which the price of the Common Stock for a period of
time has been less than $5.50 per share or the Company is in material breach of
its obligations under the agreements governing the LOPI Transaction, (v)
permitting SLOPI and its affiliates to purchase additional securities of the
Company (or pay cash in lieu thereof at the option of the Company) in order to
maintain a 21% beneficial ownership interest
19
of the Common Stock if the Company proposes to issue additional shares of Common
Stock or securities convertible into Common Stock, (vi) extending certain
statutory and corporate restrictions on business combinations applicable to
SLOPI and its affiliates and (vii) obligating the Company to issue a currently
indeterminable number of additional shares of Common Stock in the future by the
Company in satisfaction of a make-whole provision contained in the Stock Rights
and Restrictions Agreement in the event SLOPI receives less than approximately
$10.52 per share on the sale of any Common Stock that is issuable upon
conversion of the Preferred Stock.
FORWARD-LOOKING INFORMATION
From time-to-time, the Company may make certain statements that contain
"forward-looking" information as defined in the Private Securities Litigation
Reform Act of 1995 and that involves risk and uncertainty. These forward-looking
statements may include, but are not limited to exploration and seismic
acquisition plans, anticipated results from current and future exploration
prospects, the anticipated results of wells based on logging data and production
tests, future sales of production, earnings, margins, production levels and
costs, market trends in the oil and natural gas industry and the exploration and
development sector thereof, environmental and other expenditures and various
business trends. Forward-looking statements may be made by management orally or
in writing including, but not limited to, the Management's Discussion and
Analysis of Financial Condition and Results of Operations section and other
sections of the Company's filings with the Securities and Exchange Commission
under the Securities Act of 1933 and the Securities Exchange Act of 1934.
Actual results and trends in the future may differ materially depending on a
variety of factors including, but not limited to, the success of the Company's
exploration and development program, changes in the price of oil and natural
gas, world-wide political stability and economic growth, the Company's
successful execution of internal exploration, development and operating plans,
environmental regulation and costs, regulatory uncertainties and legal
proceedings.
20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has filed an appeal relating to the decision of the federal district
court in the Amoco litigation that was previously described in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 and its
Quarterly Report on Form 10-Q for the three months ended March 31, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Special Meeting of Shareholders of the Company held on June 30, 1998, the
Company's shareholders voted in favor of the LOPI Transaction and the related
Required Future Share Issuances (as defined in the Proxy Statement dated June
10, 1998, relating to such meeting). In addition, at the reconvened special
meeting (held on July 20, 1998), the Company's shareholders voted in favor of an
amendment to the Company's restated articles of incorporation that increased the
number of authorized shares of Common Stock from 100,000,000 to 200,000,000. The
number of shares voted for and against and the number of abstentions for and
broker non-votes with respect to such matters were as follows:
Withheld/ BROKER
NOMINEES FOR AGAINST ABSTAIN NON-VOTES
LOPI Transaction 21,873,653 299,618 20,182 -----
Articles Amendment 22,765,409 1,095,592 42,958 50
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
2.1 Purchase and Sale Agreement dated effective October 1, 1997, by
and between The Meridian Resource Corporation and Shell Western
E&P Inc. (incorporated by reference from the Company's Current
Report on Form 8-K dated June 30, 1998).
3.1 Certificate of Designation for Preferred Stock dated June 30,
1998. (incorporated by reference from the Company's Current Report
on Form 8-K dated June 30, 1998).
4.1 Stock Rights and Restrictions Agreement dated as of June 30, 1998,
by and between The Meridian Resource Corporation and Shell
Louisiana Onshore Properties Inc. (incorporated by reference from
the Company's Current Report on Form 8-K dated June 30, 1998).
21
4.2 Registration Rights Agreement dated June 30, 1998, by and between
The Meridian Resource Corporation and Shell Louisiana Onshore
Properties Inc. (incorporated by reference from the Company's
Current Report on Form 8-K dated June 30, 1998).
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
The Company filed the following Current Reports on Form 8-K relating to
activities during the second quarter of 1998:
On April 8, 1998, the Company filed a Current Report on Form 8-K,
reporting its first quarter drilling results and other financial data.
On April 23, 1998, the Company filed a Current Report on Form 8-K,
reporting its successful bid on certain leasehold properties.
On July 10, 1998, the Company filed a Current Report on Form 8-K dated
June 30, 1998, reporting the Shell Transactions and filing proforma
financial statements of the Company and historical financial statements
for the Shell Properties.
22
SIGNATURE
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.
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
(Registrant)
Date: August 14, 1998 By: P. RICHARD GESSINGER
P. Richard Gessinger
Executive Vice President and
Chief Financial Officer
By: LLOYD V. DELANO
Lloyd V. DeLano
Vice President
Chief Accounting Officer
23