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, 1998
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.
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(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.)
4200 One Williams Center Tulsa, Oklahoma 74172
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(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 July 31, 1998
----- ----------------------------
Common Stock, $.005 Par Value 51,661,066
-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,
1998 1997
---------- ------------
(Restated)
CURRENT ASSETS:
Cash and cash equivalents $ 3,022 $ 5,797
Accounts receivable -
Oil and gas sales 52,008 60,878
Joint operations 8,507 6,358
Deferred income taxes - 4,206
Prepaids and other current assets 12,401 12,443
------------ ----------
Total current assets 75,938 89,682
------------ ----------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Oil and gas properties, successful efforts method 1,256,919 1,158,749
Oil and gas gathering systems 13,802 12,943
Other 10,521 8,420
------------ ----------
1,281,242 1,180,112
Less accumulated depreciation, depletion and amortization 426,474 373,225
------------ ----------
854,768 806,887
------------ ----------
OTHER ASSETS, net 25,423 18,825
------------ ----------
TOTAL ASSETS $ 956,129 $ 915,394
============ ==========
See notes to unaudited consolidated financial statements.
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VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
----------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30, December 31,
1998 1997
--------- ------------
(Restated)
CURRENT LIABILITIES:
Revenue payable $ 22,094 $ 27,085
Accounts payable - trade 30,037 21,088
Other payables and accrued liabilities 19,872 31,504
---------- ----------
Total current liabilities 72,003 79,677
---------- ----------
LONG-TERM DEBT 525,351 451,096
---------- ----------
DEFERRED INCOME TAXES 31,914 43,135
---------- ----------
OTHER LONG-TERM LIABILITIES 1,455 3,908
---------- ----------
STOCKHOLDERS' EQUITY per accompanying statement:
Preferred stock, $.01 par, 5,000,000 shares authorized,
zero shares issued and outstanding - -
Common stock, $.005 par, 80,000,000 shares
authorized, 51,660,086 and 51,558,886 shares
issued and outstanding 258 258
Capital in excess of par value 202,994 202,008
Retained earnings 122,154 135,312
---------- ----------
325,406 337,578
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 956,129 $ 915,394
========== ==========
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,
----------------------- -----------------------
1998 1997 1998 1997
----------- ---------- ----------- ----------
(Restated) (Restated)
REVENUES:
Oil and gas sales $ 69,163 $ 85,366 $ 141,983 $ 169,363
Oil and gas gathering 2,656 4,367 5,335 9,214
Gas marketing 12,816 10,567 27,071 20,838
Other income (expense) 297 (457) 537 (338)
----------- ---------- ----------- ----------
84,932 99,843 174,926 199,077
----------- ---------- ----------- ----------
COSTS AND EXPENSES:
Lease operating, including production taxes 30,026 28,876 62,205 53,390
Exploration costs 10,371 3,495 12,369 5,913
Oil and gas gathering 2,265 3,441 4,518 7,765
Gas marketing 12,040 9,979 25,640 19,831
General and administrative 9,014 6,859 16,098 13,189
Depreciation, depletion and amortization 26,619 25,014 53,486 45,763
Interest 9,978 9,774 19,270 17,952
----------- ---------- ----------- ----------
100,313 87,438 193,586 163,803
----------- ---------- ----------- ----------
Income (loss) before income
taxes and minority interest (15,381) 12,405 (18,660) 35,274
PROVISION (BENEFIT) FOR INCOME TAXES:
Current (19) 569 (461) 1,984
Deferred (5,854) 850 (7,109) 4,324
MINORITY INTEREST IN
INCOME OF SUBSIDIARY - (86) - (203)
----------- ---------- ----------- ----------
NET INCOME (LOSS) $ (9,508) $ 10,900 $ (11,090) $ 28,763
=========== ========== =========== ==========
EARNINGS (LOSS) PER SHARE:
Basic $ (.18) $ .21 $ (.21) $ .57
=========== ========== =========== ==========
Diluted $ (.18) $ .21 $ (.21) $ .55
=========== ========== =========== ==========
Weighted average common shares outstanding:
Basic 51,649 51,477 51,629 50,795
=========== ========== =========== ==========
Diluted 51,649 52,625 51,629 51,980
=========== ========== =========== ==========
See notes to unaudited consolidated financial statements.
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VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
---------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1998
--------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Capital
In Excess
Common Stock of Par Retained
--------------------
Shares Amount Value Earnings Total
-------- -------- --------- --------- ---------
Balance at December 31, 1997 (Restated) 51,559 $ 258 $ 202,008 $ 135,312 $ 337,578
Net loss - - - (11,090) (11,090)
Exercise of stock options and
resulting tax effects 101 - 986 - 986
Cash dividends declared
($.04 per share) - - - (2,068) (2,068)
-------- -------- --------- --------- ---------
Balance at June 30, 1998 51,660 $ 258 $ 202,994 $ 122,154 $ 325,406
======== ======== ========= ========= =========
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,
--------------------------
1998 1997
------------ ------------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (11,090) $ 28,763
Adjustments to reconcile net income (loss) to
cash provided by operating activities -
Depreciation, depletion and amortization 53,486 45,763
Exploration costs 12,369 5,913
Provision (benefit) for deferred income taxes (7,109) 4,324
Minority interest in income of subsidiary - 203
----------- ---------
47,656 84,966
Decrease in receivables 7,309 16,797
Increase (decrease) in payables and accrued liabilities (4,864) 332
Other 136 (5,211)
----------- ---------
Cash provided by operating activities 50,237 96,884
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment -
Oil and gas properties (110,539) (170,279)
Other property and equipment (3,233) (1,190)
Purchase of subsidiary - (39,116)
Other (8,926) (1,687)
----------- ---------
Cash used by investing activities (122,698) (212,272)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock 364 47,718
Sale of 8 5/8% Senior Subordinated Notes - 96,270
Advances on revolving credit facility and other borrowings 83,141 143,427
Payments on revolving credit facility and other borrowings (10,722) (169,453)
Dividends paid (3,097) (1,493)
Other - (847)
----------- ---------
Cash provided by financing activities 69,686 115,622
----------- ---------
Net increase (decrease) in cash and cash equivalents (2,775) 234
Cash and cash equivalents, beginning of period 5,797 2,774
----------- ---------
Cash and cash equivalents, end of period $ 3,022 $ 3,008
=========== =========
See notes to unaudited consolidated financial statements.
-7-
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
----------------------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
JUNE 30, 1998 AND 1997
1. GENERAL
Effective January 1, 1998, the Company elected to change its accounting
method for oil and gas properties from the full cost method to the
successful efforts method. Management believes that the successful efforts
method is preferable and that the accounting change will more accurately
present the results of the Company's exploration and development
activities, minimize asset write-offs caused by temporary declines in oil
and gas prices and reflect an impairment in the carrying value of the
Company's oil and gas properties only when there has been a permanent
decline in their fair value. As required by generally accepted accounting
principles, all financial statements presented herein have been
retroactively restated to give effect to this change in accounting method.
The accompanying financial statements are unaudited. The consolidated
financial statements include the accounts of the Company and its wholly-and
majority-owned subsidiaries. Management believes that all material
adjustments (consisting of only normal recurring adjustments) necessary for
a fair presentation have been made. These financial statements and notes
should be read in conjunction with the 1997 audited financial statements
and related notes, as restated.
On September 12, 1997, the Company's Board of Directors approved a two-for-
one stock split of its common stock effective October 7, 1997, to
stockholders of record on September 26, 1997. All references to the number
of shares and per share amounts in the financial statements and notes
thereto have been restated to reflect the stock split.
-8-
2. SIGNIFICANT ACCOUNTING POLICIES
Change in Accounting Method
As a result of the accounting change to the successful efforts method, prior
year and interim financial statements have been restated. The effect of the
restatements on the balance sheets as of March 31, 1998, December 31, 1997,
and June 30, 1997, is as follows:
March 31, 1998 December 31, 1997 June 30, 1997
----------------------- ------------------------ -----------------------
As Reported Restated As Reported Restated As Reported Restated
------------- -------- ------------ --------- ----------- --------
Assets:
Current Assets $ 71,202 $ 71,202 $ 89,682 $ 89,682 $ 73,648 $ 73,648
Property, Plant and
Equipment, net 893,332 827,567 881,548 806,887 841,459 783,962
Other Assets 25,059 25,059 18,825 18,825 20,744 20,744
------------- -------- ---------- --------- ---------- --------
Total Assets $ 989,593 $923,828 $ 990,055 $ 915,394 $ 935,851 $878,354
============= ======== ========== ========= ========== ========
Liabilities and Stockholders'
Equity:
Current Liabilities $ 78,324 $ 78,324 $ 79,677 $ 79,677 $ 75,360 $ 75,360
Long-Term Debt 467,924 467,924 451,096 451,096 445,983 445,983
Deferred Income Taxes 63,041 37,836 71,797 43,135 61,165 39,097
Other Long-Term
Liabilities 3,617 3,572 3,955 3,908 2,794 2,794
Minority Interest - - - - 2,031 1,986
Stockholders' Equity 376,687 336,172 383,530 337,578 348,518 313,134
------------- -------- ---------- --------- ---------- --------
Total Liabilities and
Stockholders' Equity $ 989,593 $923,828 $ 990,055 $ 915,394 $ 935,851 $878,354
============= ======== ========== ========= ========== ========
The effect of the accounting change on the income statements is as follows:
Three Months Ended Three Months Ended Six Months Ended
March 31, 1998 June 30,1997 June 30, 1997
------------------------ ------------------------- ---------------------
As Reported Restated As Reported Restated As Reported Restated
------------------------ ------------------------- ---------------------
Revenues $ 90,103 $ 89,994 $ 99,843 $ 99,843 $ 199,077 $ 199,077
Costs and Expenses 101,629 93,273 82,181 87,438 153,440 163,803
------------------------ ------------------------- ---------------------
Pretax Income (Loss) (11,526) (3,279) 17,662 12,405 45,637 35,274
Income Taxes (4,934) (1,697) 3,343 1,419 10,212 6,308
Minority Interest - - (86) (86) (203) (203)
------------------------ ------------------------- ---------------------
Net Income (Loss) $ (6,592) $ (1,582) $ 14,233 $ 10,900 $ 35,222 $ 28,763
======================== ========================= =====================
Earnings (Loss) Per Share:
Basic $ (.13) $ (.03) $ .28 $ .21 $ .69 $ .57
Diluted $ (.13) $ (.03) $ .27 $ .21 $ .68 $ .55
-9-
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.
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 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.
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 the carrying
value over fair value. Fair value is defined as the present value of the
estimated future net revenues from the production of oil and gas over the
economic life of the reserves. No impairment provision was required during the
six month periods ended June 30, 1997 and 1998.
Prior to the adoption of Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets, and for Long-Lived Assets to
be Disposed of ("SFAS No. 121"), on January 1, 1996, the Company determined the
impairment of oil and gas properties on a world-wide basis. The Company would
record an impairment provision based on the excess of capitalized costs over the
undiscounted net revenues from proved reserves using period-end prices. The
impact of implementing SFAS No. 121 was not significant.
Statements of Cash Flows
Cash payments for interest totaled $18,164,262 and $14,192,276 and cash payments
for U.S. Federal and state income taxes were $1,473,252 and $2,935,100 during
the six months ended June 30, 1998 and 1997, respectively. During the six months
ended June 30, 1998, the Company made cash payments of $1,256,041 for foreign
income taxes. During the six months ended June 30, 1997, the Company made no
cash payments for foreign income taxes.
-10-
Income Taxes
Deferred income taxes are provided on transactions which are recognized in
different periods for financial and tax reporting purposes. Such temporary
differences arise primarily from the deduction of certain oil and gas
exploration and development costs which are capitalized for financial reporting
purposes and differences in the methods of depreciation. The Company follows the
provisions of Statement of Financial Accounting Standards No. 109 when
calculating the deferred income tax provision for financial purposes.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings Per Share ("SFAS No. 128"), establishing new standards for
computing and presenting earnings per share. The provisions of SFAS No. 128 are
effective for earnings per share calculations for periods ending after December
15, 1997. The Company has adopted SFAS No. 128 effective December 31, 1997, and
all earnings per share amounts disclosed herein have been calculated under the
provisions of SFAS No. 128. The adoption of SFAS No. 128 did not have a material
effect on previously reported earnings per share or on 1997 earnings per share.
Basic earnings per common share were computed by dividing net income by the
weighted average number of shares outstanding during the period. Diluted
earnings per common share were computed assuming the exercise of all dilutive
options, as determined by applying the treasury stock method.
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. The Company had no non-owner changes
in equity during the three months and six months ended June 30, 1998 and 1997.
Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 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.
-11-
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999,
however, companies may implement the statement as of the beginning of any fiscal
quarter beginning June 16, 1998. SFAS No. 133 cannot be applied retroactively
and must be applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1997 (and, at the company's election,
before January 1, 1998).
The Company has not yet quantified the impact of adopting SFAS No. 133 on its
financial statements and has not determined the timing of or method of the
adoption of SFAS No. 133. However, as of June 30, 1998, the Company had no
outstanding derivative instruments.
-12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
---------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
CHANGE IN ACCOUNTING METHOD
Effective January 1, 1998, the Company elected to convert from the full cost
method to the successful efforts method of accounting for its investments in oil
and gas properties. The Company believes that the successful efforts method of
accounting is preferable, as it will more accurately present the results of the
Company's exploration and development activities, minimize asset write-offs
caused by temporary downward oil and gas price movements and reflect an
impairment in the carrying value of its oil and gas properties only when there
has been a permanent decline in their fair value. Accordingly, the December 31,
1997, consolidated balance sheet, the consolidated statements of income for the
three months and six months ended June 30, 1997, and the consolidated statement
of cash flows for the six months ended June 30, 1997, have been restated to
conform with successful efforts accounting. The effect, net of income taxes, was
to reduce December 31, 1997, retained earnings by $46.0 million. For the
statements of income for the three months and six months ended June 30, 1997,
the effect of the accounting change was to decrease net income by $3.3 million
($.06 per diluted share) and $6.5 million ($.13 per diluted share),
respectively.
-13-
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 prices for the periods presented:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
Production:
Oil (MBbls) -
U.S. (1)..... 2,535 2,515 5,009 4,530
Argentina.... 1,546 1,407 3,084 2,727
Bolivia...... 35 34 70 59
Total........ 4,116 3,956 8,163 7,316
Gas (MMcf) -
U.S. (1)..... 10,964 8,604 21,144 16,182
Bolivia...... 1,276 1,627 2,664 2,843
Total........ 12,240 10,231 23,808 19,025
Total MBOE (1)... 6,156 5,661 12,131 10,487
Average prices:
Oil (per Bbl) -
U.S.......... $ 10.96 $ 17.03 $ 11.91 $ 18.25
Argentina.... 10.95 17.23 11.56 17.54
Bolivia...... 15.23 17.52 12.02 17.78
Total........ 10.99 17.10 11.78 17.98
Gas (per Mcf) -
U.S.......... $ 2.08 $ 1.84 $ 2.06 $ 2.13
Bolivia...... .87 1.15 .86 1.18
Total........ 1.96 1.73 1.92 1.99
________
(1) First half 1998 production was reduced by approximately 159 MBbls of oil and
486 MMcf of gas, or 240 MBOE, due to severe weather conditions in
California. Second quarter 1998 production was reduced by approximately 46
MBbls of oil and 236 MMcf of gas, or 85 MBOE, due to severe weather
conditions in California.
-14-
Average U.S. oil prices received by the Company fluctuate generally with
changes in the West Texas Intermediate ("WTI") posted prices for oil. The
Company's Argentina oil production is sold at WTI spot prices less a specified
differential. The Company experienced a 34 percent decrease in its average oil
price in the first six months of 1998 compared to the first six months of 1997.
During the first half of 1997, the impact of Argentina oil hedges reduced the
Company's overall average oil price 28 cents to $17.98 per Bbl and its average
Argentina oil price was reduced 75 cents to $17.54 per Bbl. The Company was not
a party to any oil hedges in the first six months of 1998. Before the impact of
oil hedges, the Company realized an average oil price for the first six months
of 1998 which was approximately 92 percent of WTI posted prices compared to a
realization of 93 percent of WTI posted prices for the year earlier six months.
However, due to an increase in the differential between WTI posted prices and
the NYMEX reference price ("NYMEX"), the Company's average realized prices
(before hedges) declined to 78 percent of NYMEX in the first half of 1998
compared to 85 percent of NYMEX in the first half of 1997.
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 changes in specified fuel oil indexes. During
1998, these fuel oil indexes have decreased in conjunction with the current low
oil price environment. The Company's average gas price for the first six months
of 1998 was four percent lower than 1997's first six months.
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, there are no oil or
gas hedges in place.
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 1998 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 of
approximately $2.5 million and $4.0 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 $0.7 million and $1.2 million, respectively, based on second
quarter 1998 gas production.
PERIOD TO PERIOD COMPARISON
THREE MONTHS ENDED JUNE 30, 1998, COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
The Company reported a net loss of $9.5 million for the quarter ended June
30, 1998, compared to net income of $10.9 million for the same period in 1997.
An increase in the Company's oil and gas production of nine percent on an
equivalent barrel basis and a 13 percent increase in average gas prices were
more than offset by a 36 percent decrease in average oil prices. The production
increases primarily relate to the exploitation activities in Argentina and the
exploration activities in the Galveston Bay area. The production increases were
reduced by the impact of the severe weather in California during the first half
of 1998. The resulting mudslides and flooding forced the Company to temporarily
shut-in some of its oil and gas properties for portions of the first and second
quarters lowering
-15-
production for the second quarter by approximately 46,000 barrels of oil and
236,000 Mcf of gas.
Oil and gas sales decreased $16.2 million (19 percent), to $69.2 million for
the second quarter of 1998 from $85.4 for the second quarter of 1997. A 36
percent decrease in average oil prices, partially offset by a four percent
increase in oil production, accounted for a decrease of $22.5 million. A 20
percent increase in gas production, coupled with a 13 percent increase in
average gas prices, reduced by $6.3 million the negative impact of the decline
in average oil prices.
Lease operating expenses, including production taxes, increased $1.1 million
(4 percent), to $30.0 million for the second quarter of 1998 from $28.9 million
for the second quarter of 1997. The increase in lease operating expenses is due
primarily to the nine percent increase in production on an equivalent barrel
basis and estimated costs of $500,000 for the second quarter of 1998 related to
storm damage repair and cleanup as a result of the severe weather in California.
The impact of the increased production was partially offset as lease operating
expenses per equivalent barrel produced decreased to $4.88 ($4.80 before the
effects of the severe weather in California) in the second quarter of 1998 from
$5.10 for the same period in 1997.
Exploration costs increased $6.9 million (197 percent), to $10.4 million for
the second quarter of 1998 from $3.5 million for the second quarter of 1997.
During the second quarter of 1998, the Company's exploration costs included $8.5
million for the acquisition of 3-D seismic data primarily in the U.S. Gulf Coast
area and Bolivia, $0.8 million for lease expirations, $0.6 million in other
geological and geophysical costs and $0.4 million for unsuccessful exploratory
drilling. The Company's second quarter 1997 exploration costs consisted
primarily of $1.8 million in seismic acquisition costs in the U.S., $1.5 million
related to the abandonment of a non-commercial discovery well in Ecuador and
$0.2 million in other unsuccessful exploratory drilling costs.
General and administrative expenses increased $2.1 million (30 percent), to
$9.0 million for the second quarter of 1998 from $6.9 million for the second
quarter of 1997. General and administrative expenses increased primarily due to
the addition of personnel as a result of the April 1997 acquisition of certain
producing oil and gas properties from Burlington Resources Inc. (the "Burlington
Properties") and the Company's increased emphasis on exploration activities, and
additional costs associated with unsuccessful acquisition activities.
Depreciation, depletion and amortization increased $1.6 million (6 percent),
to $26.6 million for the second quarter of 1998 from $25.0 million for the
second quarter of 1997, due primarily to the nine percent increase in production
on an equivalent barrel basis. The Company's average DD&A rate per equivalent
barrel produced for the second quarter of 1998 was $4.19 compared to $4.30 in
the year earlier period.
Interest expense increased $200,000 (2 percent), to $10.0 million for the
second quarter of 1998 from $9.8 million for the second quarter of 1997, due
primarily to a 10 percent increase in the Company's total average outstanding
debt. The increase in interest expense was partially offset by a decrease in
the Company's overall average interest rate from 8.09% in the second quarter of
1997 to 7.84% in the second quarter of 1998.
-16-
SIX MONTHS ENDED JUNE 30, 1998, COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
The Company reported a net loss of $11.1 million for the six months ended
June 30, 1998, compared to net income of $28.8 million for the same period in
1997. An increase in the Company's oil and gas production of 16 percent on an
equivalent barrel basis was more than offset by a 34 percent decrease in average
oil prices and a four percent decrease in average gas prices. The production
increases primarily relate to the acquisition of the Burlington Properties in
April 1997, the exploitation activities in Argentina and the exploration
activities in the Galveston Bay area. The production increases were reduced by
the impact of the severe weather in California during the first quarter of 1998.
The resulting mudslides and flooding forced the Company to temporarily shut-in
some of its oil and gas properties for portions of the first and second quarters
lowering production for the first half of 1998 by approximately 159,000 barrels
of oil and 486,000 Mcf of gas.
Oil and gas sales decreased $27.4 million (16 percent), to $142.0 million for
the first six months of 1998 from $169.4 for the first six months of 1997. A 34
percent decrease in average oil prices, partially offset by a 12 percent
increase in oil production, accounted for a decrease of $35.3 million. A 25
percent increase in gas production, partially offset by a four percent decrease
in average gas prices, reduced by $7.9 million the negative impact of the
decline in average oil prices.
Lease operating expenses, including production taxes, increased $8.8 million
(16 percent), to $62.2 million for the first six months of 1998 from $53.4
million for the first six months of 1997. The increase in lease operating
expenses is in line with the 16 percent increase in production and is due
primarily to operating costs associated with the Burlington Properties and
estimated costs of $1.5 million for the first six months of 1998 related to
storm damage repair and cleanup as a result of the severe weather in California.
Lease operating expenses per equivalent barrel produced increased to $5.13
($5.00 before the effects of the severe weather in California) in the first six
months of 1998 from $5.10 for the same period in 1997.
Exploration costs increased $7.0 million (130 percent), to $12.4 million for
the first six months of 1998 from $5.4 million for the comparable period in
1997. During the first six months of 1998, the Company's exploration costs
included $10.5 million for the acquisition of 3-D seismic data primarily in the
U.S. Gulf Coast area and Bolivia, $0.8 million for lease expirations, $0.6
million in other geological and geophysical costs and $0.5 million for
unsuccessful exploratory drilling. The Company's first six months 1997
exploration costs consisted primarily of $3.8 million in seismic acquisition
costs, $1.5 million related to the abandonment of a non-commercial discovery in
Ecuador and $0.6 million in other unsuccessful exploratory drilling costs.
General and administrative expenses increased $2.9 million (22 percent), to
$16.1 million for the first six months of 1998 from $13.2 million for the first
six months of 1997, due primarily to the addition of personnel as a result of
the acquisition of the Burlington Properties and the Company's increased
emphasis on exploration activities, and additional costs associated with
unsuccessful acquisition activities.
Depreciation, depletion and amortization increased $7.2 million (16 percent),
to $53.5 million for the first six months of 1998 from $46.3 million for the
first six months of 1997, due primarily to the 16 percent increase in production
on an equivalent barrel basis. The Company's average DD&A rate per
-17-
equivalent barrel produced for the first six months of 1998 was $4.26 compared
to $4.24 for the year earlier period.
Interest expense increased $1.3 million (7 percent), to $19.3 million for the
first six months of 1998 from $18.0 million for the first six months of 1997,
due primarily to a 15 percent increase in the Company's total average
outstanding debt as a result of the acquisition of the Burlington Properties in
April 1997 and increased capital spending in the Company's exploitation and
exploration programs. The increase in interest expense was partially offset by a
decrease in the Company's overall average interest rate from 8.07% in the first
six months of 1997 to 7.84% in the first six months of 1998.
CAPITAL EXPENDITURES
During the first six months of 1998, the Company's domestic oil and gas
capital expenditures totaled $67.4 million. Exploratory activities accounted
for $36.5 million of the domestic capital expenditures with exploitation
activities contributing another $30.9 million. During the first six months of
1998, the Company's international oil and gas capital expenditures totaled $44.1
million, including $27.8 million in Argentina, primarily on exploitation
activities, and $13.2 million in Bolivia, primarily on exploration activities.
The Company is 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 work unit commitment is guaranteed by the Company
through an $88.6 million letter of credit; however, the Company anticipates that
it will fulfill this three-year work unit commitment through approximately $50
to $60 million of various seismic and drilling capital expenditures. In
addition, the Company's commitment to perform 1,400 work units related to an
exploration program within the Chaco Block in Bolivia was fulfilled during 1998
through acquisitions of 3-D seismic and the drilling of two wells. Under the
Company's exploration contract on Block 19 in Ecuador, the Company is required
to participate in the drilling of one additional well. The Company expects to
drill the well during 1999 at a cost of approximately $4.0 million.
The Company is also committed to spend approximately $11.0 million in the
Republic of Yemen over the next two and one-half years. The expenditures will
include the acquisition and interpretation of over 150 square kilometers of
seismic and the drilling of three exploration wells. 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 and capital
commitments required.
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 to fund capital
expenditures other than significant acquisitions and anticipates that its cash
flow, net of debt service obligations, coupled with advances under its revolving
credit facility, will be sufficient to fund its planned $185 million of non-
acquisition capital expenditures during 1998. The Company's planned 1998 non-
acquisition capital expenditure budget is currently allocated 60 percent to
exploitation activities, including development and infill drilling, and
approximately 40 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
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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").
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.
In the past, the Company has accessed the public markets to finance
significant acquisitions and provide liquidity for its future activities. In
conjunction with the purchase of substantial oil and gas assets in 1990, 1992
and 1995, the Company completed three public equity offerings, as well as a
public debt offering in 1995, which provided the Company with aggregate net
proceeds of approximately $272 million.
On February 5, 1997, the Company completed a public offering of 3,000,000
shares (after giving effect to the Company's two-for-one common stock split
effected on October 7, 1997) of common stock, all of which were sold by the
Company. Net proceeds to the Company of approximately $47 million were used to
repay a portion of existing indebtedness under the revolving credit facility.
Also on February 5, 1997, the Company issued $100 million of its 8 5/8%
Senior Subordinated Notes Due 2009. Net proceeds to the Company of approximately
$96 million were used to repay a portion of existing indebtedness under the
revolving credit facility.
The Company's unsecured revolving credit facility under the Amended and
Restated Credit Agreement dated December 8, 1997 (the "Credit Agreement"),
establishes a borrowing base (currently $500 million) determined by the banks'
evaluation of the Company's oil and gas reserves.
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 July 31, 1998, 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 6.8
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 December 1, 2000, will be payable in 12 equal consecutive
quarterly installments commencing March 1, 2001, with maturity at December 1,
2003.
The unused portion of the Credit Agreement was approximately $93 million at
July 31, 1998. The unused portion of the Credit Agreement and the Company's
internally generated cash flow provide
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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.
INFLATION
In recent years inflation has not had a significant impact on the Company's
operations or financial condition.
INCOME TAXES
The Company incurred a current benefit for income taxes of approximately $7.1
million for the first six months of 1998 and a current provision of $4.3 million
for the first six months of 1997. 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
subsidiary, Vintage Petroleum Boliviana, Ltd., are subject to Bolivia income
taxes. Earnings of the Company's foreign subsidiary, Vintage Oil Argentina,
Inc., are subject to Argentina income taxes.
As of December 31, 1997, the Company had estimated net operating loss
carryforwards of $35.4 million for Argentina income tax reporting purposes which
can be used to offset future taxable income in Argentina. The carryforward
amount includes certain Argentina net operating loss carryforwards which were
acquired in a purchase business combination and are recorded at cost, which is
less than the calculated value under the provisions of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. These unrecorded net
operating loss carryforwards will reduce the Company's foreign income tax
provision for financial purposes in future years by approximately $4.5 million
when their benefit is realized. 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 $2.9 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.
FOREIGN OPERATIONS
A significant portion of the Company's foreign operations are located in
Argentina. 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 the 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 measured by the
Argentine Consumer Price Index declined from 200.7 percent as of June 1991 to
1.01 percent as of June 1998.
The Company believes that its Argentine operations present minimal currency
risk. 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
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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, 1998, was US$1:Bs
5.52. 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.
YEAR 2000
The Year 2000 issue represents a potentially serious information systems
problem because many software applications and operational systems written in
the past may not properly recognize calendar dates beginning in the Year 2000.
This problem could force computers to either shut down or provide incorrect data
or information. In consultation with its software and hardware providers, the
Company began the process of identifying the changes required to its major
financial/administrative systems and hardware in early 1997. Software upgrades
designed to correct the Year 2000 issue for its U.S. financial systems were
implemented in mid-1998 and testing is scheduled for completion by year end
1998. A replacement financial system has been selected for the Company's
international locations and implementation has commenced in Bolivia with
conversion of other international locations scheduled prior to April 1, 1999.
The Company is currently in the process of assessing the potential impact
that the Year 2000 issue will have on its field operating equipment and systems
and has not yet determined the impact that the Year 2000 issue will have on such
equipment and systems. In addition, the Company is also uncertain how it will
be indirectly affected by the impact that the Year 2000 issue will have on the
companies with which it conducts business. The Company does not believe that
costs to address the Year 2000 issue will have a material adverse impact on its
business, financial condition or results of operation.
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 future capital expenditures (including the amount and nature thereof),
the drilling of wells,
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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.
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PART II
OTHER INFORMATION
-23-
Item 1. Legal Proceedings
-----------------
For information regarding legal proceedings, see the Company's Form
10-K for the year ended December 31, 1997.
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
---------------------------------------------------
The Annual Meeting of Stockholders of the Company (the "Annual
Meeting") was held on May 12, 1998, in Tulsa, Oklahoma. At the Annual
Meeting, the stockholders of the Company elected Jo Bob Hille and Bryan
H. Lawrence as Class II directors of the Company for three year terms.
The stockholders also considered and approved (a) Amendment Number 4 to
the Company's 1990 Stock Plan and (b) the appointment of Arthur
Andersen LLP as the independent public accountants of the Company for
the fiscal year ending December 31, 1998.
There were present at the Annual Meeting, in person or by proxy,
stockholders holding 45,961,643 shares of the Common Stock of the
Company, or 89.01% 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:
Jo Bob Hille 45,255,931 705,712 -0- -0-
Bryan H. Lawrence 45,430,678 530,965 -0- -0-
2. Approval of Amendment
Number 4 to the Company's
1990 Stock Plan 30,072,649 11,560,825 69,129 4,259,040
3. Ratification of Arthur Andersen
LLP as independent public
accountants of the Company
for fiscal 1998 45,862,175 79,824 19,644 -0-
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Item 5. Other Information
-----------------
As set forth in the Company's Proxy Statement for its 1998 Annual
Meeting of Stockholders, stockholder proposals submitted pursuant to
Rule 14a-8 under the Securities Exchange Act of 1934 for inclusion in
the Company's proxy materials for its 1999 Annual Meeting of
Stockholders must be received by the Company no later than December 1,
1998. In accordance with the Company's By-laws, any stockholder who
intends to present a proposal at the Company's 1999 Annual Meeting of
Stockholders and has not sought inclusion of the proposal in the
Company's proxy materials pursuant to Rule 14a-8, must provide the
Company with notice of such proposal no later than March 27, 1999, in
order for such proposal to be properly brought before the meeting.
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.
10. Amendment No. 4 to Vintage Petroleum, Inc. 1990 Stock Plan
dated March 11, 1998 (Filed as Exhibit A to the Company's 1998
Proxy Statement).
27.1 Financial Data Schedule for the first six months of fiscal
1998.
27.2 Restated Financial Data Schedule for the first quarter of
fiscal 1998.
b) Reports on Form 8-K
None
*****************************************************************************
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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 13, 1998 \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
- ------ ---------------------------------
10. Amendment No. 4 to Vintage Petroleum, Inc. 1990 Stock Plan dated March
11, 1998 (Filed as Exhibit A to the Company's 1998 Proxy Statement).
27.1 Financial Data Schedule for the first six months of 1998.
27.2 Restated Financial Data Schedule for the first quarter of fiscal
1998.