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 September 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
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(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 November 1, 2000
- ----------------------------- -------------------------------
Common Stock, $.005 Par Value 62,801,416
-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
------
September 30, December 31,
2000 1999
------------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 14,181 $ 42,687
Accounts receivable -
Oil and gas sales 128,361 87,484
Joint operations 8,606 5,211
Prepaids and other current assets 19,704 19,109
------------- ------------
Total current assets 170,852 154,491
------------- ------------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Oil and gas properties, successful efforts method 1,644,501 1,521,672
Oil and gas gathering systems and plants 19,033 15,453
Other 19,034 17,287
------------- ------------
1,682,568 1,554,412
Less accumulated depreciation, depletion and amortization 640,542 583,060
------------- ------------
1,042,026 971,352
------------- ------------
OTHER ASSETS, net 45,315 42,291
------------- ------------
TOTAL ASSETS $ 1,258,193 $ 1,168,134
============= ============
See notes to unaudited consolidated financial statements.
-3-
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
----------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
September 30, December 31,
2000 1999
------------- ------------
CURRENT LIABILITIES:
Revenue payable $ 45,631 $ 25,899
Accounts payable - trade 44,212 26,118
Current taxes payable 33,869 5,875
Other payables and accrued liabilities 69,917 36,010
------------- ------------
Total current liabilities 193,629 93,902
------------- ------------
LONG-TERM DEBT 472,401 625,318
------------- ------------
DEFERRED INCOME TAXES 32,068 15,780
------------- ------------
OTHER LONG-TERM LIABILITIES 2,477 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, 62,801,416 and 62,407,866 shares
issued and outstanding, respectively 314 312
Capital in excess of par value 317,981 314,490
Retained earnings 239,323 116,327
------------- ------------
557,618 431,129
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,258,193 $ 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 Nine Months Ended
September 30, September 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
REVENUES:
Oil and gas sales $179,458 $113,580 $478,133 $240,902
Gas marketing 38,988 16,404 82,868 38,905
Oil and gas gathering and processing 5,529 1,734 13,223 5,184
Gain (loss) on disposition of assets (805) 3,305 (1,188) 7,671
Other income (expense) 722 1,406 (22,600) 2,332
-------- -------- -------- --------
223,892 136,429 550,436 294,994
-------- -------- -------- --------
COSTS AND EXPENSES:
Lease operating, including production taxes 38,215 31,886 110,737 80,991
Exploration costs 8,949 1,322 12,330 9,523
Gas marketing 37,482 15,705 79,409 37,095
Oil and gas gathering and processing 5,019 1,311 11,337 3,932
General and administrative 9,413 8,413 28,650 24,482
Depreciation, depletion and amortization 25,630 26,231 72,382 83,240
Interest 11,609 15,185 36,948 44,321
-------- -------- -------- --------
136,317 100,053 351,793 283,584
-------- -------- -------- --------
Income before income taxes 87,575 36,376 198,643 11,410
PROVISION (BENEFIT) FOR INCOME TAXES:
Current 25,273 2,749 51,741 2,796
Deferred 4,932 6,349 17,019 (5,726)
-------- -------- -------- --------
NET INCOME $ 57,370 $ 27,278 $129,883 $ 14,340
======== ======== ======== ========
EARNINGS PER SHARE:
Basic $.91 $.44 $2.08 $.25
======== ======== ======== ========
Diluted $.90 $.43 $2.03 $.25
======== ======== ======== ========
Weighted average common shares outstanding:
Basic 62,770 62,309 62,592 56,505
======== ======== ======== ========
Diluted 63,956 64,143 63,892 57,869
======== ======== ======== ========
See notes to unaudited consolidated financial statements.
-5-
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
---------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 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 $431,129
Net income - - - 129,883 129,883
Exercise of stock options and related
tax effects 393 2 3,491 - 3,493
Cash dividends declared
($.11 per share) - - - (6,887) (6,887)
-------- -------- --------- -------- --------
Balance at September 30, 2000 62,801 $314 $317,981 $239,323 $557,618
======== ======== ========= ======== ========
See notes to unaudited consolidated financial statements.
-6-
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
---------------------
2000 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 129,883 $ 14,340
Adjustments to reconcile net income to
cash provided by operating activities -
Depreciation, depletion and amortization 72,382 83,240
Exploration costs 12,330 9,523
Provision (benefit) for deferred income taxes 17,019 (5,726)
(Gain) loss on property sales 1,188 (7,671)
--------- ---------
232,802 93,706
Increase in receivables (44,272) (20,584)
Increase in payables and accrued liabilities 88,555 16,343
Other (1,228) (4,898)
--------- ---------
Cash provided by operating activities 275,857 84,567
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas expenditures (155,410) (150,037)
Other property and equipment additions (1,827) (1,491)
Proceeds from sales of oil and gas properties 863 9,715
Other (2,767) 458
--------- ---------
Cash used by investing activities (159,141) (141,355)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock 3,493 83,330
Sale of 9 3/4% Senior Subordinated Notes - 146,000
Advances on revolving credit facility and other borrowings 35,920 29,837
Payments on revolving credit facility and other borrowings (179,632) (200,361)
Dividends paid (5,003) (1,328)
--------- ---------
Cash (used) provided by financing activities (145,222) 57,478
--------- ---------
Net increase (decrease) in cash and cash equivalents (28,506) 690
Cash and cash equivalents, beginning of period 42,687 5,245
--------- ---------
Cash and cash equivalents, end of period $ 14,181 $ 5,935
========= =========
See notes to unaudited consolidated financial statements.
-7-
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
----------------------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 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. 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 nine 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 $32,313,120 and $36,454,628 for the nine
months ended September 30, 2000 and 1999, respectively. Cash payments for U.S.
Federal and state income taxes were $15,597,135 during the nine months ended
September 30, 2000. There were no cash payments made for U.S. income taxes in
the first nine months of 1999. During the nine months ended September 30, 2000
and 1999, the Company made cash payments of $7,210,019 and $62,671,
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 per common share was
computed by dividing net income by the weighted average number of shares
outstanding during the period. For the nine month period ended September 30,
2000 and 1999, the Company had outstanding stock options for 729,000 and
1,825,000 additional shares of the Company's common stock, respectively, with
average exercise prices of $20.19 and $17.04, 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 nine month periods
ended September 30, 2000 and 1999, the Company had no non-owner changes in
equity other than net income.
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.
-9-
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. 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 anticipates adopting SFAS
133, as amended, beginning January 1, 2001, and has begun the process of
evaluating its contracts for derivatives and embedded derivatives. The Company
currently has oil swaps in place covering certain amounts of production for the
fourth quarter of 2000 and calendar year 2001. The Company believes these swaps
to be highly effective and therefore believes they would qualify as hedges under
SFAS 133, as amended. Had the Company already adopted SFAS 133, as amended, it
would have been required (as it will be required beginning January 1, 2001) to
mark-to-market these oil swaps, recording the fair value to its balance sheet as
either an accrued asset or an accrued liability with the offsetting entry being
included in "Other Comprehensive Income" for the effective portion of the hedge
and the income statement for the ineffective portion of the hedge, if any.
At September 30, 2000, the Company would have recorded under SFAS 133, as
amended, a liability of $8.4 million related to its outstanding oil swaps. The
Company is currently evaluating the manner in which to calculate
ineffectiveness, as defined by SFAS 133, as amended. If any portion of the
hedge instrument is deemed to be ineffective, as defined, that portion would be
recorded in the income statement and could increase the volatility of the
Company's results of operations.
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 nine month
and three month periods ended September 30, 2000 and 1999, is shown in the
following table:
Exploration and Production
---------------------------------------
Other Gas
U.S. Argentina Bolivia Foreign Gathering Marketing Corporate Total
-------- --------- -------- ------- --------- --------- --------- ----------
NINE MONTHS ENDED 9/30/00
- ----------------------------------
Revenues from external customers.. $245,069 $178,097 $ 10,434 $19,489 $13,223 $82,868 $ 1,256 $ 550,436
Intersegment revenues............. - - - - 1,434 1,578 - 3,012
Depreciation, depletion and
amortization expense........ 38,994 24,157 5,070 1,446 1,143 - 1,572 72,382
Operating income (loss)........... 130,250 118,762 (3,163) 14,506 743 3,458 (315) 264,241
Total assets..................... 521,743 451,254 132,421 78,759 11,000 23,156 39,860 1,258,193
Capital investments............... 40,327 73,609 25,114 16,361 79 - 1,748 157,238
Long-lived assets................. 469,149 391,649 100,782 69,431 6,065 - 4,950 1,042,026
NINE MONTHS ENDED 9/30/99
- ----------------------------------
Revenues from external customers.. $157,396 $ 86,047 $ 2,943 $ 4,091 $ 5,184 $38,905 $ 428 $ 294,994
Intersegment revenues............. - - - - 951 949 - 1,900
Depreciation, depletion and
amortization expense........ 56,257 21,547 1,476 863 1,043 - 2,054 83,240
Operating income (loss)........... 38,969 43,064 287 (2,499) 209 1,810 (1,627) 80,213
Total assets..................... 523,472 378,882 89,820 39,771 7,388 12,307 73,435 1,125,075
Capital investments............... 15,239 125,319 22,107 6,222 621 - 870 170,378
Long-lived assets................. 493,036 351,321 82,146 39,556 3,928 - 3,831 973,818
THREE MONTHS ENDED 9/30/00
- ----------------------------------
Revenues from external customers.. $ 88,525 $ 76,916 $ 5,904 $ 7,739 $ 5,528 $38,988 $ 292 $ 223,892
Intersegment revenues............. - - - - 329 576 - 905
Depreciation, depletion and
amortization expense........ 13,317 8,491 2,261 579 391 - 591 25,630
Operating income (loss)........... 48,852 55,948 (2,592) 5,064 119 1,504 (298) 108,597
Capital investments............... 15,736 52,133 12,691 6,672 47 - 724 88,003
THREE MONTHS ENDED 9/30/99
- ----------------------------------
Revenues from external customers.. $ 65,147 $ 49,155 $ 1,757 $ 1,965 $ 1,734 $16,404 $ 267 $ 136,429
Intersegment revenues............. - - - - 301 375 - 676
Depreciation, depletion and
amortization expense........ 15,383 8,666 707 294 349 - 832 26,231
Operating income (loss)........... 28,494 29,812 466 1,107 74 699 (679) 59,973
Capital investments............... 6,077 124,258 7,120 229 32 - 535 138,251
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). The Company has
completed the entire work unit commitment and is currently pursuing the release
of the letter of credit held by the Bolivian government.
The Company 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. The Company has completed the work units
necessary to fulfill its initial commitment through 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, the Company drilled a fourth well in the third quarter of 2000. Should the
Company exercise its option to extend the work program, this fourth well will be
applied towards the additional work unit commitment. All four wells are
currently in various stages of completion and evaluation.
Under the Company's exploration contract on Block 19 in Ecuador, it was
required to drill one additional exploratory well in 2000. The Company drilled
the Rio Cotapino well during the third quarter. This well was determined to be
unsuccessful early in the fourth quarter and the Company is in the process of
releasing this block back to the government of Ecuador.
The Company had $42.9 million in letters of credit (including the $34.1
million in letters of credit discussed above) outstanding at September 30, 2000.
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).
On November 4, 1998, the Company issued 1,325,000 shares of common stock to
Elf Aquitaine ("Elf") 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 September 30, 2000 (based on the average price for the preceding 60
trading days of $20.69), no additional consideration would have been required.
As of November 1, 2000, the average price for the first 58 trading days prior to
the measurement date, November 4, 2000, was $22.07 per share. Based on this,
the Company does not expect to be required to deliver any additional
consideration under the guarantee. The Company has been notified by Elf that it
had disposed of all of the 1,325,000 shares originally issued by the Company.
-12-
Rent expense was $1.6 million and $1.1 million for the first nine months of
2000 and 1999, respectively. The future minimum commitments under long-term,
non-cancellable leases for office space are $0.4 million for the last quarter 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 $4.5 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 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). 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 $10.1 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 Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2000 1999 2000 1999
------- ------- ------- -------
Production:
Oil (MBbls) -
U.S.......... 2,259 2,183 6,731 6,484
Argentina.... 2,409 2,287 6,901 5,330
Ecuador...... 331 138 880 381
Bolivia...... 38 28 82 58
Total........ 5,037 4,636 14,594 12,253
Gas (MMcf) -
U.S.......... 8,787 9,577 26,931 29,010
Argentina.... 2,589 2,547 6,277 2,921
Bolivia...... 3,096 1,817 5,681 3,345
Total........ 14,472 13,941 38,889 35,276
Total MBOE....... 7,449 6,959 21,076 18,132
Average prices:
Oil (per Bbl) -
U.S.......... $ 22.86(a) $ 17.50(a) $ 23.17(b) $ 14.01(b)
Argentina.... 29.97 19.72 27.78 15.32
Ecuador...... 23.39 14.28 22.13 10.74
Bolivia...... 28.41 16.95 28.17 14.53
Total........ 26.34(a) 18.50(a) 25.31(b) 14.48(b)
Gas (per Mcf) -
U.S.......... $ 4.24 $ 2.41 $ 3.31 $ 1.98
Argentina.... 1.82 1.37 1.84 1.32
Bolivia...... 1.55 .70 1.43 .63
Total........ 3.23 2.00 2.80 1.80
- -------------------
(a) The impact of oil hedges decreased the Company's U.S. and total average oil
prices per Bbl for the three months ended September 30, 2000, by $5.59 and
$2.51, respectively. The impact of oil hedges decreased the Company's U.S.
and total average oil prices for the three months ended September 30, 1999,
by $.57 and $.27, respectively.
(b) The impact of oil hedges decreased the Company's U.S. and total average oil
prices per Bbl for the nine months ended September 30, 2000, by $3.24 and
$1.50, respectively. The impact of oil hedges decreased the Company's U.S.
and total average oil prices per Bbl for the nine months ended September 30,
1999, by $.15 and $.08, 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 and Ecuador oil production are sold at WTI spot prices as quoted
on the Platt's Crude Oil Marketwire (approximately equal to the NYMEX) less
specified differentials.
The Company experienced a 75 percent increase in its average oil price in
the first nine months of 2000 compared to the first nine months of 1999. The
Company's average realized oil price (before the impact of hedges) increased to
90 percent of the NYMEX in the nine months of 2000 compared to 83 percent of
NYMEX in the year-earlier period. The Company's U.S. and overall average oil
prices for the first nine months of 2000 were decreased by $3.24 and $1.50,
respectively, as a result of oil hedges. The Company's U.S. and overall average
oil prices for the first nine months of 1999 were decreased by 15 cents and
eight cents, respectively, as a result of oil hedges.
The Company experienced a 42 percent increase in its average oil price in
the third quarter of 2000 compared to the third quarter of 1999. The Company's
average realized oil price (before the impact of hedges) increased to 91 percent
of NYMEX in the third quarter of 2000 compared to 86 percent of NYMEX in the
year-earlier period. The Company's U.S. and overall average oil prices for the
third quarter of 2000 were decreased by $5.59 and $2.51, respectively, as a
result of oil hedges. The Company's U.S. and overall average oil prices for the
third quarter of 1999 were decreased by 57 cents and 27 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) cover 2.760 MMBbls for the fourth quarter of 2000 at an average
NYMEX reference price of $26.33 per Bbl and 1.825 MMBbls for calendar year 2001
at an average NYMEX reference price of $30.13 per Bbl.
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 third 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
nine months of 2000 was 56 percent higher than 1999's first nine months. The
Company's overall average gas price for the third quarter of 2000 was 62 percent
higher than 1999's third quarter.
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 third 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 $3.2 million and $4.9 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 $0.9 million and $1.4
million, respectively, based on third quarter 2000 gas production.
-15-
Period to Period Comparison
Three months ended September 30, 2000, Compared to three months ended September
30, 1999
The Company reported net income of $57.4 million for the quarter ended
September 30, 2000, compared to net income of $27.3 million for the year-earlier
quarter. The increase in the Company's net income is primarily due to a 42
percent increase in average oil prices and a 62 percent increase in average gas
prices combined with a seven percent increase in production on an equivalent
barrel basis. The seven 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 and the
acquisition of additional interests in the Company's producing Ecuador
concessions from Petrobras in December 1999 (collectively, the "1999
Acquisitions").
Oil and gas sales increased $65.9 million (58 percent), to $179.5 million
for the third quarter of 2000 from $113.6 million for the third quarter of 1999.
A 42 percent increase in average oil prices, coupled with a nine percent
increase in oil production, accounted for an increase in oil sales of $46.9
million for the 2000 third quarter as compared to the year-earlier quarter. A 62
percent increase in average gas prices, coupled with a four percent increase in
gas production, accounted for a $19.0 million increase in gas sales for the 2000
third quarter as compared to the year-earlier quarter. The nine percent increase
in oil production and the four percent increase in gas production are primarily
the result of the Company's exploitation and exploration activities, 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, partially offset by
dispositions.
Lease operating expenses, including production taxes, increased $6.3
million (20 percent), to $38.2 million for the third quarter of 2000 from $31.9
million for the third quarter of 1999. These cost increases resulted from the
1999 Acquisitions, the return of certain higher-cost production which was shut
in during the third quarter of last year due to low oil prices, increased well
work and maintenance during the third quarter of 2000 which had been deferred
during the low price periods of 1999 and higher production taxes as a result of
higher oil and gas sales. Lease operating expenses per equivalent barrel
produced increased 12 percent to $5.13 in the third quarter of 2000 from $4.58
for the same period in 1999.
Exploration costs increased $7.6 million (585 percent), to $8.9 million for
the third quarter of 2000 from $1.3 million for the third quarter of 1999.
During the third quarter of 2000, the Company's exploration costs included $7.6
million for unsuccessful exploratory drilling, including $5.9 million related to
the Company's two deep Naranjillos wells in Bolivia and $1.3 million related to
the Rio Cotapino well in Block 19 in Ecuador (including concession costs), $1.1
million for lease impairments and $0.2 million for other geological and
geophysical costs. The Company's 1999 third quarter exploration costs included
$0.7 million for unsuccessful exploratory drilling and lease impairments and
$0.6 million for 3-D seismic data and other geological and geophysical costs.
General and administrative expenses increased $1.0 million (12 percent), to
$9.4 million for the third quarter of 2000 from $8.4 million for the third
quarter of 1999 due primarily to increased personnel costs associated with the
1999 Acquisitions. Despite the 12 percent increase in costs, general and
administrative expenses per equivalent barrel produced for the third quarter of
2000 increased only four percent to $1.26 as a result of the seven percent
increase in the Company's oil and gas production.
-16-
Depreciation, depletion and amortization ("DD&A") decreased $0.6 million (2
percent), to $25.6 million for the third quarter of 2000 from $26.2 million for
the third quarter of 1999, despite the seven percent increase in production, due
to the eight percent decrease in the Company's average amortization rate per
equivalent barrel produced from $3.58 in the third quarter of 1999 to $3.30 in
the third 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.
Interest expense decreased $3.6 million (24 percent), to $11.6 million for
the third quarter of 2000 from $15.2 million for the third quarter of 1999, due
primarily to a 30 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 9.02% in the third quarter
of 2000 as compared to 8.33% in the third 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 $9.7 million and $5.9
million of accrued interest payable at September 30, 2000, and December 31,
1999, respectively, included in other payables and accrued liabilities.
Nine months ended September 30, 2000, Compared to nine months ended September
30, 1999
The Company reported net income of $129.9 million for the nine months ended
September 30, 2000, compared to a net income of $14.3 million for the year-
earlier period. The increase in the Company's net income is primarily due to a
75 percent increase in average oil prices and a 56 percent increase in average
gas prices, combined with a 16 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
16 percent increase in production is primarily a result of the 1999 Acquisitions
and the El Huemul concession in Argentina acquired in July 1999 (the "El Huemul
Acquisition").
Oil and gas sales increased $237.2 million (98 percent), to $478.1 million
for the first nine months of 2000 from $240.9 million for the nine months of
1999. A 75 percent increase in average oil prices coupled with a 19 percent
increase in oil production accounted for a $192.0 million increase in oil sales
for the first nine months of 2000 as compared to the year-earlier period. A 56
percent increase in average gas prices coupled with a 10 percent increase in gas
production accounted for a $45.2 million increase in gas sales for the first
nine months of 2000 as compared to the year-earlier period. The 19 percent
increase in oil production and the 10 percent increase in gas production are
primarily the result of the Company's exploitation and exploration activities,
the 1999 Acquisitions, the El Huemul Acquisition and the increase in the
Company's Bolivian gas sales through the Bolivia-to-Brazil gas pipeline which
opened in July 1999, partially offset by dispositions.
As the result of an unfavorable decision by the Supreme Court of Argentina,
the Company has recorded as other expense in the first nine months of 2000 a
non-recurring charge of $25.1 million. No similar charge existed in the first
nine months of 1999. The Company's balance sheet at September 30, 2000,
included the unpaid portion of this accrued liability of $10.1 million in its
current liabilities section under other payables and accrued liabilities.
-17-
Lease operating expenses, including production taxes, increased $29.7
million (37 percent), to $110.7 million for the first nine months of 2000 from
$81.0 million for the first nine months of 1999. These cost increases resulted
from the 1999 Acquisitions, the El Huemul Acquisition, the return of certain
higher-cost production which was shut in during the first nine months 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 oil and gas sales. Lease operating expenses per
equivalent barrels produced increased 17 percent to $5.25 in the first nine
months of 2000 from $4.47 for the same period in 1999.
Exploration costs increased $2.8 million (29 percent), to $12.3 million for
the first nine months of 2000 from $9.5 million for same period of 1999. During
the first nine months of 2000, the Company's exploration costs included $10.0
million for unsuccessful exploratory drilling, primarily in Bolivia, $2.0
million for lease impairments and $0.3 million for other geological and
geophysical costs. Exploration costs for the first nine months of 1999
consisted primarily of $5.2 million in 3-D seismic acquisition costs, primarily
in Yemen and Western Oklahoma, $2.6 million in unsuccessful exploratory drilling
and other geological and geophysical costs and $1.7 million for lease
impairments.
General and administrative expenses increased $4.2 million (17 percent), to
$28.7 million for the first nine months of 2000 from $24.5 million for the
first nine months of 1999 due primarily to increased personnel costs associated
with the 1999 Acquisitions, the El Huemul Acquisition and the impact of
deferring 1999 annual salary adjustments to the third quarter of 1999. Despite
the 17 percent increase in costs, general and administrative expenses per
equivalent barrel produced increased only slightly to $1.36 from $1.35 in the
year-earlier period primarily as a result of the 16 percent increase in
equivalent barrel production.
Depreciation, depletion and amortization decreased $10.8 million (13
percent), to $72.4 million for the first nine months of 2000 from $83.2 million
for the first nine months of 1999, despite the 16 percent increase in
production, due primarily to the 25 percent decrease in the average amortization
rate per equivalent barrel produced from $4.41 in the first nine months 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.
Interest expense decreased $7.4 million (17 percent), to $36.9 million for
the third quarter of 2000 from $44.3 million for the first nine months of 1999,
due primarily to a 24 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 8.81% in the
first nine months of 2000 as compared to 8.04% 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.
-18-
Capital Expenditures
During the first nine months of 2000, the Company's domestic oil and gas
capital expenditures totaled $40.4 million. Exploitation activities accounted
for $23.0 million of these expenditures with exploration activities contributing
$13.3 million and acquisition costs and other activities accounting for $4.1
million. During the first nine months of 2000, the Company's international oil
and gas capital expenditures totaled $115.1 million, including $24.5 million and
$15.4 million of exploration expenditures in Bolivia and Yemen, respectively.
International acquisition costs related to the September 2000 acquisition of two
concessions located in the Cuyo Basin in Argentina accounted for $40.1 million.
International exploitation activities accounted for $30.9 million, primarily on
development drilling in Argentina. Other international activities accounted for
an additional $4.2 million in capital expenditures.
On September 5, 2000, the Company purchased an interest in two concessions
in the Cuyo Basin covering approximately 104,000 acres in the Mendoza Province
of Argentina. The Company purchased 100 percent of the interest formerly held by
Perez Companc for $40.1 million, subject to customary post-closing adjustments.
The properties acquired have current net daily production of 2,000 barrels of 32
degree gravity, light, sweet crude oil and are similar in production and
operating characteristics to the Company's existing operations in the San Jorge
Basin of Argentina. Exploitation activities aimed at increasing production are
targeted to begin in the second quarter of 2001.
As of September 30, 2000, the Company had total unevaluated oil and gas
property costs of approximately $44.9 million consisting of undeveloped
leasehold costs of $19.0 million and exploratory drilling in progress of $25.9
million, including $19.3 million for costs associated with the Company's Yemen
drilling program. Future exploration expense and earnings may be impacted to
the extent any of the exploratory drilling is determined to be unsuccessful. As
the result of the determinations early in the fourth quarter of the unsuccessful
exploratory drilling of the Rio Cotapino well in Ecuador and the lower
exploratory targets of the NJL X-111 and the NJL X-118 in Bolivia, the Company
anticipates recognizing additional exploration expense for fourth quarter
activities on these wells of approximately $4.0 million ($3.0 million related to
Bolivia and $1.0 million related to Ecuador).
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). The Company has
completed the entire work unit commitment and is currently pursuing the release
of the letter of credit held by the Bolivian government.
The Company 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. The Company has completed the work units
necessary to fulfill its initial commitment through 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, the Company drilled a fourth well in the third quarter of 2000. Should
the Company exercise its option to extend the work program, this fourth well
will be applied towards the additional work unit commitment. All four wells are
currently in various stages of completion and evaluation.
-19-
Under the Company's exploration contract on Block 19 in Ecuador, it was
required to drill one additional exploratory well in 2000. The Company drilled
the Rio Cotapino well during the third quarter. This well was determined to be
unsuccessful early in the fourth quarter and the Company is in the process of
releasing this block back to the government of Ecuador.
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 $167 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's
preliminary capital expenditure budget (excluding acquisitions) for 2001 has
been recently revised to $245 million. 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.
-20-
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 nine 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 September 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 7.7 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.
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 $472 million
at October 31, 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 nine months 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
$51.7 million and $2.8 million for the first nine 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.
-21-
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 net operating loss ("NOL") of $60
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 U.S. NOL carryforward in 2000.
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 2.760 MMBbls of oil at a weighted average price of $26.33 per Bbl
(NYMEX reference price) for the last quarter of 2000 and for 1.825 MMBbls at an
average NYMEX reference price of $30.13 per Bbl for calendar year 2001. The fair
value of commodity swap agreements is the amount at which they could be settled,
based on quoted market prices. At September 30, 2000, the Company would have
been required to pay approximately $8.4 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 September 30, 2000, the amount of
the Company's fixed rate debt was approximately 85 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 9/30/00
---- ------ ------- ------- -------- -------- ----------
LONG-TERM DEBT:
Fixed rate (in thousands) - - - - $399,201 $399,201 $399,705
Average interest rate - - - - 9.2% 9.2% -
Variable rate (in thousands) - $9,150 $36,600 $27,450 - $ 73,200 $ 73,200
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 September 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 nine months of 2000, the Company's operations in Argentina accounted for
approximately 32 percent of the Company's revenues, 45 percent of its operating
profit and 36 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 11 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 September 1991
to 4.2 percent as of September 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 September 30, 2000, was
US$1:Bs 6.29. 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 September 30, 1999, YER 159.50 at December 31, 1999, and YER 163.8 on
September 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
-----------------
For information regarding legal proceedings, see the Company's Form
10-K for the year ended December 31, 1999 and its Form 10-Q for the
quarter ended June 30, 2000.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
not applicable
Item 3. Defaults Upon Senior Securities
-------------------------------
not applicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
not applicable
Item 5. Other Information
-----------------
A copy of the Company's press release dated November 1, 2000,
announcing third quarter 2000 earnings results is attached as an
exhibit hereto and is 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.
27. Financial data schedule.
99. Press release dated November 1, 2000, issued by the Company
announcing third quarter 2000 earnings results.
b) Reports on Form 8-K
Form 8-K dated September 5, 2000, was filed September 5, 2000, to
report under Item 5 the Company's press release dated September
5, 2000, and to update the Company's 2000 hedging activities.
-27-
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: November 2, 2000 \s\ Michael F. Meimerstorf
-----------------------------------------------
Michael F. Meimerstorf
Vice President and Controller
(Principal Accounting Officer)
-28-
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
- ------- -----------------------------------------------------------------
27. Financial Data Schedule.
99. Press release dated November 1, 2000, issued by the Company
announcing third quarter 2000 earnings results.
-29-