UNITED STATES
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, 2000
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 1-10578
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VINTAGE PETROLEUM, INC.
------------------------------------------
(Exact name of registrant as specified in charter)
Delaware 73-1182669
- --------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 West Seventh Street Tulsa, Oklahoma 74119-1029
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(918) 592-0101
------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year, if changed
since last report)
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
--- ---
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 7, 2000
- ------------------- -----------------------------
Common Stock, $.005 Par Value 62,760,806
-1-
PART I
FINANCIAL INFORMATION
-2-
ITEM 1. FINANCIAL STATEMENTS
-----------------------------
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands, except shares
and per share amounts)
(Unaudited)
ASSETS
------
June 30, December 31,
2000 1999
------------ -----------
CURRENT ASSETS:
Cash and cash equivalents $ 14,749 $ 42,687
Accounts receivable -
Oil and gas sales 111,077 87,484
Joint operations 7,992 5,211
Prepaids and other current assets 10,821 19,109
------------ -----------
Total current assets 144,639 154,491
------------ -----------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Oil and gas properties, successful efforts method 1,566,370 1,521,672
Oil and gas gathering systems and plants 18,985 15,453
Other 18,311 17,287
------------ -----------
1,603,666 1,554,412
Less accumulated depreciation, depletion and amortization 614,912 583,060
------------ -----------
988,754 971,352
------------ -----------
OTHER ASSETS, net 43,686 42,291
------------ -----------
TOTAL ASSETS $ 1,177,079 $ 1,168,134
============ ===========
See notes to unaudited consolidated financial statements.
-3-
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
----------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30, December 31,
2000 1999
---------- -----------
CURRENT LIABILITIES:
Revenue payable $ 36,444 $ 25,899
Accounts payable - trade 38,337 26,118
Current taxes payable 9,998 5,875
Other payables and accrued liabilities 78,751 36,010
----------- -----------
Total current liabilities 163,530 93,902
----------- -----------
LONG-TERM DEBT 479,173 625,318
----------- -----------
DEFERRED INCOME TAXES 29,114 15,780
----------- -----------
OTHER LONG-TERM LIABILITIES 3,628 2,005
----------- -----------
STOCKHOLDERS' EQUITY per accompanying statement:
Preferred stock, $.01 par, 5,000,000 shares authorized,
zero shares issued and outstanding - -
Common stock, $.005 par, 160,000,000 and 80,000,000
shares authorized, 62,755,806 and 62,407,866 shares
issued and outstanding, respectively 314 312
Capital in excess of par value 317,483 314,490
Retained earnings 183,837 116,327
----------- -----------
501,634 431,129
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,177,079 $ 1,168,134
=========== ===========
See notes to unaudited consolidated financial statements.
-4-
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2000 1999 2000 1999
---------- -------- ---------- ---------
REVENUES:
Oil and gas sales $ 154,220 $ 73,828 $ 298,675 $ 127,322
Gas marketing 25,418 12,183 43,880 22,501
Oil and gas gathering and processing 4,276 1,870 7,694 3,450
Gain (loss) on disposition of assets (289) 4,364 (383) 4,366
Other income (expense) (24,403) 316 (23,322) 926
---------- -------- ---------- ---------
159,222 92,561 326,544 158,565
---------- -------- ---------- ---------
COSTS AND EXPENSES:
Lease operating, including production taxes 37,522 25,258 72,522 49,105
Exploration costs 1,077 2,314 3,381 8,201
Gas marketing 24,400 11,596 41,927 21,390
Oil and gas gathering and processing 3,650 1,427 6,318 2,621
General and administrative 10,234 8,136 19,237 16,069
Depreciation, depletion and amortization 24,247 24,804 46,752 57,009
Interest 11,924 14,576 25,339 29,136
---------- -------- ---------- ---------
113,054 88,111 215,476 183,531
---------- -------- ---------- ---------
Income (loss) before income taxes 46,168 4,450 111,068 (24,966)
PROVISION (BENEFIT) FOR INCOME TAXES:
Current 10,542 19 26,468 47
Deferred 5,790 (752) 12,087 (12,075)
---------- -------- ---------- ---------
NET INCOME (LOSS) $ 29,836 $ 5,183 $ 72,513 $ (12,938)
========== ======== ========== =========
EARNINGS (LOSS) PER SHARE:
Basic $ .48 $ .10 $ 1.16 $ (.24)
========== ======== ========== =========
Diluted $ .47 $ .09 $ 1.14 $ (.24)
========== ======== ========== =========
Weighted average common shares outstanding:
Basic 62,591 53,997 62,502 53,555
========== ======== ========== =========
Diluted 63,932 55,857 63,568 53,555
========== ======== ========== =========
See notes to unaudited consolidated financial statements.
-5-
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
---------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------
(In thousands)
(Unaudited)
Capital
Common Stock In Excess
---------------- of Par Retained
Shares Amount Value Earnings Total
-------- -------- ----------- ---------- ---------
Balance at December 31, 1999 62,408 $ 312 $ 314,490 $ 116,327 $ 431,129
Net income - - - 72,513 72,513
Exercise of stock options and related
tax effects 348 2 2,993 - 2,995
Cash dividends declared
($.08 per share) - - - (5,003) (5,003)
-------- -------- ----------- ---------- ---------
Balance at June 30, 2000 62,756 $ 314 $ 317,483 $ 183,837 $ 501,634
======== ======== =========== ========== =========
See notes to unaudited consolidated financial statements.
-6-
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
(Unaudited)
Six Months Ended
June 30,
-----------------------
2000 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 72,513 $ (12,938)
Adjustments to reconcile net income (loss) to
cash provided by operating activities -
Depreciation, depletion and amortization 46,752 57,009
Exploration costs 3,381 8,201
Provision (benefit) for deferred income taxes 12,087 (12,075)
(Gain) loss on property sales 383 (4,366)
--------- ---------
135,116 35,831
Decrease (increase) in receivables (26,374) 6,250
Increase (decrease) in payables and accrued liabilities 63,946 (7,604)
Other 9,555 (376)
--------- ---------
Cash provided by operating activities 182,243 34,101
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas expenditures (68,179) (31,197)
Other property and equipment additions (1,056) (930)
Proceeds from sales of oil and gas properties 1,417 4,765
Other (1,084) (4,574)
--------- ---------
Cash used by investing activities (68,902) (31,936)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock 2,995 81,225
Sale of 9 3/4% Senior Subordinated Notes - 146,000
Advances on revolving credit facility and other borrowings 11,788 11,526
Payments on revolving credit facility and other borrowings (152,942) (161,397)
Dividends paid (3,120) (1,328)
--------- ---------
Cash provided (used) by financing activities (141,279) 76,026
--------- ---------
Net increase (decrease) in cash and cash equivalents (27,938) 78,191
Cash and cash equivalents, beginning of period 42,687 5,245
--------- ---------
Cash and cash equivalents, end of period $ 14,749 $ 83,436
========= =========
See notes to unaudited consolidated financial statements.
-7-
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
----------------------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
June 30, 2000 and 1999
1. GENERAL
The accompanying financial statements are unaudited. The consolidated
financial statements include the accounts of the Company and its wholly- and
majority-owned subsidiaries. In addition, the Company's interests in various
joint ventures have been proportionately consolidated, whereby the Company's
proportionate share of each joint venture's assets, liabilities, revenues and
expenses is included in the appropriate accounts in the consolidated financial
statements. Management believes that all material adjustments (consisting of
only normal recurring adjustments) necessary for a fair presentation have been
made. All significant intercompany accounts and transactions have been
eliminated in consolidation. Certain 1999 amounts have been reclassified to
conform with the 2000 presentation. These reclassifications have no impact on
net income (loss). These financial statements and notes should be read in
conjunction with the 1999 audited financial statements and related notes
included in the Company's 1999 Annual Report on Form 10-K, Item 8, Financial
Statements and Supplementary Data.
2. SIGNIFICANT ACCOUNTING POLICIES
Oil and Gas Properties
Under the successful efforts method of accounting, the Company capitalizes
all costs related to property acquisitions and successful exploratory wells, all
development costs and the costs of support equipment and facilities. All costs
related to unsuccessful exploratory wells are expensed when such wells are
determined to be non-productive; other exploration costs, including geological
and geophysical costs, are expensed as incurred. The Company recognizes gain or
loss on the sale of properties on a field basis.
Unproved leasehold costs are capitalized and are reviewed periodically for
impairment. Costs related to impaired prospects are charged to expense. If oil
and gas prices decline in the future, some of these unproved prospects may not
be economic to develop which could lead to an impairment expense.
Costs of development dry holes and proved leaseholds are amortized on the
unit-of-production method based on proved reserves on a field basis. The
depreciation of capitalized production equipment and drilling costs is based on
the unit-of-production method using proved developed reserves on a field basis.
Estimated abandonment costs, net of salvage value, are included in the
depreciation and depletion calculation.
-8-
The Company reviews its proved oil and gas properties for impairment on a
field basis. For each field, an impairment provision is recorded whenever
events or circumstances indicate that the carrying value of those properties may
not be recoverable. The impairment provision is based on the excess of carrying
value over fair value. Fair value is defined as the present value of the
estimated future net revenues from production of total proved oil and gas
reserves over the economic life of the reserves, based on the Company's
expectations of future oil and gas prices and costs. No impairment provision
was required for the first six months of either 2000 or 1999. Due to the
volatility of oil and gas prices, it is possible that the Company's assumptions
regarding oil and gas prices may change in the future and may result in future
impairment provisions.
Statements of Cash Flows
Cash payments for interest totaled $25,890,530 and $28,392,646 for the six
months ended June 30, 2000 and 1999, respectively. Cash payments for U.S.
Federal and state income taxes were $15,475,000 during the six months ended June
30, 2000. There were no cash payments made for U.S. income taxes in the first
six months of 1999. During the six months ended June 30, 2000 and 1999, the
Company made cash payments of $5,724,973 and $47,073, respectively, for foreign
taxes, primarily in Argentina.
Earnings Per Share
The Company applies Financial Accounting Standards Board Statement No. 128,
Earnings Per Share ("SFAS No. 128"). Basic earnings (loss) per common share was
computed by dividing net income (loss) by the weighted average number of shares
outstanding during the period. For the six month period ended June 30, 1999,
the computation of diluted loss per share was antidilutive; therefore, the
amounts reported for basic and diluted loss per share were the same. Had the
Company been in a net income position for this period, the Company's diluted
weighted average outstanding common shares as calculated under SFAS No. 128
would have been 55,077,315. In addition, for the six month period ended June
30, 2000 and 1999, the Company had outstanding stock options for 794,000 and
3,035,322 additional shares of the Company's common stock, respectively, with
average exercise prices of $20.11 and $14.03, respectively, which were
antidilutive.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, Reporting Comprehensive Income ("SFAS No. 130"), establishing standards for
reporting and display of comprehensive income and its components in financial
statements. SFAS No. 130 defines comprehensive income as the total of net
income and all other non-owner changes in equity. During the six month periods
ended June 30, 2000 and 1999, the Company had no non-owner changes in equity
other than net income or loss.
-9-
Hedging
The Company periodically uses hedges (swap agreements) to reduce the impact
of oil and natural gas price fluctuations. Gains or losses on swap agreements
are recognized as an adjustment to sales revenue when the related transactions
being hedged are finalized. Gains or losses from swap agreements that do not
qualify for accounting treatment as hedges are recognized currently as other
income or expense. The cash flows from such agreements are included in operating
activities in the consolidated statements of cash flows.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"). The FASB has subsequently
issued Statement No. 137 and Statement No. 138 which are amendments to SFAS No.
133. SFAS No. 133, as amended, 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. SFAS No. 133, as
amended, 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. Companies
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
SFAS No. 133, as amended, is effective for fiscal years beginning after June
15, 2000; however, beginning June 16, 1998, companies may implement the
statement as of the beginning of any fiscal quarter. SFAS No. 133, as amended,
cannot be applied retroactively and must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid contracts.
The Company has not yet quantified the impact of adopting SFAS No. 133, as
amended, on its financial statements and has not determined the timing of or
method of the adoption of SFAS No. 133, as amended.
3. SEGMENT INFORMATION
The Company's reportable business segments have been identified based on the
differences in products or services provided. Revenues for the exploration and
production segment are derived from the production and sale of natural gas,
sulfur and crude oil. Revenues for the gathering/plant segment arise from the
transportation, processing and sale of natural gas, crude oil and plant
products. The gas marketing segment generates revenue by earning fees through
the marketing of Company produced gas volumes and the purchase and resale of
third party produced gas volumes. The Company evaluates the performance of its
operating segments based on operating income before corporate general and
administrative costs and interest costs.
-10-
Operations in the gathering/plant and gas marketing segments are in the United
States. The Company operates in the oil and gas exploration and production
segment in the United States, South America and Yemen. Summarized financial
information for the Company's reportable segments for the six month and three
month periods ended June 30, 2000 and 1999, is shown in the following table:
Exploration and Production
-----------------------------------------
Other Gas
U.S. Argentina Bolivia Foreign Gathering Marketing Corporate Total
------- --------- ------- ------- --------- --------- --------- -----
Six months ended 6/30/00
- ----------------------------------
Revenues from external customers....$156,544 $101,181 $ 4,530 $11,750 $ 7,695 $43,880 $ 964 $ 326,544
Intersegment revenues............... - - - - 1,105 1,002 - 2,107
Depreciation, depletion and
amortization expense........... 25,677 15,666 2,809 867 752 - 981 46,752
Operating income (loss)............. 81,398 62,814 (571) 9,442 624 1,954 (17) 155,644
Total assets........................ 519,662 391,708 120,990 74,147 10,480 19,457 40,635 1,177,079
Capital investments................. 24,591 21,476 12,423 9,689 32 - 1,024 69,235
Long-lived assets................... 468,606 348,007 96,256 64,659 6,409 - 4,817 988,754
Six months ended 6/30/99
- ----------------------------------
Revenues from external customers....$ 92,249 $ 36,892 $ 1,186 $ 2,126 $ 3,450 $22,501 $ 161 $ 158,565
Intersegment revenues............... - - - - 650 574 - 1,224
Depreciation, depletion and
amortization expense........... 40,874 12,881 769 569 694 - 1,222 57,009
Operating income (loss)............. 10,475 13,252 (179) (3,606) 135 1,111 (949) 20,239
Total assets........................ 543,892 253,478 93,215 44,941 7,064 8,947 121,277 1,072,814
Capital investments................. 9,162 1,061 14,987 5,993 589 - 335 32,127
Long-lived assets................... 505,703 235,730 75,733 39,814 4,245 - 3,604 864,829
Three months ended 6/30/00
- ----------------------------------
Revenues from external customers....$ 81,673 $ 40,029 $ 2,652 $ 4,779 $ 4,277 $25,418 $ 394 $ 159,222
Intersegment revenues............... - - - - 555 512 - 1,067
Depreciation, depletion and
amortization expense........... 13,293 8,146 1,522 391 383 - 512 24,247
Operating income (loss)............. 42,570 20,167 830 3,615 243 1,020 (119) 68,326
Capital investments................. 17,529 14,489 6,363 6,124 11 - 659 45,175
Three months ended 6/30/99
- ----------------------------------
Revenues from external customers....$ 54,149 $ 22,235 $ 722 $ 1,405 $ 1,870 $12,184 $ (4) $ 92,561
Intersegment revenues............... - - - - 344 258 - 602
Depreciation, depletion and
amortization expense........... 17,137 5,923 402 276 419 - 647 24,804
Operating income (loss)............. 16,184 10,602 32 296 24 587 (563) 27,162
Capital investments................. 3,994 522 6,323 1,716 (48) - 107 12,614
Intersegment sales are priced in accordance with terms of existing
contracts and current market conditions. Capital investments include expensed
exploratory costs. Corporate general and administrative costs and interest
costs are not allocated to the operating income (loss) of the segments.
-11-
4. COMMITMENTS AND CONTINGENCIES
The Company committed to perform 17,728 work units related to its
concession rights in the Naranjillos field in Santa Cruz Province, Bolivia
awarded in late 1997. The total work unit commitment is guaranteed by the
Company through a letter of credit (currently $34.1 million). Approximately $33
million has been budgeted to be spent in 2000, thereby fulfilling the Company's
Naranjillos field work unit commitment.
The Company is also committed to spend approximately $11 million in the
Republic of Yemen over a two and one-half year period which began in July 1998.
At the end of the first two and one-half years, the Company has the option to
extend the work program for a second two and one-half year period with similar
work unit and capital commitment requirements. As of August 1, 2000, the
Company had completed the work units necessary to fulfill its initial commitment
and is currently awaiting governmental approval of the final portion of the work
completed. The remaining unapproved work units are currently guaranteed by a $3
million letter of credit ($11 million at June 30, 2000). The total expenditures
include the acquisition and interpretation of 150 square kilometers of seismic
and the drilling of three exploration wells. Based on the results of the
Company's initial exploratory well, during the second quarter of 2000 the
Company proposed and received governmental approval to drill a fourth well.
Should the Company exercise its option to extend the work program, this fourth
well will be applied towards the additional work unit commitment.
The Company had $53.9 million in letters of credit (including the $45.1
million in letters of credit discussed above) outstanding at June 30, 2000 (at
July 31, 2000, the letters of credit amount had been reduced to $45.9 million).
These letters of credit relate primarily to various obligations for acquisition
and exploration activities in South America and bonding requirements of various
state regulatory agencies for oil and gas operations. The Company's
availability under its revolving credit facility is reduced by the outstanding
balance of letters of credit (excluding the $34.1 million Bolivia letter of
credit discussed above).
Under the Company's exploration contract on Block 19 in Ecuador, the
Company is required to drill one additional well. The Company expects to drill
this well during the third quarter of 2000 at a cost of approximately $4
million.
On November 4, 1998, the Company issued 1,325,000 shares of common stock to
Elf Aquitaine as partial consideration for the acquisition of its French
subsidiary, Elf Hydrocarbures Equateur, S.A., which owns producing oil
properties and undeveloped acreage in Ecuador. The 1,325,000 shares of common
stock of the Company were valued at a guaranteed amount of $20 per share, or
$26.5 million. If the Company's prevailing share price is not equal to at least
$20 per share after two years from the date of closing, the Company will be
required to deliver additional consideration under the price guarantee provision
of the agreement. Such additional consideration, if any, is payable, at the
Company's option, in cash or additional shares of the Company's common stock.
Had the Company been required to fulfill its commitment under the price
guarantee at June 30, 2000 (based on the average price for the preceding 60
trading days of $21.75), no additional payments would have been required.
-12-
Rent expense was $1.1 million and $0.7 million for the first six months of
2000 and 1999, respectively. The future minimum commitments under long-term,
non-cancellable leases for office space are $0.8 million for the last two
quarters of 2000 and $1.5 million, $1.7 million, $1.7 million and $1.8 million
for the calendar years 2001 through 2004, respectively with $4.4 million
remaining in years thereafter.
On November 5, 1996, the Province of Santa Cruz, Argentina brought suit
against the Company's subsidiary Cadipsa S.A. in the Corte Suprema de Justicia
de la Nacion (the Supreme Court of Justice of the Argentine Republic, Buenos
Aires, Argentina), Dossier No. s-1451, seeking to recover approximately $10.6
million (which sum includes interest) allegedly due as additional royalties on
four concessions granted in 1990 in which the Company currently owns a 100
percent working interest. The Company and its predecessors in title have been
paying royalties at an eight percent rate; the Province of Santa Cruz claimed
the rate should be 12 percent. On May 19, 2000, the Company announced it had
received notice of an adverse decision regarding this suit. As a result of the
court's decision, the Company has recorded a one-time, after-tax charge to
"Other expense" in the second quarter of approximately $16.3 million ($25.1
million pre-tax) or $0.25 per share. Further, the Company believes that it is
entitled to partial indemnification by a third party with respect to the
decision. The pre-tax amount of $25.1 million is included in "Other payables
and accrued liabilities" in the accompanying balance sheet and the Company
anticipates funding required payments from year 2000 cash flow. The estimated
impact of the decision on the Company's Argentina production, reserves and
present value is immaterial.
The Company is a defendant in various other lawsuits and is a party in
governmental proceedings from time to time arising in the ordinary course of
business. In the opinion of management, none of the various other pending
lawsuits and proceedings should have a material adverse impact on the Company's
financial position or results of operations.
-13-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
---------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
Results of Operations
The Company's results of operations have been significantly affected by its
success in acquiring oil and gas properties and its ability to maintain or
increase production through its exploitation and exploration activities.
Fluctuations in oil and gas prices have also significantly affected the
Company's results. The following table reflects the Company's oil and gas
production and its average oil and gas sales prices for the periods presented:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
2000 1999 2000 1999
--------- ---------- ---------- ----------
Production:
Oil (MBbls) -
U.S............................... 2,249 2,196 4,472 4,301
Argentina......................... 2,274 1,492 4,492 3,043
Ecuador........................... 244 125 549 243
Bolivia........................... 25 17 44 30
Total............................. 4,792 3,830 9,557 7,617
Gas (MMcf) -
U.S............................... 9,502 9,302 18,144 19,433
Argentina......................... 2,205 304 3,688 374
Bolivia........................... 1,459 845 2,585 1,528
Total............................. 13,166 10,451 24,417 21,335
Total MBOE............................ 6,987 5,571 13,627 11,173
Average prices:
Oil (per Bbl) -
U.S............................... $ 22.33(a) $ 14.33(a) $ 23.32(b) $ 12.24(b)
Argentina......................... 26.88 14.70 26.60 12.00
Ecuador........................... 19.54 11.25 21.38 8.75
Bolivia........................... 26.45 15.13 27.97 12.22
Total............................. 24.37(a) 14.37(a) 24.77(b) 12.03(b)
Gas (per Mcf) -
U.S............................... $ 3.31 $ 1.94 $ 2.86 $ 1.77
Argentina......................... 1.82 1.00 1.85 .99
Bolivia........................... 1.38 .56 1.28 .54
Total............................. 2.84 1.80 2.54 1.67
(a) The impact of oil hedges reduced the Company's U.S. and total average oil
prices per Bbl for the three months ended June 30, 2000, by $2.93 and $1.38,
respectively. The impact of oil hedges increased the Company's U.S. and
total average oil prices for the three months ended June 30, 1999, by $0.12
and $0.07, respectively.
(b) The impact of oil hedges reduced the Company's U.S. and total average oil
prices per Bbl for the six months ended June 30, 2000, by $2.06 and $0.96,
respectively. The impact of oil hedges increased the Company's U.S. and
total average oil prices per Bbl for the six months ended June 30, 1999, by
$0.06 and $0.04, respectively.
-14-
Average U.S. oil prices received by the Company fluctuate generally with
changes in the NYMEX reference price ("NYMEX") for oil. The Company's Argentina
oil production is sold at WTI spot prices as quoted on the Platt's Crude Oil
Marketwire (approximately equal to the NYMEX) less a specified differential.
The Company experienced a 106 percent increase in its average oil price in
the first six months of 2000 compared to the first six months of 1999. The
Company's average realized oil price (before the impact of hedges) increased to
90 percent of the NYMEX in the six months of 2000 compared to 78 percent of
NYMEX in the year-earlier period. The Company's U.S. and overall average oil
prices for the first six months of 2000 were decreased by $2.06 and 96 cents,
respectively, as a result of oil hedges. The Company's U.S. and overall average
oil prices for the first six months of 1999 were increased by six cents and four
cents, respectively, as a result of oil hedges.
The Company experienced a 70 percent increase in its average oil price in
the second quarter of 2000 compared to the second quarter of 1999. The Company's
average realized oil price (before the impact of hedges) increased to 90 percent
of NYMEX in the second quarter of 2000 compared to 81 percent of NYMEX in the
year-earlier period. The Company's U.S. and overall average oil prices for the
second quarter of 2000 were decreased by $2.93 and $1.38, respectively, as a
result of oil hedges. The Company's U.S. and overall average oil prices for the
second quarter of 1999 were increased by 12 cents and seven cents, respectively,
as a result of oil hedges.
The Company has previously engaged in oil and gas hedging activities and
intends to continue to consider various hedging arrangements to realize
commodity prices which it considers favorable. Currently, oil hedges (swap
agreements) for the last two quarters of 2000 cover 4.0 MMBbls at an average
NYMEX reference price of $25.04 per Bbl. The following table reflects the
barrels hedged and the corresponding weighted average NYMEX reference prices by
quarter for the remainder of the year:
NYMEX
Reference
Price
Quarter Ending Barrels Per Bbl
---------------- --------- -----------
(in thousands)
September 30, 2000 2,589 $26.43
December 31, 2000 1,380 22.44
Average U.S. gas prices received by the Company fluctuate generally with
changes in spot market prices, which may vary significantly by region. The
Company's Bolivia average gas price is tied to a long-term contract under which
the base price is adjusted for price changes in contract specified fuel oil
indexes. During the second quarter of 2000, these fuel oil indexes increased in
conjunction with the higher oil price environment. In Argentina, the Company's
average gas price is primarily determined by the realized price of oil from its
El Huemul concession. The Company's overall average gas price for the first six
months of 2000 was 52 percent higher than 1999's first six months. The Company's
overall average gas price for the second quarter of 2000 was 58 percent higher
than 1999's second quarter.
-15-
Relatively modest changes in either oil or gas prices significantly impact
the Company's results of operations and cash flow. However, the impact of
changes in the market prices for oil and gas on the Company's average realized
prices may be reduced from time to time based on the level of the Company's
hedging activities. Based on second quarter 2000 oil production, a change in the
average oil price realized by the Company of $1.00 per Bbl would result in a
change in net income and cash flow before income taxes on a quarterly basis
(before the impact of hedges) of approximately $3.0 million and $4.7 million,
respectively. A 10 cent per Mcf change in the average price realized by the
Company for gas would result in a change in net income and cash flow before
income taxes on a quarterly basis of approximately $0.8 million and $1.3
million, respectively, based on second quarter 2000 gas production.
Period to Period Comparison
Three months ended June 30, 2000, Compared to three months ended June 30, 1999
The Company reported net income of $29.8 million for the quarter ended
June 30, 2000, compared to net income of $5.2 million for the year-earlier
quarter. The increase in the Company's net income is primarily due to a 70
percent increase in average oil prices and a 58 percent increase in average gas
prices combined with a 25 percent increase in production on an equivalent barrel
basis. These increases were partially offset by a non-recurring $16.3 million
after-tax charge related to an Argentina royalty litigation accrual. The 25
percent increase in production is primarily the result of the acquisition of
certain producing domestic oil and gas properties from Nuevo Energy Company (the
"Nuevo Acquisition") in December 1999, the acquisition of additional interests
in the Company's producing Ecuador concessions from Petrobras in December 1999
and the acquisition of the producing El Huemul concession in Argentina in July
1999 (collectively, the "1999 Acquisitions").
Oil and gas sales increased $80.4 million (109 percent), to $154.2 million
for the second quarter of 2000 from $73.8 million for the second quarter of
1999. A 70 percent increase in average oil prices, coupled with a 25 percent
increase in oil production, accounted for an increase in oil sales of $61.7
million. A 58 percent increase in average gas prices, coupled with a 26 percent
increase in gas production, accounted for an $18.7 million increase in gas sales
for the 2000 second quarter as compared to the year-earlier quarter. The 25
percent increase in oil production and the 26 percent increase in gas production
are primarily the result of the 1999 Acquisitions and the increase in the
Company's Bolivian gas sales through the Bolivia-to-Brazil gas pipeline which
opened in July 1999.
As the result of an unfavorable decision by the Supreme Court of Argentina
(See Part II, Item 1. of this Form 10-Q), the Company has recorded as other
expense in the second quarter of 2000 a non-recurring charge of $25.1 million.
No similar charge existed in the 1999 second quarter. The Company's balance
sheet at June 30, 2000, included this accrued liability of $25.1 million in its
current liabilities section under other payables and accrued liabilities.
-16-
Lease operating expenses, including production taxes, increased $12.3
million (49 percent), to $37.5 million for the second quarter of 2000 from $25.3
million for the second quarter of 1999. These cost increases resulted from the
1999 Acquisitions, the return of certain higher-cost production which was shut
in during the second quarter of last year due to low oil prices, increased well
work and maintenance this quarter which had been deferred during the low price
periods of 1999 and higher production taxes as a result of higher U.S. oil and
gas sales. Lease operating expenses per equivalent barrel produced increased 19
percent to $5.37 in the second quarter of 2000 from $4.53 for the same period in
1999.
General and administrative expenses increased $2.1 million (26 percent), to
$10.2 million for the second quarter of 2000 from $8.1 million for the second
quarter of 1999 due primarily to increased personnel costs associated with the
1999 Acquisitions and the impact of deferring 1999 annual salary adjustments to
the third quarter of 1999. Despite the 26 percent increase in costs, general
and administrative expenses per equivalent barrel produced for the second
quarter of 2000 remained flat at $1.46 as seen in the prior-year quarter as a
result of the 25 percent increase in the Company's oil and gas production.
Depreciation, depletion and amortization ("DD&A") decreased $0.6 million (2
percent), to $24.2 million for the second quarter of 2000 from $24.8 million for
the second quarter of 1999, despite the 25 percent increase in production due to
the 22 percent decrease in the Company's average amortization rate per
equivalent barrel produced. This rate decreased from $4.26 in the second
quarter of 1999 to $3.33 in the second quarter of 2000. This rate decrease was
primarily as a result of the beneficial impact on reserve volumes associated
with significantly higher oil and gas prices and the new production from the
Company's El Huemul concession which has a low amortization rate.
Interest expense decreased $2.7 million (18 percent), to $11.9 million for
the second quarter of 2000 from $14.6 million for the second quarter of 1999,
due primarily to a 27 percent decrease in the Company's total average
outstanding debt. The Company applied $88 million of proceeds from property
sales in 1999 and its significantly increased cash flow to reduce outstanding
debt. The Company's overall average interest rate increased to 8.87% in the
second quarter of 2000 as compared to 7.95% in the second quarter of 1999
primarily as the result of the significant reduction of the Company's lower-cost
floating rate debt within its total debt position. The Company had $4.8 million
and $5.9 million of accrued interest payable at June 30, 2000, and December 31,
1999, respectively, included in other payables and accrued liabilities.
Six months ended June 30, 2000, Compared to six months ended June 30, 1999
The Company reported net income of $72.5 million for the six months ended
June 30, 2000, compared to a net loss of $12.9 million for the year-earlier
period. The increase in the Company's net income is primarily due to a 106
percent increase in average oil prices and a 52 percent increase in average gas
prices, combined with a 22 percent increase in production on an equivalent
barrel basis. These increases were partially offset by a non-recurring $16.3
million after-tax charge related to an Argentina royalty litigation accrual. The
22 percent increase in production is primarily as a result of the 1999
Acquisitions.
-17-
Oil and gas sales increased $171.4 million (135 percent), to $298.7 million
for the first six months of 2000 from $127.3 million for the six months of 1999.
A 106 percent increase in average oil prices coupled with a 25 percent increase
in oil production accounted for a $145.1 million increase in oil sales for the
first six months of 2000 as compared to the year-earlier period. A 52 percent
increase in average gas prices coupled with a 14 percent increase in gas
production accounted for a $26.3 million increase in gas sales for the first six
months of 2000 as compared to the year-earlier period. The 25 percent increase
in oil production and the 14 percent increase in gas production are primarily
the result of the 1999 Acquisitions and the increase in the Company's Bolivian
gas sales through the Bolivia-to-Brazil gas pipeline which opened in July 1999.
As the result of an unfavorable decision by the Supreme Court of Argentina
(See Part II, Item 1. of this Form 10-Q), the Company has recorded as other
expense in the first half of 2000 a non-recurring charge of $25.1 million. No
similar charge existed in the first half of 1999.
Lease operating expenses, including production taxes, increased $23.4
million (48 percent), to $72.5 million for the first six months of 2000 from
$49.1 million for the first six months of 1999. These cost increases resulted
from the 1999 Acquisitions, the return of certain higher-cost production which
was shut in during the first half of last year due to low oil prices, increased
well work and maintenance in 2000 which had been deferred during the low price
periods of 1999 and higher production taxes as a result of higher U.S. oil and
gas sales. Lease operating expenses per equivalent barrels produced increased 21
percent to $5.32 in the first six months of 2000 from $4.40 for the same period
in 1999.
Exploration costs decreased $4.8 million (59 percent), to $3.4 million for
the first six months of 2000 from $8.2 million for same period of 1999. During
the first six months of 2000, the Company's exploration costs included $2.5
million for unsuccessful exploratory drilling, primarily in Bolivia, $0.8
million for lease impairments and $0.1 million for other geological and
geophysical costs. The Company's 1999 first six months exploration costs
consisted primarily of $5.2 million in 3-D seismic acquisition costs primarily
in Yemen and Western Oklahoma, $1.4 million in lease expirations and $1.6
million in unsuccessful exploratory drilling and other geological and
geophysical costs.
General and administrative expenses increased $3.1 million (19 percent), to
$19.2 million for the first six months of 2000 from $16.1 million for the first
six months of 1999 due primarily to increased personnel costs associated with
the 1999 Acquisitions and the impact of deferring 1999 annual salary adjustments
to the third quarter of 1999. Despite the 19 percent increase in costs, general
and administrative expenses per equivalent barrel produced decreased to $1.41
from $1.44 in the year earlier first half primarily as a result of the 22
percent increase in equivalent barrel production.
Depreciation, depletion and amortization decreased $10.2 million (18
percent), to $46.8 million for the first half of 2000 from $57.0 million for the
first half of 1999 despite the 22 percent increase in production due primarily
to the 33 percent decrease in the average amortization rate per equivalent
barrel produced from $4.93 in the first half of 1999 to $3.29 in 2000. This rate
decrease was primarily as a result of the beneficial impact on reserve volumes
associated with significantly higher oil and gas prices and the new production
from the Company's El Huemul concession which has a low amortization rate.
-18-
Interest expense decreased $3.8 million (13 percent), to $25.3 million for
the first half of 2000 from $29.1 million for the first half of 1999, due
primarily to a 21 percent decrease in the Company's total average outstanding
debt. The Company applied $88 million of proceeds from property sales in 1999
and its significantly increased cash flow to reduce outstanding debt. The
Company's overall average interest rate increased to 8.72% in the first six
months of 2000 as compared to 7.89% in the year-earlier period primarily as the
result of the significant reduction of the Company's lower-cost floating rate
debt within its total debt position.
Capital Expenditures
During the first six months of 2000, the Company's domestic oil and gas
capital expenditures totaled $24.6 million. Exploitation activities accounted
for $15.7 million of these expenditures with exploration activities contributing
$5.7 million and acquisition costs accounting for $3.2 million. During the first
six months of 2000, the Company's international oil and gas capital expenditures
totaled $43.6 million, including $12.0 million and $8.8 million of exploration
expenditures in Bolivia and Yemen, respectively. International exploitation
activities accounted for $19.1 million, primarily on development drilling in
Argentina. Other international activities accounted for an additional $3.7
million in capital expenditures. As of June 30, 2000, the Company had total
unevaluated oil and gas property costs of approximately $41.2 million including
undeveloped leasehhold and exploratory drilling in progress. Future exploration
expense and earnings may be impacted to the extent any of the exploratory
drilling is determined to be unsuccessful.
The Company committed to perform 17,728 work units related to its concession
rights in the Naranjillos field in Santa Cruz Province, Bolivia awarded in late
1997. The total work unit commitment is guaranteed by the Company through a
letter of credit (currently $34.1 million). Approximately $33 million has been
budgeted to be spent in 2000, thereby fulfilling the Company's Naranjillos field
work unit commitment.
Under the Company's exploration contract on Block 19 in Ecuador, the Company
is required to drill one additional well. The Company expects to drill this
well during the third quarter of 2000 at a cost of approximately $4 million.
The Company is also committed to spend approximately $11 million in the
Republic of Yemen over a two and one-half year period which began in July 1998.
At the end of the first two and one-half years, the Company has the option to
extend the work program for a second two and one-half year period with similar
work unit and capital commitment requirements. As of August 1, 2000, the
Company had completed the work units necessary to fulfill its initial commitment
and is currently awaiting governmental approval of the final portion of the work
completed. The remaining unapproved work units are currently guaranteed by a $3
million letter of credit ($11 million at June 30, 2000). The total expenditures
include the acquisition and interpretation of 150 square kilometers of seismic
and the drilling of three exploration wells. Based on the results of the
Company's initial exploratory well, during the second quarter of 2000 the
Company proposed and received governmental approval to drill a fourth well.
Should the Company exercise its option to extend the work program, this fourth
well will be applied towards the additional work unit commitment.
-19-
Except for the commitments discussed above, the timing of most of the
Company's capital expenditures is discretionary with no material long-term
capital expenditure commitments. Consequently, the Company has a significant
degree of flexibility to adjust the level of such expenditures as circumstances
warrant. The Company uses internally generated cash flow, coupled with advances
under its revolving credit facility, to fund capital expenditures other than
significant acquisitions and anticipates that its cash flow, net of debt service
obligations, will be sufficient to fund its revised budget of $172 million for
non-acquisition capital expenditures during 2000 and to further reduce its debt.
The Company's planned 2000 non-acquisition capital expenditure budget is
currently allocated 51 percent to exploitation activities, including development
and infill drilling, and 49 percent to exploration activities. The Company does
not have a specific acquisition budget since the timing and size of acquisitions
are difficult to forecast. The Company is actively pursuing additional
acquisitions of oil and gas properties. In addition to internally generated
cash flow and advances under its revolving credit facility, the Company may seek
additional sources of capital to fund any future significant acquisitions (see
"-Liquidity"), however, no assurance can be given that sufficient funds will be
available to fund the Company's desired acquisitions.
Liquidity
Internally generated cash flow and the borrowing capacity under its
revolving credit facility are the Company's major sources of liquidity. In
addition, the Company may use other sources of capital, including the issuance
of additional debt securities or equity securities, to fund any major
acquisitions it might secure in the future and to maintain its financial
flexibility. The Company funds its capital expenditures (excluding acquisitions)
and debt service requirements primarily through internally generated cash flows
from operations. Any excess cash flow is used to reduce outstanding advances
under the revolving credit facility.
In the past, the Company has accessed the public markets to finance
significant acquisitions and provide liquidity for its future activities. The
Company has completed five public equity offerings, as well as two public debt
offerings and one privately placed debt offering under Rule 144A, which have
provided the Company with aggregate net proceeds of approximately $648 million.
The Company's unsecured revolving credit facility under the Amended and
Restated Credit Agreement dated October 21, 1998, as amended (the "Credit
Agreement"), establishes a borrowing base (currently $625 million) determined by
the banks' evaluation of the Company's oil and gas reserves. The amount
available to be borrowed under the Bank Facility is limited to the lesser of the
borrowing base or the facility size, which is currently set at $535 million.
The Company may increase the facility size up to $625 million without further
approvals from the existing bank group if additional banks agree to join the
group.
Outstanding advances under the Credit Agreement bear interest payable
quarterly at a floating rate based on Bank of Montreal's alternate base rate (as
defined) or, at the Company's option, at a fixed rate for up to six months based
on the eurodollar market rate ("LIBOR"). The Company's interest rate increments
above the alternate base rate and LIBOR vary based on the level of outstanding
senior debt to the borrowing base. As of June 30, 2000, the Company had elected
a fixed rate based on LIBOR for a substantial portion of its outstanding
advances, which resulted in an average interest rate of approximately 8.4
percent per annum. In addition, the Company must pay a commitment fee ranging
from 0.25 to 0.375 percent per annum on the unused portion of the banks'
commitment.
-20-
On a semiannual basis, the Company's borrowing base is redetermined by the
banks based upon their review of the Company's oil and gas reserves. If the sum
of outstanding senior debt exceeds the borrowing base, as redetermined, the
Company must repay such excess. Any principal advances outstanding under the
Credit Agreement at September 11, 2001, will be payable in eight equal
consecutive quarterly installments commencing December 1, 2001, with maturity at
September 11, 2003.
The unused portion of the Credit Agreement was approximately $450 million at
August 7, 2000. The unused portion of the Credit Agreement and the Company's
internally generated cash flow provide liquidity which may be used to finance
future capital expenditures, including acquisitions. As additional acquisitions
are made and properties are added to the borrowing base, the banks'
determination of the borrowing base and their commitments may be increased.
The Company's internally generated cash flow, results of operations and
financing for its operations are dependent on oil and gas prices. Although the
Company has seen significant improvements in its commodity prices during the
last half of 1999 and the first two quarters of 2000, should these improvements
not be sustained, its earnings and cash flow from operations will be adversely
impacted. The Company believes that its cash flows and unused availability
under the Credit Agreement are sufficient to fund its planned capital
expenditures for the foreseeable future.
Inflation
In recent years, U.S. inflation has not had a significant impact on the
Company's operations or financial condition. For discussion on the Company's
international operations and the impact of inflation, see the section "Foreign
Currency and Operations Risk" under "Item 3. Quantitative and Qualitative
Disclosures About Market Risk" located elsewhere in this Form 10-Q.
Income Taxes
The Company incurred current provisions for income taxes of approximately
$26.5 million and $47,000 for the first six months of 2000 and 1999,
respectively. The total provision for U.S. income taxes is based on the Federal
corporate statutory income tax rate plus an estimated average rate for state
income taxes. Earnings of the Company's foreign subsidiaries are subject to
foreign income taxes. No U.S. deferred tax liability will be recognized related
to the unremitted earnings of these foreign subsidiaries as it is the Company's
intention, generally, to reinvest such earnings permanently.
The Company has a U.S. Federal alternative minimum tax ("AMT") credit
carryforward of approximately $4.8 million which does not expire and is
available to offset U.S. Federal regular income taxes in future years, but only
to the extent that U.S. Federal regular income taxes exceed the AMT in such
years. The Company also has a regular tax NOL of $58.5 million for U.S. Federal
income tax purposes which it is able to carry forward up to 20 years to offset
future income taxes to be paid. The Company expects to fully utilize its NOL
carryforward in 2000.
-21-
Forward-Looking Statements
This Form 10-Q includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. All statements in this Form 10-Q, other than
statements of historical facts, that address activities, events or developments
that the Company expects, believes or anticipates will or may occur in the
future, including production, operating costs and product price realization
targets, future capital expenditures (including the amount and nature thereof),
the drilling of wells, reserve estimates, future production of oil and gas,
future cash flows, future reserve activity and other such matters are forward-
looking statements. Although the Company believes the expectations expressed in
such forward-looking statements are based on reasonable assumptions within the
bounds of its knowledge of its business, such statements are not guarantees of
future performance and actual results or developments may differ materially from
those in the forward-looking statements.
Factors that could cause actual results to differ materially from those in
forward-looking statements include: oil and gas prices; exploitation and
exploration successes; continued availability of capital and financing; general
economic, market or business conditions; acquisition opportunities (or lack
thereof); changes in laws or regulations; risk factors listed from time to time
in the Company's reports filed with the Securities and Exchange Commission; and
other factors. The Company assumes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
-22-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
The Company's operations are exposed to market risks primarily as a result
of changes in commodity prices, interest rates and foreign currency exchange
rates. The Company does not use derivative financial instruments for speculative
or trading purposes.
Commodity Price Risk
The Company produces, purchases and sells crude oil, natural gas,
condensate, natural gas liquids and sulfur. As a result, the Company's financial
results can be significantly impacted as these commodity prices fluctuate widely
in response to changing market forces. The Company has previously engaged in oil
and gas hedging activities and intends to continue to consider various hedging
arrangements to realize commodity prices which it considers favorable.
Currently, the Company has entered into various hedges (swap agreements) for
a total of 4.0 MMBbls of oil at a weighted average price of $25.04 per Bbl
(NYMEX reference price) for the last two quarters of 2000. The fair value of
commodity swap agreements is the amount at which they could be settled, based on
quoted market prices. At June 30, 2000, the Company would have been required to
pay approximately $20.9 million to terminate its oil swap agreements then in
place. The Company continues to monitor oil and gas prices and may enter into
additional oil and gas hedges or swaps in the future.
Interest Rate Risk
The Company's interest rate risk exposure results primarily from short-term
rates, mainly LIBOR based borrowings from its commercial banks. To reduce the
impact of fluctuations in interest rates the Company maintains a portion of its
total debt portfolio in fixed rate debt. At June 30, 2000, the amount of the
Company's fixed rate debt was approximately 83 percent of total debt. In the
past, the Company has not entered into financial instruments such as interest
rate swaps or interest rate lock agreements. However, it may consider these
instruments to manage the impact of changes in interest rates based on
management's assessment of future interest rates, volatility of the yield curve
and the Company's ability to access the capital markets in a timely manner. The
following table provides information about the Company's long-term debt cash
flows and weighted average interest rates by expected maturity dates:
Fair Value
There- at
2000 2001 2002 2003 after Total 6/30/00
------ ------ ------ ------ ------ ------ -----------
Long-Term Debt:
Fixed rate (in thousands) - - - - $399,173 $399,173 $395,077
Average interest rate - - - - 9.2% 9.2% -
Variable rate (in thousands) - $10,000 $40,000 $30,000 - $ 80,000 $ 80,000
Average interest rate - (a) (a) (a) - (a) -
(a) LIBOR plus an increment, based on the level of outstanding senior debt to
the borrowing base, up to a maximum increment of 2.0 percent. The increment
above LIBOR at June 30, 2000, was 0.875 percent.
-23-
Foreign Currency and Operations Risk
International investments represent, and are expected to continue to
represent, a significant portion of the Company's total assets. The Company has
international operations in Argentina, Bolivia, Ecuador and Yemen. For the
first six months of 2000, the Company's operations in Argentina accounted for
approximately 39 percent of the Company's revenues, 57 percent of its operating
profit and 33 percent of its total assets. During such period, the Company's
operations in Argentina represented its only foreign operations accounting for
more than 10 percent of its revenues and operating income. For this same
period, the Company's Bolivia operations represented 10 percent of its total
assets, but did not exceed 10 percent of the Company's revenues or operating
income. The Company continues to identify and evaluate international
opportunities but currently has no binding agreements or commitments to make any
material international investment. As a result of such significant foreign
operations, the Company's financial results could be affected by factors such as
changes in foreign currency exchange rates, weak economic conditions or changes
in the political climate in these foreign countries.
The Company believes Argentina offers a relatively stable political
environment and does not anticipate any significant change in the near future.
The current democratic form of government has been in place since 1983 and,
since 1989, has pursued a steady process of privatization, deregulation and
economic stabilization and reforms involving the reduction of inflation and
public spending. Argentina's 12-month trailing inflation rate as measured by the
Argentine Consumer Price Index declined from 200.7 percent as of June 1991 to
4.5 percent as of June 2000.
All of the Company's Argentine revenues are U.S. dollar based, while a large
portion of its costs are denominated in Argentine pesos. The Argentina Central
Bank is obligated by law to sell dollars at a rate of one Argentine peso to one
U.S. dollar and has sought to prevent appreciation of the peso by buying dollars
at rates of not less than 0.998 peso to one U.S. dollar. As a result, the
Company believes that should any devaluation of the Argentine peso occur, its
revenues would be unaffected and its operating costs would not be significantly
increased. At the present time, there are no foreign exchange controls
preventing or restricting the conversion of Argentine pesos into dollars.
Since the mid-1980's, Bolivia has been undergoing major economic reform,
including the establishment of a free-market economy and the encouragement of
foreign private investment. Economic activities that had been reserved for
government corporations were opened to foreign and domestic private investments.
Barriers to international trade have been reduced and tariffs lowered. A new
investment law and revised codes for mining and the petroleum industry, intended
to attract foreign investment, have been introduced.
On February 1, 1987, a new currency, the Boliviano ("Bs"), replaced the peso
at the rate of one million pesos to one Boliviano. The exchange rate is set
daily by the Government's exchange house, the Bolsin, which is under the
supervision of the Bolivian Central Bank. Foreign exchange transactions are not
subject to any controls. The US$:Bs exchange rate at June 30, 2000, was US$1:Bs
6.19. The Company believes that any currency risk associated with its Bolivian
operations would not have a material impact on the Company's financial position
or results of operations.
-24-
Prior to the Company's acquisition of Elf Ecuador in November 1998, its
previous operations in Ecuador were through a farm-in exploration joint venture
with two other companies in Block 19. Since 1992, the Government has generally
sought to reduce its participation in the economy and has implemented certain
macroeconomic reforms which were designed to reduce inflation. The Company
believes the current Government has a favorable attitude toward foreign
investment and has strong international relationships with the U.S.
The new administration led by President Gustavo Naboa is undertaking a
broad-based program of economic reform to stem the decline in economic activity
and to lay the basis for renewed economic growth. The legal basis for many of
the reforms is the recently enacted Ley Fundamental para la Transformacion
Economica del Ecuador (the "economic transformation law"), which is based on the
official dollarization of the economy at a conversion rate of 25,000 sucres per
U.S. dollar, a plan introduced last January by the previous administration.
While significant protests are being made by the rural population against
dollarization, the plan has been initiated and is expected to proceed to
completion. Although the Company believes any currency risk associated with its
operations in Ecuador would not have a material impact on its financial position
or results of operations, it has policies in place that reduce its exposure to
currency risk related to the sucre including maintaining essentially all of its
cash in U.S. dollar accounts primarily in U.S. bank accounts. All of the
Company's revenues in Ecuador are U.S. dollar based.
During mid-1996, Yemen's local currency, the rial, was allowed to float as
official exchange rates were abolished. When the Company began exploration
efforts in July 1998, the Yemeni exchange rate ("YER") was 136 Yemeni rials to
US$1. The rial gradually weakened, trading at YER 143 on December 31, 1998, YER
160 at June 30, 1999, YER 159.50 at December 31, 1999, and YER 156.70 on June
30, 2000. Strong crude oil prices and a recent border agreement reached with
Saudi Arabia have helped to stabilize the current exchange rate to the U.S.
dollar.
The majority of the Company's current contracts related to its Yemen
exploration operations are U.S. dollar based and cash held in Yemeni rials is
minimal. The Company believes that any currency risk associated with its
operations in Yemen would not have a material impact on the Company's financial
position or results of operations.
-25-
PART II
OTHER INFORMATION
-26-
Item 1. Legal Proceedings
-----------------
On May 19, 2000, the Company announced it had received notice of an
adverse decision by the Corte Suprema de Justicia de la Nacion (Supreme
Court of Justice of the Argentina Republic, Buenos Aires, Argentina) in
an administrative dispute over the appropriate rate of royalty due on
certain of its oil production. As previously disclosed, the Company and
its predecessors in title have been paying royalties at an eight
percent rate on certain of its concessions whereas the Province of
Santa Cruz claimed that a rate of 12 percent should apply.
As a result of the court's decision, the Company has recorded a one-
time, after-tax charge to earnings in the second quarter of
approximately $16.3 million ($25.1 million pre-tax) or $0.25 per share.
Further, the Company believes that it is entitled to partial
indemnification by a third party with respect to the decision. The
Company anticipates funding required payments from year 2000 cash flow.
The estimated impact of the decision on the Company's Argentina
production, reserves and present value is immaterial.
For information regarding other legal proceedings, see the Company's
Form 10-K for the year ended December 31, 1999.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
An amendment to the Company's Restated Certificate of Incorporation to
increase the number of authorized shares of Common Stock, $.005 par
value per share, from 80,000,000 to 160,000,000 was approved by the
stockholders of the Company at the Company's Annual Meeting held on May
9, 2000. A Certificate of Amendment was filed with Secretary of State
of Delaware on June 12, 2000.
Item 3. Defaults Upon Senior Securities
-------------------------------
not applicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Annual Meeting of Stockholders of the Company (the "Annual
Meeting") was held on May 9, 2000, in Tulsa, Oklahoma. At the Annual
Meeting, the stockholders of the Company elected William C. Barnes and
John T. McNabb, II as Class I Directors. The stockholders also
considered and approved (a) an amendment to the Company's Restated
Certificate of Incorporation to increase the number of authorized
shares of common stock from 80,000,000 to 160,000,000, (b) Amendment
Number 6 to the Company's 1990 Stock Plan and (c) the appointment of
Arthur Andersen LLP as the independent public accountants of the
Company for the fiscal year ending December 31, 2000.
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There were present at the Annual Meeting, in person or by proxy,
stockholders holding 52,934,959 shares of the Common Stock of the
Company, or 84.8 percent of the total stock outstanding and entitled to
vote at the Annual Meeting. The table below describes the results of
voting at the Annual Meeting.
Votes Broker
Votes Against or Non-
For Withheld Abstentions Votes
------- ------------ ------------- --------
1. Election of Directors:
William C. Barnes 49,552,587 3,382,372 -0- -0-
John T. McNabb 50,284,612 2,650,347 -0- -0-
2. Approval of Amendment
to the Company's Restated
Certificate of Incorporation 48,662,284 4,236,768 35,907 -0-
3. Approval of Amendment
Number 6 to the Company's
1990 Stock Plan 28,699,670 16,032,887 53,772 8,148,630
4. Ratification of Arthur Andersen
LLP as independent public
accountants of the Company
for fiscal 2000 52,893,148 14,965 26,846 -0-
Item 5. Other Information
-----------------
Copies of the Company's press releases each dated August 9, 2000,
announcing second quarter 2000 earnings results and revisions to 2000
capital budget and growth targets and announcing preliminary 2001
capital budget and growth targets are attached as exhibits hereto and
incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits
The following documents are included as exhibits to this Form 10-Q.
Those exhibits below incorporated by reference herein are indicated
as such by the information supplied in the parenthetical
thereafter. If no parenthetical appears after an exhibit, such
exhibit is filed herewith.
3.1 Certificate of Amendment of the Company's Restated Certificate
of Incorporation.
3.2 Restated Certificate of Incorporation, as amended, of the
Company.
10. Amendment No. 6 to Vintage Petroleum, Inc., 1990 Stock Plan
dated March 17, 2000 (filed as Exhibit A to the Company's
Proxy Statement for Annual Meeting of Stockholders dated
March 30, 2000).
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27. Financial data schedule.
99.1 Press release dated August 9, 2000, issued by the Company
announcing second quarter 2000 earnings results and revisions
to 2000 capital budget and growth targets.
99.2 Press release dated August 9, 2000, issued by the Company
announcing preliminary 2001 capital budget and growth targets.
b) Reports on Form 8-K
Form 8-K dated April 17, 2000, was filed April 18, 2000, to report
under Item 5 the Company's press release dated April 17, 2000.
Form 8-K dated May 3, 2000, was filed May 4, 2000, to report under
Item 5 the Company's press release dated May 3, 2000.
Form 8-K dated May 10, 2000, was filed May 11, 2000, to report
under Item 5 the Company's press release dated May 10, 2000.
Form 8-K dated May 19, 2000, was filed May 22, 2000, to report
under Item 5 the Company's press release dated May 19, 2000.
Form 8-K dated June 13, 2000, was filed June 30, 2000, to report
under Item 5 the Company's press releases dated June 13, 2000, and
June 28, 2000, and to update the Company's 2000 hedging activities.
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Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VINTAGE PETROLEUM, INC.
-----------------------
(Registrant)
DATE: August 11, 2000 \s\ Michael F. Meimerstorf
--------------------------------------------
Michael F. Meimerstorf
Vice President and Controller
(Principal Accounting Officer)
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Exhibit Index
The following documents are included as exhibits to this Form 10-Q. Those
exhibits below incorporated by reference herein are indicated as such by the
information supplied in the parenthetical thereafter. If no parenthetical
appears after an exhibit, such exhibit is filed herewith.
Exhibit
Number
- ------ Description
----------------------------------------------------------
3.1 Certificate of Amendment of the Company's Restated Certificate
of Incorporation.
3.2 Restated Certificate of Incorporation, as amended, of the
Company.
10. Amendment No. 6 to Vintage Petroleum, Inc., 1990 Stock Plan
dated March 17, 2000 (filed as Exhibit A to the Company's Proxy
Statement for Annual Meeting of Stockholders dated March 30,
2000).
27. Financial Data Schedule.
99.1 Press release dated August 9, 2000, issued by the Company
announcing second quarter 2000 earnings results and revisions to
2000 capital budget and growth targets.
99.2 Press release dated August 9, 2000, issued by the Company
announcing preliminary 2001 capital budget and growth targets.
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