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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[_] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-13446
BARRETT RESOURCES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-0832476
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1515 ARAPAHOE STREET,
TOWER 3,
SUITE 1000
DENVER, COLORADO
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
80202
(ZIP CODE)
(303) 572-3900
(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 [_]
There were 31,902,615 shares of the registrant's $.01 par value common stock
outstanding as of November 12, 1998.
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BARRETT RESOURCES CORPORATION
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets--September 30, 1998 and
December 31, 1997................................................... 3
Consolidated Condensed Statements of Income--Three Months Ended
September 30, 1998 and 1997......................................... 4
Consolidated Condensed Statements of Income--Nine Months Ended
September 30, 1998 and 1997......................................... 5
Consolidated Condensed Statements of Cash Flows--Nine Months Ended
September 30, 1998 and 1997......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................... 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................. 15
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BARRETT RESOURCES CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents......................... $ 11,578 $ 14,479
Receivables, net.................................. 89,039 102,934
Inventory......................................... 14,542 2,579
Other current assets.............................. 1,485 1,701
-------- --------
Total current assets............................ 116,644 121,693
Property and equipment, net......................... 833,764 747,175
Other assets, net................................... 3,661 3,833
-------- --------
$954,069 $872,701
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 76,748 $ 61,870
Amounts payable to oil and gas property owners.... 15,732 27,174
Production taxes payable.......................... 21,464 17,945
Accrued and other liabilities..................... 13,628 17,917
-------- --------
Total current liabilities....................... 127,572 124,906
Long-term debt...................................... 315,061 266,437
Deferred income taxes............................... 75,261 68,977
Stockholders' equity:
Preferred stock, $.001 par value: 1,000,000 shares
authorized, none outstanding..................... -- --
Common stock, $.01 par value: 45,000,000 shares
authorized; 31,897,015 outstanding (31,415,528 at
December 31, 1997)............................... 319 314
Additional paid-in capital........................ 260,561 247,390
Retained earnings................................. 175,356 164,677
Treasury stock, at cost........................... (61) --
-------- --------
Total stockholders' equity...................... 436,175 412,381
-------- --------
$954,069 $872,701
======== ========
See accompanying notes.
3
BARRETT RESOURCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
---------------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
Revenues:
Oil and gas production............................ $ 47,745 $46,342
Trading revenues.................................. 98,582 42,019
Interest income................................... 156 175
Other income...................................... 256 631
-------- -------
146,741 89,167
Operating expenses:
Lease operating expenses.......................... 13,219 12,817
Cost of trading................................... 94,460 40,735
Depreciation, depletion and amortization.......... 25,502 18,334
General and administrative........................ 5,066 6,414
Interest expense.................................. 5,255 3,403
Other expense..................................... 252 --
-------- -------
143,754 81,703
-------- -------
Income for the period before income taxes........... 2,987 7,464
Provision for income taxes.......................... 1,135 2,836
-------- -------
Net income for the period........................... $ 1,852 $ 4,628
======== =======
Earnings per common share:
Basic............................................. $ .06 $ .15
Assuming Dilution................................. $ .06 $ .14
See accompanying notes.
4
BARRETT RESOURCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED
---------------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
Revenues:
Oil and gas production............................ $155,332 $144,120
Trading revenues.................................. 249,700 89,550
Interest income................................... 511 1,364
Other income...................................... 4,849 1,905
-------- --------
410,392 236,939
Operating expenses:
Lease operating expenses.......................... 41,756 42,220
Cost of trading................................... 240,236 86,679
Depreciation, depletion and amortization.......... 74,738 50,226
General and administrative........................ 19,354 18,564
Interest expense.................................. 14,672 8,721
Other expense..................................... 2,412 --
-------- --------
393,168 206,410
-------- --------
Income for the period before income taxes........... 17,224 30,529
Provision for income taxes.......................... 6,545 11,601
-------- --------
Net income for the period........................... $ 10,679 $ 18,928
======== ========
Earnings per common share:
Basic............................................. $ .34 $ .61
Assuming dilution................................. $ .33 $ .59
See accompanying notes.
5
BARRETT RESOURCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
---------------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
Cash flows from operations:
Net income....................................... $ 10,679 $ 18,928
Adjustments needed to reconcile to net cash
provided by operations:
Depreciation, depletion, and amortization...... 75,061 50,479
Deferred income taxes.......................... 6,284 10,075
Other.......................................... (1,392) --
--------- ---------
90,632 79,482
Change in current assets and liabilities:
Accounts receivable........................... 13,895 222
Other current assets.......................... (11,646) (2,044)
Accounts payable.............................. 14,878 6,748
Amounts due oil and gas owners................ (11,442) (2,871)
Production taxes payable...................... 3,519 6,621
Accrued and other liabilities................. (8,661) 3,198
--------- ---------
Net cash flow provided by operations............... 91,175 91,356
--------- ---------
Cash flows from investing activities:
Proceeds from sale of oil and gas properties....... 4,021 8,717
Acquisition of property and equipment.............. (156,333) (226,755)
--------- ---------
Net cash flow used in investing activities......... (152,312) (218,038)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock........... 3,999 1,057
Borrowings on line of credit..................... 91,000 65,000
Repayments of line of credit..................... (36,000) (85,000)
Proceeds from issuance of Senior Notes, net of
offering costs.................................. -- 145,953
Payments on other long-term debt................. (612) (942)
Other............................................ (151) --
--------- ---------
Net cash flow provided by financing activities..... 58,236 126,068
--------- ---------
(Decrease) increase in cash and cash equivalents... (2,901) (614)
Cash and cash equivalents at beginning of period... 14,479 14,539
--------- ---------
Cash and cash equivalents at end of period......... $ 11,578 $ 13,925
========= =========
See accompanying notes.
6
BARRETT RESOURCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated
condensed financial statements contain all adjustments necessary to present
fairly the financial position of Barrett Resources Corporation and its wholly
owned subsidiaries, collectively referred to as the "Company", as of September
30, 1998 and the results of operations and cash flows for the periods
presented. All such adjustments are of a normal recurring nature. The results
of operations for the periods presented are not necessarily indicative of the
results for the full year.
The accounting policies followed by the Company are set forth in Note 1 to
the Company's financial statements in Form 10-K for the year ended December
31, 1997. These financial statements should be read in conjunction with the
financial statements and notes included in the Form 10-K. Certain
reclassifications have been made to 1997 amounts to conform to the 1998
presentation.
2. INCOME TAXES
Provisions for income taxes were calculated in accordance with Statement of
Financial Accounting Standards No. 109 which provides that a deferred tax
liability or asset be determined based on the timing differences between the
basis used for financial versus tax reporting of assets and liabilities as
measured by the effective tax rates. For the quarter ended September 30, 1998,
the Company used an estimated effective tax rate of 38 percent.
The Company is vigorously contesting a "Notice of Deficiency" of $5.3
million together with penalties of $1.1 million, and an undetermined amount of
interest, issued by the Internal Revenue Service resulting from an examination
of federal tax returns of a subsidiary of the Company for years 1991 through
1993. The deficiency resulted primarily from the IRS's disallowance of certain
net operating loss deductions claimed during the periods under examination and
may affect approximately $30 million of related unused net operating loss
carryforwards. The Company believes that the federal returns of the subsidiary
properly reflect the federal tax liability and that the existing net operating
loss carryforwards are appropriate as supported by relevant authority. A trial
of this matter was conducted in May and all post-trial briefs have been filed.
A decision is not expected until the first quarter of 1999.
3. LONG-TERM DEBT
The Company's long-term debt consists of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
Line of Credit..................................... $155,000 $100,000
7.55% Senior Notes................................. 150,000 150,000
Production Payments................................ 15,258 17,231
-------- --------
Total............................................ 320,258 267,231
Less: current portion.............................. 5,197 794
-------- --------
Long-term debt..................................... $315,061 $266,437
======== ========
As of September 30, 1998, the Company's effective interest rate, on an
outstanding balance of $155 million on its line of credit, was 5.99% per
annum.
Total interest paid for the nine months ended September 30, 1998 was $16.8
million.
7
BARRETT RESOURCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
4. EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
Earnings Per Share (SFAS No. 128) effective December 15, 1997. This
pronouncement requires restatement of earnings per share for all prior periods
presented. As a result, the Company's reported earnings per share for the
three and nine months ended September 30, 1997 have been restated.
The following data show the amounts used in computing earnings per share and
the effect on income and the weighted average number of shares of dilutive
potential common stock.
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
---------------------
1998 1997
---------- ----------
(IN THOUSANDS)
(UNAUDITED)
Income available to common stockholders................. $1,852 $4,628
========== ==========
Weighted average number of common shares used in basic
EPS.................................................... 31,890 31,363
Effect of dilutive securities:
Stock options......................................... 234 435
Written put option.................................... 150 150
---------- ----------
Weighted number of common shares and dilutive Potential
common stock used in EPS--assuming dilution............ 32,274 31,948
========== ==========
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1998 1997
--------- ---------
(IN THOUSANDS)
(UNAUDITED)
Income available to common stockholders................... $10,679 $18,928
========= =========
Weighted average number of common shares used in basic
EPS...................................................... 31,693 31,353
Effect of dilutive securities:
Stock options........................................... 353 483
Written put option...................................... 150 92
--------- ---------
Weighted number of common shares and dilutive Potential
common stock used in EPS--assuming dilution.............. 32,196 31,928
========= =========
5. SUPPLEMENTAL CASH FLOW INFORMATION
The Company's non-cash investing and financing activities for the nine
months ending September 30 were as follows:
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1998 1997
--------- ---------
(IN THOUSANDS)
(UNAUDITED)
Issuance/commitment of common stock for property
acquisitions............................................ $9,116 $4,219
Common stock/treasury share options exercised............ 60 207
Reduction of debt through utilization of tax benefits.... 1,392 --
Assumption of debt with property acquisitions............ -- 2,785
8
BARRETT RESOURCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
6. RECENTLY ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities". SFAS 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. It also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. SFAS 133 is
effective for fiscal years beginning after June 15, 1999. The Company has not
yet quantified the impacts of adopting SFAS 133 on its financial statements
and has not determined the timing of or method of adoption of SFAS 133.
However, SFAS 133 could increase volatility in earnings and other
comprehensive income.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about
Segments of an Enterprise and Related Information" effective for fiscal years
beginning after December 15, 1997. This statement requires a public company to
report financial and descriptive information regarding its reportable
operating segments on the same basis that is used internally for evaluating
segment performance and deciding how to allocate resources to segments. The
Company expects to adopt SFAS 131 for the year ending December 31, 1998.
9
BARRETT RESOURCES CORPORATION
FOR THE QUARTER AND NINE MONTHS ENDED
SEPTEMBER 30, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
For the nine months ended September 30, 1998, total assets increased $81.4
million, or nine percent, to $954.1 million as compared with total assets of
$872.7 million at December 31, 1997. Cash and short term investments decreased
$2.9 million to $11.6 million, working capital decreased $7.7 million to a
negative $10.9 million and net property and equipment increased $86.6 million
to $833.8 million.
During the nine month period, the Company invested in oil and gas properties
in its areas of activity, which increased both property and equipment and
long-term debt.
Operating cash flows before working capital adjustments totaled $90.6
million for the nine month period ended September 30, 1998 compared with $79.5
million for the comparable period in 1997. After working capital adjustments,
cash flow provided by operations decreased to $91.2 million from $91.4 million
for the same nine month period in 1997.
Capital expenditures of $161.4 million, including non-cash transactions
involving issuance of common stock and assumption of debt, for the nine month
period decreased $68.4 million as compared with the same period in 1997. These
expenditures, funded by operating cash flows and borrowings, consisted
principally of drilling and development activities of oil and gas properties.
Of these capital expenditures, approximately 54 percent was invested in the
Rocky Mountain Region, nine percent in the Mid-Continent Region, 19 percent in
the Gulf of Mexico Region and 16 percent in the Republic of Peru.
The Company plans to continue actively acquiring, exploring and developing
oil and gas properties. The Company expects cash flow from its producing
properties and its borrowing capacity to be sufficient to fund its anticipated
capital and operating requirements, including any contingencies.
The Company's operating results are directly affected by oil and gas prices.
Oil and gas prices also affect the reserve values used in determining the
"ceiling test" limitation for the Company's capitalized oil and gas property
costs accounted for under the full cost method. Should the net capitalized
costs of the Company's oil and gas properties exceed the estimated present
value of future net cash flows from proved oil and gas reserves, such excess
costs would be recognized as an impairment and charged to current expense. For
purposes of determining the "ceiling test," the Company performs a
comprehensive engineering study of its proved reserves each year end. For
quarterly reporting, the Company updates this annual study through the
utilization of reasonable estimates and approximations which consider the
effects of price changes, production rate changes and revisions to reserves.
Oil and gas prices at a date closely approximating the Company's earnings
release date were used to value the Company's reserves. These prices were
lower by 16 percent and 10 percent, respectively, from the December 31, 1997
levels. A further decline in oil and gas sales prices could result in the
recognition of an impairment expense in future periods.
EXPLORATION AND DEVELOPMENT ACTIVITIES
Following is a description of significant activities of the Company's
exploration and development activities for the third quarter of 1998.
10
Rocky Mountain Region
Cave Gulch
On August 13, 1998, the Cave Gulch 1-29LAK well, located in the Wind River
Basin, blew out due to a casing failure. The natural gas venting from the well
was ignited on August 17, 1998. A development well, the Cave Gulch 4-19LAK,
located approximately 4000 feet from the 1-29 well, was converted to a relief
well and is currently drilling at 14,778 feet and is expected to intersect the
1-29LAK well by year end. Following the intersection, the Company plans to
kill the 1-29LAK well shortly thereafter. The Company believes it has adequate
insurance to cover the costs of controlling the 1-29LAK well, well relief
operations and the drilling of a replacement well, if attempted. Insurance
does not cover any lost revenues or reserves from the well. The Company has a
70 percent working interest in the 1-29LAK well.
The Cave Gulch 3-29MAD well, an ultra deep exploratory well, commenced
production from the Muddy Formation in October and is currently producing at
37 MMcfd. Earlier tests showed that two downhole formations were not
productive: the Madison Formation was wet and the Tensleep Formation was not
capable of producing commercial quantities of gas. The Company has an 85
percent working interest in the Muddy Formation in this well. The Company's
interest is subject to change in January 1999 pending a Wyoming Oil and Gas
Conservation Commission decision regarding possible participation by two
adjacent units in the 3-29MAD well production. The Company has a 69 percent
and an 84 percent, respectively, working interest in the two adjacent units.
Powder River Basin--Coal Bed Methane
On July 20, 1998, the United States Court of Appeals for the Tenth Circuit
held that a reservation of coal to the United States in patents issued under
the 1909 and 1910 Coal Land Acts includes coal-bed methane. On October 21,
1998, President Clinton signed, legislation that effectively removed certain
existing leases entered into with surface patent holders from the Tenth
Circuit ruling. Between the time of the Tenth Circuit decision and the
enactment of this legislation, the Company had discontinued drilling coal-bed
methane wells on fee leases in the Powder River Basin. Since the legislation
was signed, this drilling has resumed.
The Bureau of Land Management ("BLM") has required an Environmental Impact
Study ("EIS") be completed prior to approving additional drilling on Federal
leases in the Powder River Basin. The Company anticipates a decision in
September 1999. Approximately half of the Company's acreage is on Federal
leases in the Powder River Basin.
The Company plans to participate in the drilling of approximately 300 wells
in 1998 and an additional 400 to 500 wells in 1999 in its coal bed methane
play in the Powder River Basin.
Mid-Continent Region
Three new wells in the Anadarko Basin and one well in the Arkoma Basin were
completed and commenced production in the third quarter. Five additional wells
are currently being drilled or completed.
Gulf of Mexico
In August, the High Island A-545 #2, operated by Shell, commenced production
at 21 MMcfd. In November, the Company expects the West Cameron 528 well to
commence production. The Company has a 40 percent and 22 percent interest,
respectively, in these wells.
International--Peru
During the third quarter, the Company drilled and tested the third well of a
three well exploratory program on Block 67 located in the Republic of Peru.
Preliminary test results of the three wells indicated significant
11
accumulations of heavy oil. Based on current oil prices and due to the absence
of an infrastructure, production from the three structures tested is not
currently economical. A feasibility study indicates additional delineation of
these structures and exploration of additional structures could ultimately
develop significant recoverable hydrocarbons. To confirm this potential, a
three year seismic, delineation and exploration program is being developed.
The Company, together with its partners, is seeking additional partners to
participate in the program. The Company has a 70 percent working interest in
the project.
Year 2000
The following Year 2000 statements constitutes a Year 2000 Readiness
Disclosure within the meaning of the Year 2000 Information and Readiness
Disclosure Act of 1998.
Year 2000 issues result from the inability of certain electronic hardware
and software to accurately calculate, store or use a date subsequent to
December 31, 1999. These dates can be erroneously interpreted in a number of
ways, e.g., the year 2000 could be interpreted as the year 1900. This
inability could result in a system failure or miscalculations that could in
turn cause operational disruptions. These issues could affect not only
information technology ("IT") systems, such as computer systems used for
accounting, land, engineering and seismic processing, but also systems that
contain embedded chips.
The Company has completed an assessment of its IT systems to determine
whether these systems are Year 2000 compliant. The Company has determined that
these systems are either compliant or with relatively minor modifications or
upgrades (many of which would have been made in any event as part of the
Company's continuing effort to enhance its IT systems) will be compliant. All
necessary modifications and upgrades and the testing thereof are expected to
be completed by the end of the first quarter of 1999.
The Company is assessing its non-information systems to ascertain whether
these systems contain embedded computer chips that will not properly function
subsequent to December 31, 1999. These systems include office equipment, the
automatic wellhead equipment used to operate wells in the Piceance Basin and
southwest Kansas, the Company-owned gas gathering pipelines in the Piceance
Basin, the Uinta Basin and in southwest Kansas and the Company's gas
processing plant in the Piceance Basin. Except for certain portions of the
southwest Kansas wellhead automation equipment, all of these systems have been
determined to be Year 2000 compliant. The southwest Kansas wellhead automation
equipment will be modified and tested by the end of the first quarter of 1999.
To date, the Company has relied upon its internal staff to access its Year
2000 readiness. Outside consultants will be used for limited projects such as
the modification and testing of the southwest Kansas wellhead automation
equipment. The costs associated with assessing the Company's Year 2000
internal compliance and related systems modification, upgrading and testing
are not currently expected to exceed $250,000.
The Company is in the process of communicating with certain of its
significant suppliers, service companies, gas gatherers and pipelines,
electricity providers and financial institutions to determine the
vulnerability of the Company to third parties' failure to address their Year
2000 issues. While the Company has not yet received definitive responses
indicating all such entities are Year 2000 compliant, it has not received
information suggesting the Company is vulnerable to potential year 2000
failures by these parties. These communications are expected to continue into
the first quarter of 1999. At this time the Company has not developed any
contingency plans to address third party non-compliance with Year 2000
matters. However, should its communications with any third parties indicate
any vulnerability, appropriate contingency plans will be developed.
The Company does not anticipate any significant disruptions of its
operations due to Year 2000 issues. Among the potential "worst case" problems
the Company could face would be the loss of electricity used to power well
pumps and compressors that would result in wells being shut-in, or the
inability of a third party gas gathering company or pipeline to accept gas
from the Company's wells or gathering lines which would also result in the
Company's wells being shut-in. A disruption in production would result in the
loss of income.
12
Results of Operations
For the third quarter ended September 30, 1998 net income of $1.8 million or
$.06 per diluted share was $2.8 million lower than net income of $4.6 million
or $.14 per diluted share for the third quarter 1997. The decrease in net
income is attributable to lower oil production volumes and lower realized oil
prices, increases in depreciation, depletion and amortization expense, and
higher interest costs. These factors were partially offset by increased gas
production revenues resulting from higher production volumes and by increased
gas trading activities. Net income for the nine months ended September 30,
1998 was $10.7 million, or $.33 per diluted share, a decrease of $8.2 million
over net income of $18.9 million, or $.59 per diluted share, for the first
nine months of 1997.
Total revenues for the third quarter of 1998 were $146.7 million, up 65
percent compared to $89.2 million for the same period in 1997. For the nine
months ended September 30, 1998, total revenues were $410.4 million as
compared to $236.9 million for the comparable 1997 period. Increased gas
production and gas trading activities were the primary factors contributing to
the third quarter and nine month total revenue increases.
Production revenues for the third quarter of 1998 increased three percent to
$47.7 million from $46.3 million in 1997. For the nine months ended September
30, 1998, production revenues were up eight percent to $155.3 million compared
with revenues of $144.1 million for the same period in 1997.
Production revenues and related volumes and average prices during the
periods presented were as follows:
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- -----------------
1998 1997 1998 1997
------- ------- -------- --------
Gas Revenues (000's)........................ $42,538 $36,605 $136,146 $113,115
Gas Production (Bcf)........................ 23.0 19.8 70.5 55.8
Average Price per Mcf....................... $1.85 $1.84 $1.93 $2.03
Oil Revenues (000's)........................ $5,207 $9,737 $19,186 $31,005
Oil Production (Mbbls)...................... 492 586 1,619 1,722
Average Price per Barrel.................... $10.58 $16.62 $11.85 $18.01
(Note: Bcf = billion cubic feet; Mcf = thousand cubic feet; Mbbls = thousand
barrels)
With a 16 percent increase in production volumes, third quarter gas revenues
increased 16 percent as compared with the same period in 1997. A 26 percent
increase in production volumes, which was partially offset by a five percent
decrease in the average gas price, resulted in a 20 percent increase in gas
revenues for the nine month period ended September 30, 1998 as compared with
the same period in 1997.
Third quarter 1998 oil revenues were 47 percent below the same period in
1997. This decrease is directly attributed to a 36 percent decrease in average
oil prices and a 16 percent decrease in production volumes. Oil revenues
decreased 38 percent for the first nine months of 1998 as compared with 1997,
due principally to the lower oil prices and to a six percent decrease in
production volumes. Oil prices for the nine month period were on average 34
percent lower in 1998 than 1997.
To reduce its exposure to volatile gas price fluctuations, the Company
enters into hedging arrangements, principally swaps and options, for both
trading and producing activities. Gains or losses on these hedging
arrangements are generally offset by opposite changes in the realized price of
natural gas and are recognized in revenues for the periods to which the hedge
relates. As of September 30, 1998, the Company held positions to hedge Rocky
Mountain and Mid-Continent natural gas production of 6.9 Bcf for the fourth
quarter of 1998 and approximately 128.1 Bcf for the period of January 1999
through 2003. Fixed prices associated with these positions range from $1.70 to
$2.09 per MMBtu.
For the quarter ended September 30, 1998, revenues from trading activities
were $98.6 million on 56.1 Bcf of gas compared to $42.0 million on 25.8 Bcf of
gas for the same period in 1997. The associated costs of trading
13
increased to $94.5 million from $40.7 million. The gross margin from trading
activities was $4.1 million and $1.3 million for the respective quarters ended
September 30, 1998 and 1997. The gross margin from trading activities for the
first nine months of 1998 was $9.5 million on 133.2 Bcf with revenues of
$249.7 million compared to a gross margin of $2.9 million on 50.0 Bcf with
revenues of $89.6 million for the first nine months of 1997.
Per unit production costs averaged $.51 and $.52 per Mcfe produced for the
third quarter and nine months ended September 30, 1998, respectively, compared
with $.55 and $.64 per Mcfe produced for comparable periods in 1997,
respectively.
Depreciation, depletion and amortization increased to $25.5 million from
$18.3 million for the quarters ended September 30, 1998 and 1997,
respectively, and to $74.7 million from $50.2 million for the nine month
periods ended September 30, 1998 and 1997, respectively. These increases are
attributed to higher depletion rates and to an 11 percent and 21 percent
increase in equivalent production for the quarter and nine months ended
September 30, 1998, respectively, as compared to the same periods in 1997, and
higher depletion rates. For the three months ended September 30, 1998 and
1997, depletion on oil and gas production was recorded at $.94 and $.75 per
Mcfe, respectively. For the nine month periods ended September 30, 1998 and
1997, depletion on oil and gas production was recorded at $.89 and $.72 per
Mcfe, respectively.
Interest expense increased to $5.3 million from $3.4 million for the
quarters ended September 30, 1998 and 1997, respectively, and to $14.7 million
from $8.7 million for the nine month periods ended September 30, 1998 and
1997, respectively. Increases are directly attributed to higher debt levels.
The Company's largest source of operating income is from sales of its gas
and oil production. Therefore, the levels of the Company's revenues and
earnings are affected by prices at which natural gas and oil are being sold.
This is particularly true with respect to natural gas, which accounted for
approximately 88 percent of the Company's production revenue for the first
nine months of 1998. As a result, the Company's operating results for any
prior period are not necessarily indicative of future operating results
because of the fluctuations in gas and oil prices and the lack of
predictability of those fluctuations as well as changes in production levels.
----------------
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act
of 1934. Although the Company believes that the expectations reflected in the
forward-looking statements and the assumptions upon which such forward-looking
statements are based are reasonable, it can give no assurance that such
expectations and assumptions will prove to have been correct. See the
Company's Annual Report on Form 10-K for additional statements concerning
important factors that could cause actual results to differ materially from
the Company's expectations. These factors include but are not limited to
fluctuations in gas and crude oil prices, the success rate of exploration
efforts, the timeliness of development activities, and changes in the
political and economic environment of Peru.
14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)The following Exhibit is filed as part of this Quarterly Report on form
10-Q:
27. Financial Data Schedule
(b)There were no reports on Form 8-K filed during the quarter ended
September 30, 1998.
15
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Barrett Resources Corporation
/s/ A. Ralph Reed
November 13, 1998 By-----------------------------------
A. Ralph Reed
Chief Operating Officer and
President
/s/ J. Frank Keller
November 13, 1998 By-----------------------------------
J. Frank Keller
Chief Financial Officer
16