=============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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 1-14344
__________________________
PATINA OIL & GAS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-2629477
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1625 Broadway
Denver, Colorado 80202
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (303) 389-3600
Title of class Name of exchange on which listed
-------------------- ------------------------------------
Common Stock, $.01 par value New York Stock Exchange
7.125% Convertible Preferred Stock, $.01 par value New York Stock Exchange
Common Stock Warrants New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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 16,011,691 shares of common stock outstanding on July 27, 1999.
===============================================================================
PART I. FINANCIAL INFORMATION
Patina Oil & Gas Corporation (the "Company") was formed in 1996 to hold the
assets and operations of Snyder Oil Corporation ("SOCO") in the Wattenberg Field
and to facilitate the acquisition of Gerrity Oil & Gas Corporation (the "Gerrity
Acquisition"). The financial statements included herein have been prepared in
conformity with generally accepted accounting principles. The statements are
unaudited but reflect all adjustments which, in the opinion of management, are
necessary to fairly present the Company's financial position and results of
operations.
2
PATINA OIL & GAS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
December 31, June 30,
1998 1999
------------ -----------
(Unaudited)
ASSETS
Current assets
Cash and equivalents $ 10,086 $ 5,078
Accounts receivable 9,953 9,658
Inventory and other 3,286 3,211
--------- ---------
23,325 17,947
--------- ---------
Oil and gas properties, successful efforts method 598,712 612,135
Accumulated depletion, depreciation and amortization (273,935) (293,551)
--------- ---------
324,777 318,584
--------- ---------
Gas facilities and other 6,692 6,865
Accumulated depreciation (4,590) (5,060)
--------- ---------
2,102 1,805
--------- ---------
Other assets, net 1,329 1,159
--------- ---------
$ 351,533 $ 339,495
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 16,825 $ 15,684
Accrued liabilities 6,754 5,057
--------- ---------
23,579 20,741
--------- ---------
Senior debt 68,000 63,000
Subordinated notes 74,021 72,278
Other noncurrent liabilities 9,957 8,835
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par, 5,000,000 shares
authorized, 3,166,860 and 3,216,820 shares issued
and outstanding 32 32
Common stock, $.01 par, 100,000,000 shares
authorized, 15,752,389 and 16,009,044 shares
issued and outstanding 158 160
Capital in excess of par value 206,792 209,144
Deferred compensation (1,038) (845)
Retained earnings (deficit) (29,968) (33,850)
--------- ---------
175,976 174,641
--------- ---------
$ 351,533 $ 339,495
========= =========
The accompanying notes are an integral part of these statements.
3
PATINA OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
Three Months Six Months
Ended June 30, Ended June 30,
---------------- ------------------
1998 1999 1998 1999
------ ------ ------ ------
(Unaudited)
Revenues
Oil and gas sales $17,455 $20,047 $37,798 $36,507
Other 872 400 1,166 595
------- ------- ------- -------
18,327 20,447 38,964 37,102
------- ------- ------- -------
Expenses
Direct operating 4,258 4,454 8,895 8,575
Exploration (5) 9 18 22
General and administrative 1,998 1,466 3,824 2,819
Interest expense and other 3,355 2,963 6,664 5,876
Depletion, depreciation and amortization 10,222 9,813 20,760 20,086
------- ------- ------- -------
Income (loss) before taxes (1,501) 1,742 (1,197) (276)
------- ------- ------- -------
Provision (benefit) for income taxes
Current - - - -
Deferred - - - -
------- ------- ------- -------
- - - -
------- ------- ------- -------
Net income (loss) $(1,501) $ 1,742 $(1,197) $ (276)
======= ======= ======= =======
Net income (loss) per common share $ (0.19) $ 0.01 $ (0.27) $ (0.22)
======= ======= ======= =======
Weighted average shares outstanding 16,140 15,931 16,210 15,854
======= ======= ======= =======
The accompanying notes are an integral part of these statements.
4
PATINA OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
(In thousands)
Capital in Retained
Preferred Stock Common Stock Excess of Deferred Earnings
------------------------ -------------------
Shares Amount Shares Amount Par Value Compensation (Deficit)
-------- -------- -------- ------ --------- ------------ ---------
Balance, December 31, 1997 3,094 $ 31 16,450 $ 165 $ 208,525 $(1,828) $ (18,452)
Repurchase of common and preferred (68) (1) (1,338) (13) (8,676) - -
Issuance of common - - 640 6 3,224 (688) -
Preferred dividends and accretion 141 2 - - 3,719 - (6,335)
Common dividends - - - - - - (657)
Net loss - - - - - 1,478 (4,524)
----- ---- ------ ----- --------- ------- ---------
Balance, December 31, 1998 3,167 32 15,752 158 206,792 (1,038) (29,968)
Repurchase of common and preferred (23) - (78) (1) (636) - -
Issuance of common - - 335 3 999 (335) -
Preferred dividends and accretion 73 - - - 1,989 - (3,282)
Common dividends - - - - - - (324)
Net loss - - - - - 528 (276)
----- ---- ------ ----- --------- ------- ---------
Balance, June 30, 1999 (unaudited) 3,217 $ 32 16,009 $ 160 $ 209,144 $ (845) $ (33,850)
===== ==== ====== ===== ========= ======= =========
The accompanying notes are an integral part of these statements.
5
PATINA OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended June 30,
---------------------------------
1998 1999
--------- ---------
(Unaudited)
Operating activities
Net income (loss) $ (1,197) $ (276)
Adjustments to reconcile net income (loss) to net
cash provided by operations
Exploration expense 18 22
Depletion, depreciation and amortization 20,760 20,086
Deferred compensation expense 766 479
Amortization of deferred credits (260) (482)
Changes in current and other assets and liabilities
Decrease (increase) in
Accounts receivable 9,403 295
Inventory and other 316 (187)
Decrease in
Accounts payable (2,901) (2,301)
Accrued liabilities (2,329) (489)
Other assets and liabilities (4,563) (2,114)
-------- --------
Net cash provided by operating activities 20,013 15,033
-------- --------
Investing activities
Acquisition, development and exploration (11,566) (13,183)
Other (228) (173)
-------- --------
Net cash used by investing activities (11,794) (13,356)
-------- --------
Financing activities
Decrease in indebtedness (3,213) (6,743)
Deferred credits 267 1,818
Issuance of common stock 1,308 493
Repurchase of common stock (4,976) (271)
Repurchase of preferred stock - (366)
Preferred dividends (1,307) (1,292)
Common dividends (332) (324)
-------- --------
Net cash used by financing activities (8,253) (6,685)
-------- --------
Decrease in cash (34) (5,008)
Cash and equivalents, beginning of period 12,609 10,086
-------- --------
Cash and equivalents, end of period $ 12,575 5,078
======== ========
The accompanying notes are an integral part of these statements.
6
PATINA OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND NATURE OF BUSINESS
Patina Oil & Gas Corporation (the "Company" or "Patina"), a Delaware
corporation, was formed in 1996 to hold the assets and operations of Snyder Oil
Corporation ("SOCO") in the Wattenberg Field and to facilitate the acquisition
of Gerrity Oil & Gas Corporation ("Gerrity"). In conjunction with the Gerrity
Acquisition, SOCO received 14.0 million common shares. In 1997, a series of
transactions eliminated SOCO's ownership in the Company. The transactions
included: (i) the sale by SOCO of 10.9 million shares of Patina common stock in
a public offering, (ii) the repurchase by the Company of SOCO's remaining 3.0
million common shares, (iii) the sale by the Company of $40.0 million of 8.50%
convertible preferred stock and the issuance of 160,000 common shares to certain
institutional investors and (iv) the sale of 303,797 common shares at $9.875 per
share and the grant of 496,250 restricted common shares by the Company to
certain officers and managers. As a result of these transactions, SOCO's
ownership in the Company was eliminated
The Company's operations currently consist of the acquisition, development,
exploitation and production of oil and natural gas properties primarily in the
Wattenberg Field of Colorado's D-J Basin.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Producing Activities
The Company utilizes the successful efforts method of accounting for its
oil and gas properties. Consequently, leasehold costs are capitalized when
incurred. Unproved properties are assessed periodically within specific
geographic areas and impairments in value are charged to expense. Exploratory
expenses, including geological and geophysical expenses and delay rentals, are
charged to expense as incurred. Exploratory drilling costs are initially
capitalized, but charged to expense if and when the well is determined to be
unsuccessful. Costs of productive wells, unsuccessful developmental wells and
productive leases are capitalized and amortized on a unit-of-production basis
over the life of the remaining proved or proved developed reserves, as
applicable. Oil is converted to natural gas equivalents (Mcfe) at the rate of
one barrel to six Mcf. Amortization of capitalized costs has generally been
provided over the entire Wattenberg Field, as the wells are located in the same
reservoirs. No accrual has been provided for estimated future abandonment costs
as management estimates that salvage value will approximate or exceed such
costs.
In 1995, the Company adopted Statement of Financial Accounting Standards
No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets." SFAS
121 requires the Company to assess the need for an impairment of capitalized
costs of oil and gas properties on a field-by-field basis. During 1997, the
Company recorded an impairment of $26.0 million to oil and gas properties as the
estimated future cash flows (undiscounted and without interest charges) expected
to result from these assets and their disposition, largely proven undeveloped
drilling locations, was less than their net book value. The impairment primarily
resulted from low year-end oil and natural gas prices. While no impairments were
necessary in 1998 or the first six months of 1999, changes in underlying
assumptions or the amortization units could result in additional impairments in
the future.
Gas facilities and other
Depreciation of gas gathering and transportation facilities is provided
using the straight-line method over the estimated useful life of five years.
Equipment is depreciated using the straight-line method with estimated useful
lives ranging from three to five years.
Other Assets
Other Assets at December 31, 1998 and June 30, 1999 were comprised of $1.3
million and $1.2 million of notes receivable from certain officers and managers
of the Company. See Note (9).
7
Section 29 Tax Credits
The Company has entered into arrangements to monetize its Section 29 tax
credits. These arrangements result in revenue increases of approximately $0.40
per Mcf on production volumes from qualified Section 29 properties. As a result,
the Company recognized additional gas revenues of $1,062,000 and $1,235,000 for
the six months ended June 30, 1998 and 1999, respectively. These arrangements
are expected to increase revenues through 2002.
Gas Imbalances
The Company uses the sales method to account for gas imbalances. Under this
method, revenue is recognized based on the cash received rather than the
Company's proportionate share of gas produced. Gas imbalances at December 31,
1998 and June 30, 1999 were insignificant.
Financial Instruments
The book value and estimated fair value of cash and equivalents was $10.1
million and $5.1 million at December 31, 1998 and June 30, 1999. The book value
and estimated fair value of the Company's senior debt was $68.0 million and
$63.0 million at December 31, 1998 and June 30, 1999. The book value of these
assets and liabilities approximates fair value due to the short maturity or
floating rate structure of these instruments. The book value of the Senior
Subordinated Notes ("Subordinated Notes" or "Notes") was $74.0 million and $72.3
million and the estimated fair value was $69.9 million and $72.3 million at
December 31, 1998 and June 30, 1999, respectively. The fair value of the Notes
is estimated based on their price on the New York Stock Exchange. The Company
redeemed all of the Notes on July 15, 1999.
From time to time, the Company enters into commodity derivatives contracts
and fixed-price physical contracts to manage its exposure to oil and gas price
volatility. Commodity derivatives contracts, which are generally placed with
major financial institutions or with counterparties of high credit quality that
the Company believes are minimal credit risks, may take the form of futures
contracts, swaps or options. The oil and gas reference prices of these commodity
derivatives contracts are based upon oil and natural gas futures which have a
high degree of historical correlation with actual prices received by the
Company. The Company accounts for its commodity derivatives contracts using the
hedge (deferral) method of accounting. Under this method, realized gains and
losses on such contracts are deferred and recognized as an adjustment to oil and
gas sales revenues in the period in which the physical product to which the
contracts relate, is actually sold. Gains and losses on commodity derivatives
contracts that are closed before the hedged production occurs are deferred until
the production month originally hedged.
The Company entered into various swap contracts for oil (NYMEX based) for
the first six months of 1998 and 1999. The Company recognized a gain of $238,000
in the six month period ended June 30, 1998 and a loss of $370,000 in the six
month period ended June 30, 1999 related to these swap contracts based on
settlements during the respective periods.
The Company entered into various CIG and PEPL index based swap contracts
for natural gas for the first six months 1998 and 1999. The Company recognized
gains of $543,000 in the six month period ended June 30, 1998 and $310,000 in
the six month period ended June 30, 1999 related to these swap contracts based
on settlements during the respective periods.
As of June 30, 1999, the Company had entered into swap contracts for oil
(NYMEX based) for the period July 1999 through December 1999. The weighted
average oil price for the NYMEX based contracts is $18.16 for total contract
volumes of 506,000 barrels of crude oil. The unrecognized losses on these
contracts totaled $640,000 based on estimated market values as of June 30, 1999.
8
As of June 30, 1999, the Company had entered into CIG and PEPL index based
swap contracts for natural gas for the period July 1999 through October 1999.
The weighted average natural gas price for the CIG index based contracts is
$1.82 for total contract volumes of 3,530,000 MMBtu's of natural gas and for the
PEPL index based contracts is $2.21 for total contract volumes of 615,000
MMBtu's of natural gas. The unrecognized losses on these contracts totaled
$587,000 based on estimated market values as of June 30, 1999.
In October 1998, the Company entered into an interest rate swap contract
for a two-year period, extendable for one additional year at the option of the
third party. The contract is for $30.0 million principal with a fixed interest
rate of 4.57% payable by the Company and the variable interest rate, the three-
month LIBOR, payable by the third party. The difference between the Company's
fixed rate of 4.57% and the three-month LIBOR rate, which is reset every 90
days, is received or paid by the Company in arrears every 90 days. The Company
received $59,000 in January 1999, $36,000 in April 1999 and $33,000 in July 1999
pursuant to this contract.
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 on 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.
Stock Options and Awards
The Company accounts for its stock-based compensation plans under the
principles prescribed by the Accounting Principles Board's Opinion No. 25 ("APB
No. 25"), "Accounting for Stock Issued to Employees." Accordingly, stock options
awarded under the Employee Plan and the Non-Employee Directors Plan are
considered to be "noncompensatory" and do not result in recognition of
compensation expense. However, the restricted stock awarded under the Restricted
Stock Plan is considered to be "compensatory" and the Company recognized
$766,000 and $479,000 of non-cash general and administrative expenses for the
six months ended June 30, 1998 and 1999. See Note (6).
Per Share Data
The Company uses the weighted average number of shares outstanding in
calculating earnings per share data. When dilutive, options and warrants are
included as share equivalents using the treasury stock method and are included
in the calculation of diluted per share data. Common stock issuable upon
conversion of convertible preferred securities is also included in the
calculation of diluted per share data if their effect is dilutive.
Risks and Uncertainties
Historically, the market for oil and natural gas has experienced
significant price fluctuations. Prices for oil and for natural gas in the Rocky
Mountain region have, at times, been particularly volatile. The price
fluctuations can result from variations in weather, levels of production in the
region, availability of transportation capacity to other regions of the country
and various other factors. Increases or decreases in prices received could have
a significant impact on the Company's future results.
9
Supplemental Cash Flow Information
The Company incurred the following significant non-cash items:
Six Months Ended
March 31,
1998 1999
---- ----
(In thousands)
Stock grant awarded to officers and managers............................. $ 688 $ 335
Dividends and accretion - 8.50% preferred stock.......................... 1,841 1,824
The 1998 stock grant award represents 100,000 common shares granted to the
President in conjunction with his appointment in the first quarter of 1998 and
has been recorded as Deferred Compensation in the equity section of the
accompanying consolidated balance sheets. The 1999 stock grant award represents
100,000 common shares granted to the Chief Executive Officer in conjunction with
his voluntary reduction in cash salary, waiver of any 1998 bonus and other
compensation arrangements in the second quarter of 1999 and has also been
recorded as Deferred Compensation in the equity section of the accompanying
consolidated balance sheets. The Company recognized $766,000 and $479,000 of
non-cash general and administrative expenses for the six months ended June 30,
1998 and 1999 related to these stock grants and the stock grants awarded to
certain officers and managers in conjunction with the redistribution of
SOCO's ownership of the Company. See Note (9).
Other
All liquid investments with an original maturity of three months or less
are considered to be cash equivalents. Certain amounts in the prior period
consolidated financial statements have been reclassified to conform with the
current classifications.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
In the opinion of management, those adjustments to the financial statements
(all of which are of a normal and recurring nature) necessary to present fairly
the financial position and results of operations have been made. These interim
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
10
(3) OIL AND GAS PROPERTIES
The cost of oil and gas properties included approximately $585,000 and
$637,000 at December 31, 1998 and June 30, 1999, respectively, in unevaluated
leasehold costs related to a prospect in Wyoming. Acreage generally held for
exploration or resale and its value, if any, is excluded from amortization. The
following table sets forth costs incurred related to oil and gas properties:
Six
Year Ended Months Ended
December 31, June 30,
1998 1999
-------- -------
(In thousands)
Acquisition................................................. $ 2,319 $ 1,850
Development................................................. 21,711 11,311
Exploration and other....................................... 59 22
-------- -------
$ 24,089 $13,183
======== =======
(4) INDEBTEDNESS
The following indebtedness was outstanding on the respective dates:
December 31, June 30,
1998 1999
-------- --------
(In thousands)
Bank facilities................................................. $68,000 $63,000
Less current portion............................................ - -
-------- -------
Senior debt, net................................................ $68,000 $63,000
======== =======
Subordinated notes.............................................. $74,021 $72,278
======== ========
In April 1997, the Company entered into an amended bank Credit Agreement
(the "Credit Agreement"). The Credit Agreement is a revolving credit facility in
an aggregate amount up to $140.0 million. The amount available under the
facility is adjusted semiannually, each May 1 and November 1, and equaled $100.0
million at June 30, 1999 with $63.0 million of debt outstanding at that time.
Subsequent to quarter-end and in conjunction with the redemption of the 11.75%
Senior Subordinated Notes, the Company entered into a Second Amended and
Restated Bank Credit Agreement (the "Amended Credit Agreement"). The Amended
Credit Agreement is a revolving credit facility in an aggregate amount up to
$200.0 million. The amount available under the facility is adjusted
semiannually, each May 1 and November 1, and equaled $160.0 million at July 15,
1999.
The Company may elect that all or a portion of the credit facility bear
interest at a rate equal to: (i) the higher of (a) the prime rate or (b) the
Federal Funds Effective Rate plus .5%, or (ii) the rate at which Eurodollar
deposits for one, two, three or six months (as selected by the Company) are
offered in the interbank Eurodollar market plus a margin which fluctuates from
0.625% to 1.125% (1.00% to 1.50% under the Amended Credit Agreement), determined
by a debt to EBITDA ratio. During the six month period ended June 30, 1999, the
average interest rate under the facility approximated 6.10%.
In October 1998, the Company entered into an interest rate swap contract
for a two-year period, extendable for one additional year at the option of the
third party. The contract is for $30.0 million principal with a fixed interest
rate of 4.57% payable by the Company and the variable interest rate, the three-
month LIBOR, payable by the third party. The difference between the Company's
fixed rate of 4.57% and the three-month LIBOR rate, which is reset every 90
days,
11
is received or paid by the Company in arrears every 90 days. The Company
received $59,000 in January 1999, $36,000 in April 1999 and $33,000 in July 1999
pursuant to this contract.
The Credit Agreement and the Amended Credit Agreement contain certain
financial covenants, including but not limited to, a maximum total debt to
capitalization ratio, a maximum total debt to EBITDA ratio and a minimum current
ratio. The Credit Agreement and the Amended Credit Agreement also contain
certain negative covenants, including but not limited to restrictions on
indebtedness; certain liens; guaranties, speculative derivatives and other
similar obligations; asset dispositions; dividends, loans and advances; creation
of subsidiaries; investments; leases; acquisitions; mergers; changes in fiscal
year; transactions with affiliates; changes in business conducted; sale and
leaseback and operating lease transactions; sale of receivables; prepayment of
other indebtedness; amendments to principal documents; negative pledge causes;
issuance of securities; and non-speculative commodity hedging. Borrowings under
the Credit Agreement mature in July 2000 and borrowings under the Amended Credit
Agreement mature in July 2003, but may be prepaid at anytime. The Company has
periodically negotiated extensions of the Credit Agreement; however, there is no
assurance the Company will be able to do so in the future. The Company had a
restricted payment basket of $7.9 million as of June 30, 1999, which may be used
to repurchase common stock, preferred stock and warrants and pay dividends on
its common stock.
In conjunction with the Gerrity Acquisition, the Company assumed $100.0
million of 11.75% Senior Subordinated Notes due July 15, 2004. Under purchase
accounting, the Notes have been reflected in the accompanying financial
statements at a book value of 105.875% of their principal amount, their call
price as of July 15, 1999. Interest is payable each January 15 and July 15. The
Notes became redeemable at the option of the Company, in whole or in part, on or
after July 15, 1999, at 105.875%. Through June 30, 1999, the Company has
repurchased $31.7 million principal amount of the Notes, resulting in $68.3
million of principal amount of Notes outstanding. These Notes are reflected at a
book value of $72.3 million at June 30, 1999 in the accompanying financial
statements. The Notes are unsecured general obligations and are subordinated to
all senior indebtedness and to any existing and future indebtedness of the
Company's subsidiaries. The Company redeemed all of the Notes subsequent to
quarter-end at the call price of 105.875%. The redemption was financed with
borrowings under the bank credit facility.
Subsequent to entering into the Amended Credit Agreement, scheduled
maturities of indebtedness for the next five years are zero for 1999, 2000,
2001, 2002 and $63.0 million and the amount related to the redemption of the
Notes in 2003. Management intends to review the facility and extend the maturity
on a regular basis; however, there can be no assurance that the Company will be
able to do so.
Cash payments for interest totaled $6.8 million and $6.1 million during the
six months ended June 30, 1998 and 1999, respectively.
(5) STOCKHOLDERS' EQUITY
A total of 100.0 million common shares, $.01 par value, are authorized of
which 16.0 million were issued and outstanding at June 30, 1999. The Company
issued 6.0 million common shares and 3.0 million five-year common stock warrants
exercisable at $12.50 (which expire in May 2001), in exchange for all of the
outstanding stock of Gerrity upon consummation of the Gerrity Acquisition.
Subsequent to the acquisition date, the Company has repurchased 5,633,000 shares
of common stock (including the 3.0 million common shares repurchased from SOCO
in conjunction with the redistribution of SOCO's majority ownership in October
1997), 148,682 shares of 7.125% preferred stock, 68,743 shares of 8.50%
preferred stock, 500,000 warrants issued to Gerrity's former chief executive
officer, and 80,549 five year common stock warrants for total consideration of
$52.0 million. The common stock is listed on the New York Stock Exchange.
Prior to 1997, no dividends had been paid on common stock. A quarterly cash
dividend of one cent per common share was initiated in December 1997.
A total of 5.0 million preferred shares, $.01 par value, are authorized. At
June 30, 1999, the Company had two issues of preferred stock outstanding
consisting of 1,444,926 shares of 7.125% preferred and 1,771,894 shares of 8.50%
preferred.
12
In May 1996, 1.2 million shares of 7.125% preferred stock were issued to
certain Gerrity preferred shareholders electing to exchange their preferred
shares (the "Original Exchange Offer"). There were no proceeds received related
to this issuance. In October 1996, Gerrity's certificate of incorporation was
amended to provide that all remaining shares of Gerrity's preferred stock be
exchanged for 7.125% preferred shares on the same terms as the Original Exchange
Offer. This exchange resulted in the issuance of an additional 389,000 preferred
shares. Each share of 7.125% preferred stock is convertible into common stock at
any time at $8.61 per share, or 2.9036 common shares. The 7.125% preferred stock
pays quarterly cash dividends, when declared by the Board of Directors, based on
an annual rate of $1.78 per share. The 7.125% preferred stock is currently
redeemable at the option of the Company at an initial call price of $26.25 per
share, declining ratably to $25.00 through 2006. The liquidation preference of
the 7.125% preferred stock is $25 per share, plus accrued and unpaid dividends.
As of June 30, 1999, there were 1,444,926 7.125% preferred shares outstanding
with an aggregate liquidation preference of $36.1 million. The 7.125% preferred
stock is listed on the New York Stock Exchange. Holders of the 7.125% preferred
stock are not generally entitled to vote, except with respect to certain limited
matters. The Company paid $1,307,000 and $1,292,000 ($.4453 per 7.125%
convertible preferred share each quarter) in preferred dividends during the six
months ended June 30, 1998 and 1999, and had accrued an additional $327,000 and
$322,000 at June 30, 1998 and 1999, respectively, for dividends.
In October 1997, 1.6 million shares of 8.50% preferred stock and 160,000
common shares were issued to a group of private investors for $40.0 million.
The investors agreed not to sell, transfer or dispose of any shares of the 8.50%
preferred prior to October 1999. Each share of the 8.50% preferred stock is
convertible into common stock at any time at $9.50 per share or 2.6316 common
shares. The 8.50 % preferred stock pays quarterly dividends, when declared by
the Board of Directors, and are payable-in-kind ("PIK Dividend") until October
1999, and in cash thereafter. The 8.50% preferred stock is redeemable at the
option of the Company at any time after October 2000 at 106% of its stated value
declining by 2% per annum thereafter. The liquidation preference is $25 per
share, plus accrued and unpaid dividends. As of June 30, 1999, there were
1,771,894 8.50% preferred shares outstanding with an aggregate liquidation
preference of $44.3 million. The 8.50% preferred stock is privately held.
Holders of the 8.50% preferred stock are entitled to vote with the common stock,
based upon the number of shares of common stock into which the shares of 8.50%
preferred stock are convertible. The Company paid $1.7 million and $1.8 million
in PIK Dividends (issued an additional 69,850 and 72,960 8.50% preferred shares)
during the six months ended June 30, 1998 and 1999, respectively.
The Company adopted Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings per Share" during 1997. SFAS 128 specifies computation,
presentation and disclosure requirements for earnings per share for entities
with publicly held common stock or potential common stock. All prior period
earnings per share amounts have been restated in accordance with SFAS 128.
In accordance with SFAS 128, the Company computed the net income (loss) per
share by dividing the net income (loss), less dividends and accretion on
preferred stock, by the weighted average common shares outstanding during the
period. Net income (loss) applicable to common stockholders for the three months
ended June 30, 1998 and 1999, was ($3,084,000) and $94,000, respectively. Net
income (loss) applicable to common stockholders for the six months ended June
30, 1998 and 1999, was ($4,345,000) and ($3,558,000), respectively. As of June
30, 1999 there were 282,917 common shares related to certain stock grant awards
that were not vested. As such, these shares have not been included in basic
weighted average common shares outstanding during the period.
Diluted net income (loss) per share was computed by dividing the net income
(loss), less dividends and accretion on preferred stock, by the weighted average
common shares outstanding during the period plus all dilutive potential shares
outstanding (zero for three months and six months ended June 30, 1998 and 1999,
respectively). The potential common stock equivalents of the 7.125% and 8.50%
preferred stock, $12.50 common stock warrants and stock options were anti-
dilutive for all periods presented. Net income (loss) per common share and
diluted net income (loss) per common share were the same for all periods
presented.
13
(6) EMPLOYEE BENEFIT PLANS
401(k) Savings
The Company has a 401(k) profit sharing and savings plan (the "401(k)
Plan"). The initial 401(k) Plan was established in 1996. In conjunction with the
sale of SOCO's ownership in the Company in October 1997, a new plan was adopted
effective January 1, 1997. Eligible employees may make voluntary contributions
to the 401(k) Plan. The amount of employee contributions is limited as specified
in the 401(k) Plan. The Company may, at its discretion, make additional matching
or profit sharing contributions to the 401(k) Plan. The Company has historically
made profit sharing contributions to the 401(k) Plan, which totaled $338,000 for
1998. The 1998 profit sharing contribution was made in shares of the Company's
common stock (138,462 shares).
Stock Purchase Plan
In 1998, the Company adopted and the stockholders approved a stock purchase
plan ("Stock Purchase Plan"). Pursuant to the Stock Purchase Plan, certain
officers, directors and managers are eligible to purchase shares of common stock
at prices ranging from 50% to 85% of the closing price of the stock on the
trading day prior to the date of purchase ("Closing Price"). In addition,
employee participants may be granted the right to purchase shares pursuant to
the Stock Purchase Plan with all or a part of their salary and bonus. A total
of 500,000 shares of common stock are reserved for possible purchase under the
Stock Purchase Plan. In May 1999, an amendment to the Stock Purchase Plan was
approved by the stockholders allowing for the annual renewal of 500,000 shares
of common stock reserved for possible purchase under the plan. In 1998, the
Board of Directors approved 291,250 common shares (exclusive of shares available
for purchase with participants' salaries and bonuses) for possible purchase by
participants at 75% of the Closing Price during the current Plan Year as defined
in the Stock Purchase Plan. As of December 31, 1998, participants purchased
257,632 shares of common stock, including 76,712 shares purchased with
participant's 1997 bonuses, at prices ranging from $3.69 to $7.31 per share
($2.77 to $5.48 net price per share), resulting in cash proceeds to the Company
of $1.3 million. In 1999, the Board of Directors approved 136,250 common shares
(exclusive of shares available for purchase with participants' salaries and
bonuses) for possible purchase by participants at 75% of the Closing Price
during the current Plan Year as defined in the Stock Purchase Plan. As of June
30, 1999, participants purchased 77,050 shares of common stock at prices ranging
from $5.06 to $5.94 per share ($3.80 to $4.45 net price per share), resulting in
cash proceeds to the Company of $303,000. The Company recorded non-cash general
and administrative expenses of $161,000 and $40,000 associated with these
purchases for the six months ended June 30, 1998 and 1999.
Stock Option and Award Plans
In 1996, the shareholders adopted a stock option plan for employees
providing for the issuance of options at prices not less than fair market value.
Options to acquire the greater of up to three million shares of common stock or
10% of outstanding diluted common shares may be outstanding at any given time.
The specific terms of grant and exercise are determinable by a committee of
independent members of the Board of Directors. A total of 512,000 options were
issued in May 1996, with an exercise price of $7.75 per common share, 271,000
options were issued in February 1997, with an exercise price of $9.25 per common
share, 485,000 options were issued in February 1998, 96,000 in March 1998,
25,000 in May 1998, 8,000 in July 1998, 313,000 in February 1999, and 300,000 in
April 1999 with exercise prices of $7.06, $6.88, $7.19, $6.56, $2.94 and $3.94
per common share, respectively. The options vest over a three-year period (30%,
60%, 100%) and expire five years from date of grant. In addition, 250,000 fully
vested five-year options were granted in October 1997 at an exercise price of
$9.88.
In 1996, the shareholders adopted a stock grant and option plan (the
"Directors' Plan") for nonemployee Directors. The Directors' Plan provides for
each eligible Director to receive common shares having a market value equal to
$2,500 quarterly in payment of one-half their retainer. A total of 3,632 shares
were issued in 1996, 4,512 shares were issued in 1997, 11,914 shares were issued
in 1998 and 5,620 were issued in the first six months of 1999. It also provides
for 5,000 options to be granted annually to each eligible Director. A total of
20,000 options were issued in May 1996, with
14
an exercise price of $7.75 per common share, 20,000 options were issued in
May 1997, with an exercise price of $8.625, 25,000 options were issued in May
1998, with an exercise price of $7.75, and 25,000 options were issued in May
1999, with an exercise price of $5.13. In addition, 10,000 options were issued
in October 1997 with an exercise price of $10.313, 10,000 options were issued in
January 1998 with an exercise price of $7.19, and 5,000 options were issued in
February 1999 with an exercise price of $2.94. The options vest over a three-
year period (30%, 60%, 100%) and expire five years from date of grant.
In 1997, the shareholders approved a special stock grant and purchase plan
for certain officers and managers ("Management Investors") in conjunction with
the redistribution of SOCO's ownership in the Company. The plan, which was
amended effective December 31, 1997, provided for the grant of 496,250
restricted common shares, net of forfeitures, to the Management Investors.
These shares vest at 25% per year on January 1, 1998, 1999, 2000 and 2001. The
non-vested granted common shares have been recorded as Deferred Compensation in
the equity section of the accompanying consolidated balance sheets. The
Management Investors simultaneously purchased 303,797 common shares from the
Company at $9.875 per share. A portion of this original purchase ($850,000) was
financed by the Company. See Note (9).
In conjunction with the appointment of a President in March 1998, the
President was included in the stock grant and purchase plans. He was granted
100,000 restricted common shares that vest at 33% per year in March 1999, 2000
and 2001. The non-vested granted common shares have been recorded as Deferred
Compensation in the equity section of the accompanying consolidated balance
sheets. The President simultaneously purchased 100,000 common shares from the
Company at $6.875 per share. A portion of this purchase ($584,000) was financed
by the Company. See Note (9).
In April 1999, the Chief Executive Officer was granted 100,000 restricted
shares of common stock in consideration of his voluntary reduction in cash
salary, waiver of any 1998 bonus and other compensation arrangements. The shares
vest ratably throughout 1999 and have been recorded as Deferred Compensation
in the equity section of the accompanying consolidated balance sheets.
The Company recognized $766,000 and $479,000 of non-cash general and
administrative expenses for the six months ended June 30, 1998 and 1999 with
respect to these stock grants.
(7) FEDERAL INCOME TAXES
A reconciliation of the federal statutory rate to the Company's effective
rate as they apply to the provision (benefit) for the six months ended June 30,
1998 and 1999 follows:
1998 1999
---- ----
Federal statutory rate...................................... (35%) (35%)
Utilization of net deferred tax asset....................... - -
Increase in valuation allowance against deferred tax asset.. 35% 35%
---- ----
Effective income tax rate................................... - -
==== ====
For tax purposes, the Company had regular net operating loss carryforwards
of approximately $83.0 million and alternative minimum tax ("AMT") loss
carryforwards of approximately $34.6 million at December 31, 1998. Utilization
of the regular and AMT net operating loss carryfowards will be limited to
approximately $12.5 million per year as a result of the redistribution of SOCO's
majority ownership in the Company in 1997. In addition, utilization of $31.9
million regular net operating loss carryforwards and $31.6 million AMT loss
carryforwards will be limited to $5.2 million per year as a result of the
Gerrity Acquisition in May 1996. These carryforwards expire from 2006 through
2018. At December 31, 1998, the Company had alternative minimum tax credit
carryforwards of $650,000 which are available indefinitely. There were no cash
payments made by the Company for federal taxes during 1997. The Company paid
$239,000 of federal taxes during 1998.
15
(8) MAJOR CUSTOMERS
During the six months ended June 30, 1998 and 1999, Duke Energy Field
Services, Inc. accounted for 39% and 38%, Amoco Production Company accounted for
13% and 19%, Enron Capital & Trade Resources accounted for 12% and 4%, and
Aurora Natural Gas, LLC accounted for zero and 14% of revenues, respectively.
Management believes that the loss of any individual purchaser would not have a
long-term material adverse impact on the financial position or results of
operations of the Company.
(9) RELATED PARTY
In October 1997, certain officers and managers purchased 303,797 common
shares at $9.875 per share from the Company. A portion of this original
purchase ($850,000) was financed by the Company through the issuance of 8.50%
recourse promissory notes. The remaining notes are secured by the common stock
purchased and additional common shares granted to the respective officers and
managers. Interest is due annually and the notes mature in January 2001. These
notes have been reflected as Other Assets in the accompanying consolidated
balance sheets.
In conjunction with the appointment of a President in March 1998, the
President purchased 100,000 shares of common stock at $6.875 per share. The
Company loaned him $584,000, or 85% of the purchase price, represented by a
recourse promissory note that bears interest at 8.50% per annum payable each
March 31 until the note is paid. The note matures in March 2001 and is secured
by all of the shares purchased and granted to him (100,000 shares) in connection
with his employment with the Company. In consideration of the depressed stock
price and overall lower year-end bonuses, the interest due as of March 31, 1999
under the Management Investor's and President's notes was forgiven by the
Company in April 1999.
(10) COMMITMENTS AND CONTINGENCIES
The Company leases office space and certain equipment under non-cancelable
operating leases. Future minimum lease payments under such leases approximate
$500,000 per year through 2001.
The Company is a party to various lawsuits incidental to its business, none
of which are anticipated to have a material adverse impact on its financial
position or results of operations.
16
PATINA OIL & GAS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three months ended June 30, 1999 compared to three months ended June 30, 1998.
Revenues for the second quarter of 1999 totaled $20.4 million, a 12%
increase from the prior year period. The increase was due primarily to higher
production and recovering oil prices. Net income in the second quarter of 1999
was $1.7 million compared to a net loss of $1.5 million in the second quarter
1998. The increase was attributed to higher production, cost efficiencies and
recovering oil prices.
Average daily oil and gas production for the second quarter totaled 4,377
barrels and 78.1 MMcf (104.3 MMcfe), an increase of 11% on an equivalent basis
from the same period in 1998. During the quarter, 10 wells were drilled or
deepened and 23 refracs were performed, compared to four wells and 14 refracs
and recompletions in the same period of 1998. The Company's current development
activity, the benefits of certain minor acquisitions and continued success with
the production enhancement program has resulted in increasing production for
four successive quarters. The decision to increase development activity is
heavily dependent on the prices being received for production.
Average oil prices increased 13% from $13.41 per barrel in the second
quarter of 1998 to $15.17 in 1999. Average natural gas prices increased 1% from
$1.95 per Mcf for the second quarter of 1998 to $1.97 in 1999. The average oil
prices includes hedging losses of $370,000 or $0.93 per barrel in 1999. The
average natural gas prices include hedging losses of $116,000 or $0.02 per Mcf
in 1998 and $180,000 or $0.03 per Mcf in 1999. Direct operating expenses totaled
$4.5 million or $0.47 per Mcfe for the second quarter of 1999 compared to $4.3
million or $0.49 per Mcfe in the prior year period.
General and administrative expenses, net of third party reimbursements, for
the second quarter of 1999 totaled $1.5 million, a $532,000 or 27% decrease from
the same period in 1998. The reduction in general and administrative expense was
due to the Company's cost reduction program implemented at the beginning of
1999. Included in general and administrative expenses is $305,000 and $473,000
for the three months ended June 30, 1999 and 1998 of non-cash expenses related
to the common stock grants awarded to certain officers and managers of the
Company in conjunction with the redistribution of SOCO's ownership of the
Company in 1997.
Interest and other expenses fell to $3.0 million in the second quarter of
1999, a $392,000 or 12% decline from the prior year period. Interest expense
decreased as a result of lower average debt balances outstanding and lower
interest rates on the Company's debt as over $22.0 million face amount of 11.75%
Subordinated Notes were repurchased in late 1998. The Company's average interest
rate for the second quarter of 1999 was 9.1% compared to 10.3% in the second
quarter of 1998.
Depletion, depreciation and amortization expense for the second quarter of
1999 totaled $9.8 million, a decrease of $409,000 or 4% from the 1998 level.
Depletion expense totaled $9.6 million or $1.01 per Mcfe for the second quarter
of 1999 compared to $10.0 million or $1.17 per Mcfe for 1998. The decrease in
depletion expense resulted primarily from a lower rate depletion rate, partially
offset by higher production quantities. The depletion rate was lowered in the
second quarter of 1999 in conjunction with the completion of an internal mid-
year reserve report reflecting additional oil and gas reserves due primarily to
the identification of additional refrac projects and drilling locations and
upward revisions due to over-performance and the increase in oil and gas prices.
Depreciation and amortization expense for the three months ended June 30, 1999
totaled $240,000, or $0.03 per Mcfe compared to $201,000, or $0.02 per Mcfe for
the same period in 1998.
17
Six months ended June 30, 1999 compared to six months ended June 30, 1998.
Revenues for the six months ended June 30, 1999 totaled $37.1 million, a 5%
decrease from the prior year period. The decrease was due primarily to the sharp
decline in oil and gas prices in early 1999, partially offset by higher
production. The net loss in the first six months of 1999 was $276,000 compared
to net loss of $1.2 million in the first six months of 1998. The decrease was
attributed to higher production, cost efficiencies and recovering oil prices.
Average daily oil and gas production for the six months of 1999 totaled
4,516 barrels and 76.6 MMcf (103.7 MMcfe), an increase of 7% on an equivalent
basis from the same period in 1998. Twenty-one wells were drilled or deepened
and 50 refracs and recompletions were performed during the first six months of
1999, compared to 12 wells and 35 refracs and recompletions in the same period
of 1998. The Company's current development activity, the benefits of certain
minor acquisitions and continued success with the production enhancement program
has resulted in increasing production for four successive quarters. The decision
to increase development activity is heavily dependent on the prices being
received for production.
Average oil prices decreased from $14.42 per barrel in the first six months
of 1998 to $13.36 in 1999. Average natural gas prices decreased from $2.06 per
Mcf for the first six months of 1998 to $1.85 in 1999. The average oil prices
includes hedging gains of $285,000 or $0.34 per barrel in 1998 and hedging
losses of $370,000 or $0.45 per barrel in 1999. The decrease in natural gas
prices was primarily the result of the decrease in the average CIG and PEPL
indexes and lower natural gas liquids prices experienced in the first quarter of
1999 compared to 1998. The average natural gas prices include hedging gains of
$720,000 or $0.06 per Mcf in 1998 and $310,000 or $0.02 per Mcf in 1999. Direct
operating expenses totaled $8.6 million or $0.46 per Mcfe for the first six
months of 1999 compared to $8.9 million or $0.51 per Mcfe in the prior year
period.
General and administrative expenses, net of third party reimbursements, for
the first six months of 1999 totaled $2.8 million, a $1.0 million or 26%
decrease from the same period in 1998. The reduction in general and
administrative expense was due to the Company's cost reduction program
implemented at the beginning of 1999. Included in general and administrative
expenses is $479,000 and $766,000 for the six months ended June 30, 1999 and
1998 of non-cash expenses related to the common stock grants awarded to certain
officers and managers of the Company in conjunction with the redistribution of
SOCO's ownership of the Company in 1997.
Interest and other expenses fell to $5.9 million for the six month period
ended June 30, 1999, a $788,000 or 12% decline from the prior year period.
Interest expense decreased as a result of lower average debt balances
outstanding and lower interest rates on the Company's debt as over $22.0 million
face amount of 11.75% Subordinated Notes were repurchased in late 1998. The
Company's average interest rate for the first six months of 1999 was 9.1%
compared to 10.3% in the first six months of 1998.
Depletion, depreciation and amortization expense for the six month period
ended June 30, 1999 totaled $20.1 million, a decrease of $674,000 or 3% from the
1998 level. Depletion expense totaled $19.6 million or $1.05 per Mcfe for the
first six months of 1999 compared to $20.4 million or $1.17 per Mcfe for 1998.
The decrease in depletion expense resulted from a lower depletion rate,
partially offset by higher production quantities. The depletion rate was lowered
in the second quarter of 1999 in conjunction with the completion of an internal
mid-year reserve report reflecting additional oil and gas reserves due primarily
to the identification of additional refrac projects and drilling locations and
upward revisions due to over-performance and the increase in oil and gas prices.
Depreciation and amortization expense for the six months ended June 30, 1999
totaled $470,000, or $0.03 per Mcfe compared to $371,000, or $0.02 per Mcfe for
the same period in 1998.
18
Development, Acquisition and Exploration
During the first six months of 1999, the Company incurred $13.2 million in
capital expenditures, with development expenditures comprising $11.3 million.
During the period, the Company successfully drilled or deepened 21 wells,
recompleted one well and refraced 49 wells. The Company also acquired additional
proved reserves in Wattenberg for $1.9 million. The Company anticipates
incurring approximately $13.0 million on the further development of its
properties during 1999. The decision to increase or decrease development
activity is heavily dependent on the prices being received for production.
Financial Condition and Capital Resources
At June 30, 1999, the Company had $339.5 million of assets. Total
capitalization was $309.9 million, of which 56% was represented by stockholders'
equity, 20% by senior debt and 24% by subordinated debt. During the six months
ended June 30, 1999, net cash provided by operations totaled $15.0 million, as
compared to $20.0 million in the first six months of 1998 ($19.8 million and
$20.1 million prior to changes in working capital, respectively). At June 30,
1999, there were no significant commitments for capital expenditures. The
Company anticipates 1999 capital expenditures, exclusive of acquisitions, to
approximate $24.0 million. The level of these and other future expenditures is
largely discretionary, and the amount of funds devoted to any particular
activity may increase or decrease significantly, depending on available
opportunities and market conditions. The Company plans to finance its ongoing
development, acquisition and exploration expenditures and additional security
repurchases using internal cash flow, proceeds from asset sales and bank
borrowings. In addition, joint ventures or future public and private offerings
of debt or equity securities may be utilized.
In April 1997, the Company entered into an amended bank Credit Agreement
(the "Credit Agreement"). The Credit Agreement is a revolving credit facility in
an aggregate amount up to $140.0 million. The amount available under the
facility is adjusted semiannually, each May 1 and November 1, and equaled $100.0
million at June 30, 1999 with $63.0 million of debt outstanding at that time.
Subsequent to quarter-end and in conjunction with the redemption of the 11.75%
Senior Subordinated Notes, the Company entered into a Second Amended and
Restated Bank Credit Agreement (the "Amended Credit Agreement"). The Amended
Credit Agreement is a revolving credit facility in an aggregate amount up to
$200.0 million. The amount available under the facility is adjusted
semiannually, each May 1 and November 1, and equaled $160.0 million at July 15,
1999.
The Credit Agreement and the Amended Credit Agreement contain certain
financial covenants, including but not limited to, a maximum total debt to
capitalization ratio, a maximum total debt to EBITDA ratio, a minimum current
ratio and various other negative covenants that could limit the Company's
ability to incur other debt, consummate acquisitions, dispose of assets, pay
dividends or repurchase securities. Borrowings under the Credit Agreement mature
in July 2000 and borrowings under the Amended Credit Agreement mature in July
2003, but may be prepaid at anytime. The Company has periodically negotiated
extensions of the Credit Agreement; however, there is no assurance the Company
will be able to do so in the future. The Company had a restricted payment basket
of $7.9 million as of June 30, 1999, which may be used to repurchase common
stock, preferred stock and warrants and pay dividends on its common stock.
The Company may elect that all or a portion of the credit facility bear
interest at a rate equal to: (i) the higher of (a) the prime rate or (b) the
Federal Funds Effective Rate plus .5%, or (ii) the rate at which Eurodollar
deposits for one, two, three or six months (as selected by the Company) are
offered in the interbank Eurodollar market plus a margin which fluctuates from
0.625% to 1.125% (1.00% to 1.50% under the Amended Credit Agreement), determined
by a debt to EBITDA ratio. During the first six months of 1999, the average
interest rate under the facility approximated 6.1%.
In October 1998, the Company entered into an interest rate swap contract
for a two-year period, extendable for one additional year at the option of the
third party. The contract is for $30.0 million principal with a fixed interest
rate of 4.57% payable by the Company and the variable interest rate, the three-
month LIBOR, payable by the third party. The difference between the Company's
fixed rate of 4.57% and the three-month LIBOR rate, which is reset every 90
days,
19
is received or paid by the Company in arrears every 90 days. The Company
received $59,000 in January 1999, $36,000 in April 1999 and $33,000 in July 1999
pursuant to this contract.
The Company had $72.3 million of 11.75% Senior Subordinated Notes due July
15, 2004 outstanding on June 30, 1999. The Notes have been reflected in the
accompanying financial statements at a book value of 105.875% of their principal
amount ($68.3 million of principal amount outstanding as of June 30, 1999).
Since May 1996 and through June 30, 1999 the Company has repurchased $31.7
million principal amount of the 11.75% Subordinated Notes through borrowings on
the Company's bank facility. The Notes are redeemable at the option of the
Company, in whole or in part, at any time on or after July 15, 1999 at 105.875%
of their principal amount. The Notes are unsecured general obligations and are
subordinated to all senior indebtedness and to any existing and future
indebtedness of the Company's subsidiaries. The Company redeemed all of the
Notes subsequent to quarter-end at the call price of 105.875%. The redemption
was financed with borrowings under the Amended Credit Facility.
In conjunction with the appointment of a President in March 1998, the
President purchased 100,000 shares of Common Stock at $6.875 per share. The
Company loaned him $584,000, or 85% of the purchase price, represented by a
recourse promissory note that bears interest at 8.50% per annum payable each
March 31 until the note is paid. The note matures in March 2001 and is secured
by all of the shares purchased and granted to him (100,000 shares) in connection
with his employment with the Company.
The Company has entered into arrangements to monetize its Section 29 tax
credits. These arrangements result in revenue increases of approximately $0.40
per Mcf on production volumes from qualified Section 29 properties. As a result,
the Company recognized additional gas revenues of $1,062,000 and $1,235,000 for
the six months ended June 30, 1998 and 1999, respectively. These arrangements
are expected to increase revenues through 2002.
The Company's primary cash requirements will be to finance acquisitions,
development expenditures, repayment of indebtedness, and general working capital
needs. However, future cash flows are subject to a number of variables,
including the level of production and oil and natural gas prices, and there can
be no assurance that operations and other capital resources will provide cash in
sufficient amounts to maintain planned levels of capital expenditures or that
increased capital expenditures will not be undertaken.
The Company believes that available borrowings under its Credit Agreement,
projected operating cash flows and the cash on hand will be sufficient to cover
its working capital, capital expenditures, planned development activities and
debt service requirements for the next 12 months. In connection with
consummating any significant acquisition, additional debt or equity financing
will be required, which may or may not be available on terms that are acceptable
to the Company.
Certain Factors That May Affect Future Results
Statements that are not historical facts contained in this report are
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ from projected results. Such statements address
activities, events or developments that the Company expects, believes, projects,
intends or anticipates will or may occur, including such matters as future
capital, development and exploration expenditures (including the amount and
nature thereof), drilling or deepening of wells, reserve estimates (including
estimates of future net revenues associated with such reserves and the present
value of such future net revenues), future production of oil and natural gas,
business strategies, expansion and growth of the Company's operations, cash flow
and anticipated liquidity, prospect development and property acquisition,
obtaining financial or industry partners for prospect or program development, or
marketing of oil and natural gas. Factors that could cause actual results to
differ materially ("Cautionary Disclosures") are described, among other places,
in the Marketing, Competition, and Regulation sections in the Company's 1998
Form 10-K and under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Without limiting the Cautionary
Disclosures so described, Cautionary Disclosures include, among others: general
economic conditions, the market price of oil and natural gas, the risks
associated with exploration, the Company's ability to find, acquire, market,
develop and produce new properties, operating hazards attendant to the oil and
natural gas business, uncertainties in the estimation of proved reserves and in
the projection of future rates of production and timing of development
expenditures, the strength and financial resources
20
of the Company's competitors, the Company's ability to find and retain skilled
personnel, climatic conditions, labor relations, availability and cost of
material and equipment, environmental risks, the results of financing efforts,
and regulatory developments. All written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the Cautionary Disclosures. The Company disclaims
any obligation to update or revise any forward-looking statement to reflect
events or circumstances occurring hereafter or to reflect the occurrence of
anticipated or unanticipated events.
Year 2000 Issues
The Company is aware of the issues associated with the programming code in
many existing computer systems and devices with embedded technology as the
millennium approaches. The "Year 2000" problem concerns the inability of
information and technology-based operating systems to properly recognize and
process date-sensitive information beyond December 31, 1999. The Year 2000
problem is potentially pervasive; virtually every computer operation or business
system that utilizes embedded computer technology may be affected in some way by
the rollover of the two-digit year value to 00. The risk is that computer
systems will not properly recognize date sensitive information when the year
changes to 2000, which could result in system failures or miscalculations,
resulting in a serious threat of business disruption.
In response to the potential impact of the Year 2000 issue on the Company's
business and operations, the Board of Directors formed a Year 2000 Committee
consisting of members of senior management and the Information Systems Manager.
The committee reports to the Board at each quarterly meeting as to the progress
of the evaluation and the necessity for any systems modifications and
contingency planning. This committee has assessed the readiness for Year 2000
compliance of the Company's internal computer systems and field operations and
continues to identify its critical and non-critical third party dependencies
with respect to vendors, suppliers, customers and other significant business
relationships.
The internal assessment included a review of the Company's inventory of
computer hardware and software. During 1998, the Company purchased and converted
to its own in-house computer system. In conjunction with this process, the
Company determined that the new systems and hardware were substantially Year
2000 compliant. Certain other software is being corrected or reprogrammed for
Year 2000 compliance. Based on current information from system and software
vendors, with the exception of our internal field gathering and reporting
production system, all other systems are Y2K compliant. It is anticipated that
the field production system and any related reprogramming efforts will be
completed by September 30, 1999, allowing adequate time for testing. As such,
management believes the Year 2000 issues with respect to its internal systems
can be mitigated without a significant potential effect on the Company's
financial position or operations.
The Company's internal review also included an assessment of the field
operations and any related software or control equipment with embedded chip
technology utilized in the production and development of its oil and gas
properties. Through vendor inquiries and actual field testing, the Company
anticipates minimal disruption of the field operations and equipment.
In addition, to ensure external Year 2000 readiness, the Company has made
written inquiries concerning the Year 2000 readiness of all of its vendors,
suppliers, customers and others with whom the Company has significant business
relationships. Responses have been received from many of those contacted,
although some of the responses have been inconclusive with respect to Year 2000
compliance. As a result, follow up inquiries are planned for any critically
dependent third parties not responding. A further assessment of the potential
impact of the Year 2000 issue on the Company's business and operations will be
made as this information is received and evaluated. The Company is not currently
aware of any third party issues that would cause a significant disruption of its
business or operations. If the follow-up assessment of any significant third
party responses indicates that they will not be Year 2000 compliant, it may be
necessary to develop contingency plans to minimize the negative impact on the
Company.
The Company also relies on non-information technology systems such as
telephones, facsimile machines, air conditioning, heating, elevators in its
leased office building and other equipment which may have embedded technology
such as micro processors, which may or may not be Year 2000 compliant. Written
inquiries have been sent to these third parties,
21
but as much of this technology is outside of the Company's control and not
easily tested by these entities, it is difficult to assess or remedy any such
non-compliance that could adversely affect the Company's ability to conduct
business. Management believes any such disruption is not likely to have a
significant effect on the Company's financial position or operations.
The Company's goal is to have all internal systems Year 2000 compliant, and
third party assessments completed no later than September 30, 1999. This should
allow sufficient time prior to January 1, 2000 to validate the system
modifications and complete any additional contingency planning for third parties
that may not be Year 2000 compliant. However, given the complexity of the Year
2000 issue, there can be no assurance that the Company will be able to address
these problems without costs and uncertainties that might affect future
financial results or cause reported financial information not to be necessarily
indicative of future operating results or future financial condition.
Although the Company currently anticipates that minimal business disruption
will occur as a result of Year 2000 issues, in the event the computer based
programs and embedded technology equipment of the Company, or that owned and
operated by third parties, should fail to function properly, possible
consequences include but are not limited to loss of communication links,
inability to produce and transport oil and natural gas, loss of electric power,
and the inability to engage in normal automated or computerized business
activities.
To date, the Company has not finalized its contingency plans for possible
Year 2000 issues. After the completion of the assessment and review of the
results of monitoring the compliance efforts and status of third parties, the
Company will finalize such contingency plans based on its assessment of outside
risks. The Company anticipates that final contingency plans, as necessary, will
be in place by September 30, 1999. The total costs incurred to date in the
assessment, evaluation and remediation of the Year 2000 compliance matters have
been nominal and management estimates that total future third party, software
and equipment costs, based upon information developed to date, will be less than
$100,000.
Market and Commodity Risk
The Company's major market risk exposure is in the pricing applicable to
its oil and natural gas production. Realized pricing is primarily driven by the
prevailing domestic price for oil and spot prices applicable to the Rocky
Mountain and Mid-Continent regions for its natural gas production. Historically,
prices received for oil and gas production have been volatile and unpredictable.
Pricing volatility is expected to continue. Natural gas price realizations
during 1998 ranged from a monthly low of $1.79 per Mcf to a monthly high of
$2.36 per Mcf and ranged from a monthly low of $1.68 per Mcf to a monthly high
of $2.09 per Mcf during the first six months of 1999. Oil prices ranged from a
monthly low of $9.56 per barrel to a monthly high of $17.44 per barrel during
1998 and ranged from a monthly low of $10.70 per barrel to a monthly high of
$15.41 per barrel during the first six months of 1999. Both oil and natural gas
prices increased significantly from the first quarter to the second quarter of
1999. A significant decline in the prices of oil or natural gas could have a
material adverse effect on the Company's financial condition and results of
operations.
From time to time, the Company enters into commodity derivatives contracts
and fixed-price physical contracts to manage its exposure to oil and gas price
volatility and to support oil and natural gas prices at targeted levels. The
Company uses futures contracts, swaps, options and fixed-price physical
contracts to hedge its commodity prices. Realized gains or losses from price
risk management activities are recognized in oil and gas sales revenues in the
period in which the associated production occurs. The Company entered into
various swap contracts for oil (NYMEX based) during the first six months of 1998
and 1999. The Company recognized a gain of $285,000 or $0.34 per barrel in 1998
and a loss of $370,000 or $0.45 per barrel in 1999 related to these swap
contracts based on settlements during the respective periods. As of June 30,
1999, the Company had entered into swap contracts for oil (NYMEX based) for the
period July 1999 through December 1999. The weighted average oil price for the
NYMEX based contracts is $18.16 for total contract volumes of 506,000 barrels of
crude oil. The unrecognized losses on these contracts totaled $640,000 based on
estimated market values as of June 30, 1999. The Company entered into various
CIG and PEPL index based swap contracts for natural gas during the first six
months of 1998 and 1999. The Company recognized gains of $720,000 or $0.06 per
Mcf in 1998 and $310,000 or $0.02 per Mcf in 1999 related to these swap
contracts based on settlements during the respective periods. As of June 30,
1999, the Company had entered into CIG and PEPL index based swap
22
contracts for natural gas for the period July 1999 through October 1999. The
weighted average natural gas prices for the CIG and PEPL index based contracts
are $1.82 and $2.21 for total contract volumes of 3,530,000 and 615,000 MMBtu's
of natural gas, respectively. The unrecognized losses on these contracts totaled
$587,000 based on estimated market values as of June 30, 1999.
Inflation and Changes in Prices
While certain of its costs are affected by the general level of inflation,
factors unique to the oil and natural gas industry result in independent price
fluctuations. Over the past five years, significant fluctuations have occurred
in oil and natural gas prices. Although it is particularly difficult to estimate
future prices of oil and natural gas, price fluctuations have had, and will
continue to have, a material effect on the Company.
The following table indicates the average oil and natural gas prices
received over the last five years and highlights the price fluctuations by
quarter for 1998 and 1999. Average price computations exclude hedging gains and
losses and other nonrecurring items to provide comparability. Average prices per
Mcfe indicate the composite impact of changes in oil and natural gas prices. Oil
production is converted to natural gas equivalents at the rate of one barrel per
six Mcf.
Average Prices
---------------------------------------
Natural Equivalent
Oil Gas Mcf
--- --- ---
(Per Bbl) (Per Mcf) (Per Mcfe)
Annual
------
1994............... $14.84 $1.70 $1.94
1995............... 16.43 1.34 1.73
1996............... 20.47 1.99 2.41
1997............... 19.54 2.25 2.55
1998............... 13.13 1.87 1.96
Quarterly
---------
1998
----
First.............. $14.70 $2.04 $2.16
Second............. 13.41 1.95 2.03
Third.............. 12.83 1.72 1.84
Fourth............. 11.45 1.78 1.81
1999
----
First.............. $11.65 $1.65 $1.72
Second............. $16.10 $1.99 $2.17
23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information with respect to this item is incorporated by reference from
Notes to Consolidated Financial Statements in Part 1 of this report.
Item 4. Submission of Matters to a Vote of Security Holders
On May 27, 1999 the Annual Meeting of the Company's common stockholders was
held. A summary of the proposals upon which a vote was taken and the
results of the voting were as follows:
Number of Shares Voted
For Withheld
--- --------
Proposals
1) Election of Directors
Christopher C. Behrens 18,345,449 122,156
Robert J. Clark 18,345,449 122,156
Brian J. Cree 18,341,496 126,109
Jay W. Decker 18,347,827 119,778
Thomas R. Denison 18,348,427 119,178
Thomas J. Edelman 18,342,289 125,316
Elizabeth K. Lanier 18,219,875 247,730
Alexander P. Lynch 18,344,362 123,243
For Against Abstain
--- ------- -------
2) Approval of amendment to
Company's 1996 Employee
Stock Option Plan 11,317,317 1,665,994 504,579
3) Approval of amendment to
Company's 1998 Stock
Purchase Plan 10,124,736 2,865,772 497,382
24
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
10.1 Second Amended and Restated Credit Agreement dated as of July 15,
1999 by and among the Company, as Borrower, and Chase Bank of
Texas, National Association, as Administrative Agent, Bank of
America, N.A., as Syndication Agent, Bank One, Texas, N.A., as
Documentation Agent and certain commercial lending institutions.*
10.2 Amendment No. 1 to the 1996 Employee Stock Option Plan of Patina
Oil & Gas Corporation.*
10.3 Amendment No. 1 to the 1998 Stock Purchase Plan of Patina Oil &
Gas Corporation.*
27 Financial Data Schedule.*
* Filed herewith
(b) No reports on Form 8-K were filed by Registrant during the quarter ended
June 30, 1999.
25
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.
PATINA OIL & GAS CORPORATION
BY /s/ David J. Kornder
---------------------------------------
David J. Kornder, Vice President and Chief
Financial Officer
July 28, 1999
26