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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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: March 31, 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: 1-10671
THE MERIDIAN RESOURCE CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 76-0319553
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1401 ENCLAVE PARKWAY, SUITE 300, HOUSTON, TEXAS 77077
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 281-597-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 and 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
--- ---
Number of shares of common stock outstanding at May 12, 2000 46,666,201
Page 1 of 18
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THE MERIDIAN RESOURCE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations (unaudited) for the
Three Months Ended March 31, 2000 and 1999 3
Consolidated Balance Sheets as of March 31, 2000 (unaudited)
and December 31, 1999 4
Consolidated Statements of Cash Flows (unaudited) for the
Three Months Ended March 31, 2000 and 1999 6
Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands of dollars, except per share information)
(unaudited)
THREE MONTHS ENDED
MARCH 31,
2000 1999
-------- --------
REVENUES:
Oil and natural gas $ 47,930 $ 23,104
Interest and other 131 202
-------- --------
48,061 23,306
-------- --------
OPERATING COSTS AND EXPENSES:
Oil and natural gas operating 4,425 4,170
Severance and ad valorem taxes 4,240 2,239
Depletion and depreciation 18,300 12,687
General and administrative 3,913 2,794
-------- --------
30,878 21,890
-------- --------
EARNINGS BEFORE INTEREST
AND INCOME TAXES 17,183 1,416
OTHER EXPENSES:
Interest expense 6,332 5,055
Taxes on income -- --
-------- --------
NET EARNINGS (LOSS) 10,851 (3,639)
DIVIDENDS ON PREFERRED STOCK 1,350 1,350
-------- --------
NET EARNINGS (LOSS) APPLICABLE
TO COMMON STOCKHOLDERS $ 9,501 $ (4,989)
======== ========
NET EARNINGS (LOSS) PER SHARE:
Basic $ 0.20 $ (0.11)
======== ========
Diluted $ 0.18 $ (0.11)
======== ========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES:
Basic 46,456 45,817
======== ========
Diluted 64,120 45,817
======== ========
See notes to consolidated financial statements.
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THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(thousands of dollars)
(unaudited)
MARCH 31, DECEMBER 31,
2000 1999
-------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,152 $ 6,617
Accounts receivable, less allowance for doubtful
accounts $891 [2000] and $1,003 [1999] 32,351 28,478
Due from affiliates 1,196 165
Prepaid expenses and other 1,255 1,234
-------- --------
Total current assets 38,954 36,494
-------- --------
PROPERTY AND EQUIPMENT:
Oil and natural gas properties, full cost method
(including $58,010,000 [2000] and
$62,686,000 [1999] not subject to depletion) 937,420 916,495
Land 478 478
Equipment 9,410 8,737
-------- --------
947,308 925,710
Accumulated depletion and depreciation 507,503 489,203
-------- --------
439,805 436,507
-------- --------
OTHER ASSETS 4,349 4,718
-------- --------
$483,108 $477,719
======== ========
See notes to consolidated financial statements.
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THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(thousands of dollars)
(unaudited)
MARCH 31, DECEMBER 31,
2000 1999
---------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 18,370 $ 21,359
Revenues and royalties payable 5,133 4,728
Accrued liabilities 15,064 17,772
---------- ----------
Total current liabilities 38,567 43,859
---------- ----------
LONG-TERM DEBT 250,000 250,000
---------- ----------
9 1/2% CONVERTIBLE SUBORDINATED NOTES 20,000 20,000
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value (25,000,000 shares
authorized, 3,982,906 [2000 and
1999] shares of Series A Cumulative
Convertible Preferred Stock issued at stated value) 135,000 135,000
Common stock, $0.01 par value (200,000,000 shares
authorized, 46,666,201 [2000] and 46,409,980 [1999]
issued) 476 472
Additional paid-in capital 275,467 274,298
Accumulated deficit (235,846) (245,347)
Unrealized loss on securities held for resale (185) (185)
Unamortized deferred compensation (371) (378)
---------- ----------
Total stockholders' equity 174,541 163,860
---------- ----------
$ 483,108 $ 477,719
========== ==========
See notes to consolidated financial statements.
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THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands of dollars)
(unaudited)
THREE MONTHS ENDED
MARCH 31,
2000 1999
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 10,851 $ (3,639)
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Depletion and depreciation 18,300 12,687
Amortization of other assets 322 487
Non-cash compensation 395 437
Changes in assets and liabilities:
Accounts receivable (3,873) 4,124
Due from affiliates (1,031) (437)
Prepaid expenses and other (21) (932)
Accounts payable (2,989) 12,010
Revenues and royalties payable 405 (3,533)
Accrued liabilities and other (1,923) (11,127)
-------- --------
Net cash provided by operating activities 20,436 10,077
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (22,212) (25,425)
Sale of property and equipment 614 3,244
-------- --------
Net cash used in investing activities (21,598) (22,181)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 2,000 15,000
Reductions in long-term debt (2,000) (5,042)
Proceeds from issuance of common stock -- 272
Preferred dividends (1,350) (1,350)
Additions to deferred loan costs 47 (917)
-------- --------
Net cash provided by financing activities (1,303) 7,963
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,465) (4,141)
Cash and cash equivalents at beginning of period 6,617 9,478
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,152 $ 5,337
======== ========
See notes to consolidated financial statements.
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THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements reflect the accounts of The Meridian
Resource Corporation and its subsidiaries (the "Company") after elimination of
all significant intercompany transactions and balances. The financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999, as filed with the Securities and Exchange Commission.
The financial statements included herein as of March 31, 2000, and for the three
month periods ended March 31, 2000 and 1999, are unaudited, and, in the opinion
of management, the information furnished reflects all material adjustments,
consisting of normal recurring adjustments, necessary for a fair statement of
the results for the interim periods presented. Certain minor reclassifications
of prior period statements have been made to conform to current reporting
practices.
2. DEBT
LONG-TERM DEBT
In May 1998, the Company amended and restated its credit facility with The Chase
Manhattan Bank as Administrative Agent (the "Credit Facility") to provide for
maximum borrowings, subject to borrowing base limitations, of up to $250
million. The borrowing base was reaffirmed on March 31, 2000, and was set at
$250 million, with the next scheduled redetermination on September 20, 2000.
3. COMMITMENTS AND CONTINGENCIES
LITIGATION
There are no material legal proceedings to which Meridian or any of its
subsidiaries or partnerships is a party or by which any of its property is
subject, other than ordinary and routine litigation incidental to the business
of producing and exploring for crude oil and natural gas.
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4. EARNINGS PER SHARE
(in thousands, except per share)
The following tables set forth the computation of basic and diluted net earnings
(loss) per share:
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
---------- ----------
Numerator:
Net earnings (loss) $ 10,851 $ (3,639)
Less: Preferred dividend requirement 1,350 1,350
---------- ----------
Net earnings (loss) used in per share calculation $ 9,501 $ (4,989)
Denominator:
Denominator for basic net earnings (loss) per
share - weighted-average shares outstanding 46,456 45,817
Effect of potentially dilutive common shares:
Convertible preferred stock 12,837 N/A
Convertible subordinated notes 2,857 --
Employee and director stock options 225 N/A
Warrants 1,745 N/A
---------- ----------
Denominator for diluted net earnings (loss) per
share - weighted average shares outstanding
and assumed conversions 64,120 45,817
========== ==========
Basic net earnings (loss) per share $ 0.20 $ (0.11)
========== ==========
Diluted net earnings (loss) per share $ 0.18 $ (0.11)
========== ==========
5. SALE OF PROPERTIES
In an effort to reduce bank debt and increase liquidity, the Company announced
on January 14, 2000, the initiation of a formal process to pursue the sale of
certain non-strategic oil and gas properties located in south Louisiana, the
Texas Gulf Coast and offshore in the Gulf of Mexico. The properties scheduled
for sale accounted for approximately 20% of the Company's net average daily
production, or approximately 30 Mmcfe per day. This process is on schedule with
two of the fifteen packages closed and additional closings subject only to the
negotiation of definitive purchase and sale agreements and due diligence. The
two sales to date, approved by the banks, have permitted Meridian to improve
company liquidity after reducing our Credit Facility and borrowing base to $239
million. There is no assurance that such additional closings will take place.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of Meridian's financial operations for the three
months ended March 31, 2000 and 1999. The notes to the Company's consolidated
financial statements included in this report, as well as our Annual Report on
Form 10-K for the year ended December 31, 1999 (and the notes attached thereto),
should be read in conjunction with this discussion.
GENERAL
BUSINESS ACTIVITIES. To date, Meridian's drilling activities have been focused
in the Weeks Island Field, North Turtle Bayou/Ramos Field and Thornwell Field,
each of which have contributed to the increase in our average daily production
rates of 157.1 Mmcfe per day for the first quarter of 2000 over 132.8 Mmcfe per
day for the fourth quarter of 1999 and 137.8 Mmcfe per day for the first quarter
of 1999. We anticipate drilling activities in these three areas will comprise
approximately 57% of our capital expenditure budget of $85 million. The
remaining 43% of the year 2000 capital budget will be divided between the
generation of new prospects and the drilling of approximately six additional
wells in various other fields.
During the first quarter of 2000, we have completed and placed on production the
Breaux No. 1 well in the North Turtle Bayou Field. This well is currently adding
approximately 13 Mmcf per day to our current average daily production rate. In
addition, we have drilled and completed four wells in the Weeks Island, South
Thornwell and West Lake Verret fields that have also contributed to the increase
in the daily average production rate for the first quarter of 2000. Currently,
we are drilling and/or completing four additional wells in the South Thornwell
and North Turtle Bayou fields. Meridian continues to focus its operating
activities in the South Louisiana/Southeast Texas Gulf Coast Region. We have
developed an asset base that enables us to explore and exploit our low risk
drilling projects with its cash flow. The efforts to reduce our lifting costs
have been highly successful and, along with the goal to reduce our debt, will
remain an integral part of management's business plan.
We are proceeding with the sale of non-strategic assets as evidenced by our
recently announced sale of properties. We are on schedule with the property
sales. With the potential proceeds from the sale of oil and gas producing
properties and excess cash flow from operations, we are committed to improving
our working capital and reducing our debt.
The Company is currently in discussion with Shell regarding the Stock Rights and
Restrictions Agreement to which Meridian and an affiliate of Shell are parties.
INDUSTRY CONDITIONS. Revenues, profitability and future growth rates of Meridian
are substantially dependent upon prevailing prices for oil and natural gas. Oil
and natural gas prices have been extremely volatile in recent years and are
affected by many factors outside of our control. In this regard, average
worldwide oil and natural gas prices have increased substantially from levels in
early 1999. Our average oil price for the three months ended March 31, 2000, was
$24.30 per barrel compared to $22.39 per barrel for the three months ended
December 31, 1999, and $11.44 per barrel for the three months ended March 31,
1999. Our average natural gas price for the three months ended March 31, 2000,
was $2.69 per MCF compared to $2.71 per MCF for the three months ended December
31, 1999, and $1.83 per MCF for the three months ended March 31, 1999.
Fluctuations in prevailing prices for oil and natural gas have several important
consequences to us, including affecting the level of cash flow received from our
producing properties, the timing of exploration of certain prospects and our
access to capital markets, which could impact our revenues, profitability and
ability to maintain or increase our exploration and development program.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
OPERATING REVENUES. First quarter 2000 oil and natural gas revenues increased
$24.8 million as compared to first quarter 1999 revenues, primarily due to
production volumes increasing 16% and average commodity prices increasing 79%,
both on a natural gas equivalent basis. The production increase is a direct
result of new wells being placed on production during the last twelve months.
The following table summarizes the Company's operating revenues, production
volumes and average sales prices for the three months ended March 31, 2000 and
1999:
THREE MONTHS ENDED
MARCH 31, 2000 PERCENTAGE
--------------------- INCREASE INCREASE
2000 1999 (DECREASE) (DECREASE)
-------- -------- ---------- ----------
Production Volumes:
Oil (Mbbl) 1,140 1,044 96 9%
Natural gas (Mmcf) 7,505 6,109 1,396 23%
MMCFE 14,347 12,373 1,974 16%
Average Sales Prices:
Oil (per Bbl) $ 24.30 $ 11.44 $ 12.86 112%
Natural gas (per Mcf) $ 2.69 $ 1.83 $ 0.86 47%
MMCFE $ 3.34 $ 1.87 $ 1.47 79%
Operating Revenues (000's):
Oil $ 27,711 $ 11,943 $ 15,768 132%
Natural gas 20,219 11,161 9,058 81%
-------- -------- -------- --------
Total Operating Revenues $ 47,930 $ 23,104 $ 24,826 107%
======== ======== ======== ========
OPERATING EXPENSES. Oil and natural gas operating expenses increased $0.2
million to $4.4 million for the three months ended March 31,2000, compared to
$4.2 million for the same period in 1999. This increase was primarily due to the
additional operating expenses related to increased production and the inclusion
of new wells brought on production in the last twelve months. On an MCFE basis,
operating expenses have decreased in the three months ended March 31, 2000, to
$0.31 from $0.34 for the three months ended March 31, 1999. This reduction is
primarily due to our efforts to reduce operating costs on our properties.
SEVERANCE AND AD VALOREM TAXES. Severance and ad valorem taxes increased $2.0
million to $4.2 million for the first quarter of 2000, compared to $2.2 million
during the same period in 1999. Meridian's oil and natural gas production is
primarily from southern Louisiana, and, therefore, is subject to Louisiana
severance tax. The severance tax rates for Louisiana are 12.5% of gross oil
revenues and $0.078 per Mcf for natural gas. Our first quarter increase of $2.0
million was primarily due to the increase in oil and natural gas production over
the same period in 1999 and the 112% increase in the average sales price of oil
over 1999.
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DEPLETION AND DEPRECIATION. Depletion and depreciation expense increased $5.6
million during the first quarter of 2000 to $18.3 million from $12.7 million for
the same period of 1999. This was primarily a result of the increase in
production volumes in 2000 over 1999 levels and an increase in the depletion
rate reflecting a rationalization of cost associated with the unevaluated
portion of our full cost pool by $5 million and a decrease in new wells drilled
during the first quarter of 2000.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense increased
by $1.1 million to $3.9 million for three months ended March 31, 2000, compared
to $2.8 million during the comparable period last year. This increase was
primarily a result of increases in salaries, wages, other compensation and
related employee costs due to an increased number of employees associated with
the growth of the Company's asset base and producing properties related to the
Shell properties acquisition and the development and exploitation opportunities
associated with them and the 3-D seismic covering them.
INTEREST EXPENSE. Interest expense increased $1.3 million to $6.3 million during
the first quarter of 2000 compared to $5.1 million in the comparable period in
1999. The increase is a result of additional borrowings to fund exploration
activities of approximately $10 million under our credit facility and the
issuance of the Subordinated Notes during June 1999.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL. During the first quarter of 2000, Meridian's liquidity improved
as capital expenditures were internally financed with cash from operations. As
of March 31, 2000, we had a cash balance of $4.2 million and working capital of
$0.4 million. This $7.7 million improvement in working capital confirms our
intention to delever the balance sheet by using available cash flow to reduce
payables and other debt.
CREDIT FACILITY. We entered into an amended and restated credit facility with
The Chase Manhattan Bank as Administrative Agent (the "Credit Facility") to
provide for maximum borrowings, subject to borrowing base limitations, of up to
$250 million. The borrowing base was reaffirmed on March 31, 2000, and was set
at $250 million, with the next scheduled redetermination set for September 20,
2000. Two successful property sales during the second quarter were approved by
the banks and permitted Meridian to improve its liquidity and reduced the
borrowing base to $239 million. Borrowings under the Credit Facility are secured
by pledges of the outstanding capital stock of our subsidiaries and a mortgage
of the offshore oil and natural gas properties and several onshore oil and
natural gas properties. Borrowings under the Credit Facility mature on May 22,
2003.
The Credit Facility includes various restrictive covenants including an interest
coverage ratio of 3.0 to 1.0, a minimum net worth requirement of approximately
$82 million, and a total debt leverage ratio (based upon total indebtedness to
12-month trailing EBITDA) of 3.25 to 1.00 at December 31, 1999, and thereafter.
Assuming that Meridian continues to be successful in the development and
exploration program during the next 12 months, management believes that we will
be able to comply with the Credit Facility covenants primarily due to the
increase in production in addition to the positive effects of higher oil and
natural gas prices; however, any declines in oil and natural gas commodity
prices or unanticipated declines or delays in production may adversely affect
the ability to comply with the Credit Facility covenants.
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Under the Credit Facility, as amended, the Company may secure either (i) an
alternative base rate loan that bears interest at a rate per annum equal to the
greater of the administrative agent's prime rate, a certificate of deposit based
rate or a federal funds based rate plus 0.25% to 1.0% or (ii) a Eurodollar base
rate loan that bears interest, generally, at a rate per annum equal to the
London interbank offered rate plus 1.25% to 2.5%, depending on the ratio of the
aggregate outstanding loans and letters of credit to the borrowing base. The
Credit Facility also provides for commitment fees ranging from .3% to .5% per
annum.
SHORT-TERM CREDIT FACILITY. The Company entered into a short-term committed line
of credit with a commercial bank for $5 million which will expire on January 1,
2001. The interest rate is the prime rate plus 1%, and interest payments are due
on the last day of March, June, September and December. It is renewable by
mutual agreement of the parties. As of March 31, 2000, the full amount was
available to be drawn.
9 1/2% CONVERTIBLE SUBORDINATED NOTES. During June 1999, the Company completed
private placements of an aggregate of $20 million of its 9 1/2% Convertible
Subordinated Notes due June 18, 2005 (the "Notes"). The Notes are unsecured and
contain customary events of default, but do not contain any maintenance or other
restrictive covenants. Interest is payable on a quarterly basis.
The Notes are convertible at any time by the holders of the Notes into shares of
our common stock, $.01 par value ("Common Stock"), utilizing a conversion price
of $7.00 per share (the "Conversion Price"). The Conversion Price is subject to
customary anti-dilution provisions. The holders of the Notes have been granted
registration rights with respect to the shares of Common Stock that are issued
upon conversion of the Notes or issuance of the warrants discussed below.
The Company may prepay the Notes at any time without penalty or premium;
however, in the event we redeem or prepay the Notes on or before June 21, 2001,
we will issue to the holders of the Notes warrants to purchase that number of
shares of Common Stock into which such Notes would have been convertible on the
date of prepayment. Such warrants will have exercise prices equal to the
Conversion Price in effect on the date of issuance and will expire on June 21,
2001, regardless of the date such warrants are issued.
CAPITAL EXPENDITURES. To date, Meridian's drilling activities have been focused
in the Weeks Island Field, North Turtle Bayou/Ramos Field and Thornwell Field.
We anticipate drilling activities in these three areas will comprise
approximately 57% of our capital expenditure budget of $85 million. The
remaining 43% of the year 2000 capital budget will be divided between the
generation of new prospects and the drilling of approximately six additional
wells in various other fields.
During the first quarter of 2000, we have completed and placed on production the
Breaux No. 1 well in the North Turtle Bayou Field. In addition, we have drilled
and completed four wells in the Weeks Island, South Thornwell and West Lake
Verret fields. Currently, we are drilling and/or completing four additional
wells in the South Thornwell and North Turtle Bayou fields. Capital expenditures
during the three months ended March 31, 2000, consisted of $22.2 million for
property and equipment primarily related to exploration and development of
various prospects, including leases, seismic data acquisitions, and drilling and
completion costs. Management expects the remaining $63 million budgeted for
capital expenditures for 2000 to be primarily funded from cash flows from
operations.
POTENTIAL SALE OF PROPERTIES. In an effort to reduce bank debt and increase
liquidity, the Company announced on January 14, 2000, the initiation of a formal
process to pursue the sale of certain non-strategic oil and gas properties
located in south Louisiana, the Texas Gulf Coast and offshore in the Gulf of
Mexico.
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The properties scheduled for sale accounted for approximately 20% of the
Company's net average daily production, or approximately 30 Mmcfe per day. This
process is on schedule with two of the fifteen packages closed and additional
closings subject only to the negotiation of definitive purchase and sale
agreements and due diligence. The two sales to date, approved by the banks, have
permitted Meridian to improve company liquidity after reducing our Credit
Facility and borrowing base to $239 million. There is no assurance that such
additional closings will take place.
DIVIDENDS. It is Company policy to retain its existing cash for reinvestment in
its business, and therefore, does not anticipate that dividends will be paid
with respect to the Common Stock in the foreseeable future. The Preferred Stock
issued upon closing of the LOPI Transaction accrues an annual cash dividend of
4% of its stated value with the dividend ceasing to accrue incrementally on
one_third of the shares of Preferred Stock on June 30, 2001, 2002 and 2003 so
that no dividends will accrue on any shares of Preferred Stock after June 30,
2003. Dividends on the Preferred Stock aggregating $1.35 million were accrued
for the first three months of 2000, of which none had been paid as of March 31,
2000.
STOCK RIGHTS AND RESTRICTIONS AGREEMENT. In light of the large ownership
position issued to SLOPI in the LOPI Transaction and in recognition of both
Meridian's and SLOPI's desire that Meridian functions as an independent oil and
gas company, we entered into a Stock Rights and Restrictions Agreement with
SLOPI that defines and limits our respective rights and obligations. This
agreement will limit SLOPI's and its affiliates' control while protecting their
interests in the context of certain extraordinary transactions by (i) allowing
SLOPI to maintain representation on our Board of Directors, (ii) restricting
SLOPI's and its affiliates' ability to effect certain business combinations with
us or to propose certain business combinations with us, (iii) restricting the
ability of SLOPI and its affiliates to sell certain portions of their shares of
Common Stock and Preferred Stock, subject to certain exceptions designed to
permit them to sell those shares over time and to sell those shares in the event
of certain business combinations involving us, (iv) limiting SLOPI's and its
affiliates' discretionary voting rights to 23% of the total voting shares,
except with respect to certain extraordinary events and in situations in which
the price of the Common Stock for a period of time has been less than $5.50 per
share or we are in material breach of our obligations under the agreements
governing the LOPI Transaction, (v) permitting SLOPI and its affiliates to
purchase additional amounts of our securities in order to maintain a 21%
beneficial ownership interest in our Common Stock or securities convertible into
our Common Stock, (vi) extending certain statutory and corporate restrictions on
business combinations applicable to SLOPI and its affiliates and (vii)
obligating us, at our option, to either issue a currently indeterminable number
of additional shares of Common Stock in the future or pay cash in satisfaction
of a make-whole provision contained in the Stock Rights and Restrictions
Agreement in the event SLOPI ultimately receives less than approximately $10.52
per share on the sale of any Common Stock that is issuable upon conversion of
the Preferred Stock. SLOPI currently is restricted from selling shares of Common
Stock owned by it until July 1, 2000. Unless an earlier sale of shares is
requested by Shell, and approved by the Meridian Board of Directors, Shell can
only sell shares of Common Stock under SEC Rule 144 or by requesting Meridian to
permit the sale through one of eight registration rights granted to Shell for
the period of its holding. Beginning on July 1, 2000, SLOPI may sell 25% of the
Common Stock owned by it and may sell an incremental 25% of the Common Stock
owned by it each year until June 30, 2004, at which time restrictions on sale
under the Stock Rights and Restrictions Agreement will terminate.. SLOPI is
prohibited from selling all of its Common Stock upon conversion of its Preferred
Stock except as set out above. We are continuing our discussion with Shell
concerning terms and conditions of the Stock Rights and Restrictions Agreement.
However, in the event SLOPI decided to sell all of the Common Stock issued to it
upon conversion of the Preferred Stock at market prices existing on March 31,
2000, the make-whole provisions would be approximately $21 million per year or a
total of $85 million after the four years. Meridian may satisfy this provision
at its election in cash or Common Stock. Based on oil and natural gas prices at
March 31, 2000, and, assuming such oil and natural gas prices continue at or
about those levels, we
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believe sufficient cash resources from operating activities will be generated
during the year 2000 to pay any make-whole obligations owed to Shell in cash
rather than issue Common Stock, and we believe it would make any such payments
in cash assuming it is able to obtain the requisite waivers under the Credit
Facility. This obligation could significantly dilute all holders of our Common
Stock other than Shell, or significantly reduce our ability to raise additional
funds for exploration and development.
FORWARD-LOOKING INFORMATION
From time to time, we may make certain statements that contain "forward-looking"
information as defined in the Private Securities Litigation Reform Act of 1995
and that involve risk and uncertainty. These forward-looking statements may
include, but are not limited to exploration and seismic acquisition plans,
anticipated results from current and future exploration prospects, future
capital expenditure plans, anticipated results from third party disputes and
litigation, expectations regarding compliance with our credit facility, the
anticipated results of wells based on logging data and production tests, future
sales of production, earnings, margins, production levels and costs, market
trends in the oil and natural gas industry and the exploration and development
sector thereof, environmental and other expenditures and various business
trends. Forward-looking statements may be made by management orally or in
writing including, but not limited to, the Management's Discussion and Analysis
of Financial Condition and Results of Operations section and other sections of
our filings with the Securities and Exchange Commission under the Securities Act
of 1933, as amended, and the Securities Exchange Act of 1934, as amended.
Actual results and trends in the future may differ materially depending on a
variety of factors including, but not limited to the following:
Changes in the price of oil and natural gas. The prices we receive for our oil
and natural gas production and the level of such production are subject to wide
fluctuations and depend on numerous factors that we do not control, including
seasonality, worldwide economic conditions, the condition of the United States
economy (particularly the manufacturing sector), foreign imports, political
conditions in other oil-producing and natural-gas-producing countries, the
actions of the Organization of Petroleum Exporting Countries and domestic
government regulation, legislation and policies. Material declines in the prices
received for oil and natural gas could make the actual results differ from those
reflected in our forward-looking statements.
Operating Risks. The occurrence of a significant event for which we are not
fully insured against could have a material adverse effect on our financial
position and results of operations. Our operations are subject to all of the
risks normally incident to the exploration for and the production of oil and
natural gas, including uncontrollable flows of oil, natural gas, brine or well
fluids into the environment (including groundwater and shoreline contamination),
blowouts, cratering, mechanical difficulties, fires, explosions, unusual or
unexpected formation pressures, pollution and environmental hazards, each of
which could result in damage to or destruction of oil and natural gas wells,
production facilities or other property, or injury to persons. In addition, we
are subject to other operating and production risks such as title problems,
weather conditions, compliance with government permitting requirements,
shortages of or delays in obtaining equipment, reductions in product prices,
limitations in the market for products, litigation and disputes in the ordinary
course of business. Although we maintain insurance coverage considered to be
customary in the industry, we are not fully insured against certain of these
risks either because such insurance is not available or because of high premium
costs. We cannot predict if or when any such risks could affect our operations.
The occurrence of a significant event for which we are not adequately insured
could cause our actual results to differ from those reflected in our
forward-looking statements.
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Drilling Risks. Our decision to purchase, explore, develop or otherwise exploit
a prospect or property will depend in part on the evaluation of data obtained
through geophysical and geological analysis, production data and engineering
studies, which are inherently imprecise. Therefore, we cannot assure you that
all of our drilling activities will be successful or that we will not drill
uneconomical wells. The occurrence of unexpected drilling results could cause
the actual results to differ from those reflected in our forward-looking
statements.
Uncertainties in Estimating Reserves and Future Net Cash Flows. Reserve
engineering is a subjective process of estimating the recovery from underground
accumulations of oil and natural gas that cannot be measured in an exact manner,
and the accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and judgement.
Reserve estimates are inherently imprecise and may be expected to change as
additional information becomes available. There are numerous uncertainties
inherent in estimating quantities and values of proved reserves and in
projecting future rates of production and timing of development expenditures,
including many factors beyond our control. Because all reserve estimates are to
some degree speculative, the quantities of oil and natural gas that we
ultimately recover, production and operating costs, the amount and timing of
future development expenditures and future oil and natural gas sales prices may
differ from those assumed in these estimates. Significant downward revisions to
our existing reserve estimates could cause the actual results to differ from
those reflected in our forward-looking statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is currently exposed to market risk from hedging contracts changes
and changes in interest rates. A discussion of the market risk exposure in
financial instruments follows.
HEDGING CONTRACTS
Meridian addresses market risk by selecting instruments whose value fluctuations
correlate strongly with the underlying commodity being hedged. We enter into
swaps and other derivative contracts to hedge the price risks associated with a
portion of anticipated future oil and gas production. While the use of hedging
arrangements limits the downside risk of adverse price movements, it may also
limit future gains from favorable movements. Under these agreements, payments
are received or made based on the differential between a fixed and a variable
product price. These agreements are settled in cash at or prior to expiration or
exchanged for physical delivery contracts. Meridian does not obtain collateral
to support the agreements, but monitors the financial viability of
counter-parties and believes its credit risk is minimal on these transactions.
In the event of nonperformance, we would be exposed to price risk. Meridian has
some risk of accounting loss since the price received for the product at the
actual physical delivery point may differ from the prevailing price at the
delivery point required for settlement of the hedging transaction.
Effective July 16, 1999, the Company entered into certain hedging contracts as
summarized in the table below. The Notional Amount is equal to the total net
volumetric hedge position of the Company during the periods. The positions
effectively hedge approximately 56% of the Company's average first quarter oil
production. The fair values of the hedge are based on the difference between the
strike price and the New York Mercantile Exchange future prices for the
applicable trading months of 2000.
Weighted Average Fair Value at
Notional Strike Price March 31, 2000
Amount ($ per unit) (in thousands)
----------- ----------------------- -----------------
Oil (thousands of barrels): Floor Ceiling
------- ---------
April 2000 - June 2000 637 $ 16.00 $ 24.00 $ (1,639)
INTEREST RATES
We are subject to interest rate risk on our long_term fixed interest rate debt
and variable interest rate borrowings. Our long_term borrowings primarily
consist of borrowings under the Credit Facility and the $20 million principal of
9 1/2% Convertible Subordinated Notes due June 18, 2005. Since borrowings under
the Credit Facility float with prevailing interest rates (except for the
applicable interest period for Eurodollar loans), the carrying value of
borrowings under the Credit Facility should approximate the fair market value of
such debt. Changes in interest rates, however, will change the cost of
borrowing. Assuming $239 million remains borrowed under the Credit Facility, we
estimate our annual interest expense will change by $2.4 million for each 100
basis point change in the applicable interest rates utilized under the Credit
Facility. Changes in interest rates would, assuming all other things being
equal, cause the fair market value of debt with a fixed interest rate, such as
the Notes, to increase or decrease, and thus increase or decrease the amount
required to refinance the debt. The fair value of the Notes is dependent on
prevailing interest rates and our current stock price as it relates to the
conversion price of $7.00 per share of our Common Stock.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material legal proceedings to which Meridian or any of its
subsidiaries or partnerships is a party or by which any of its property is
subject, other than ordinary and routine litigation incidental to the business
of producing and exploring for crude oil and natural gas.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.1 Financial Data Schedule.
(b) The Company filed no reports on Form 8-K during the first quarter of
2000.
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SIGNATURE
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.
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
--------------------------------------------------
(Registrant)
Date: May 15, 2000 By: /s/ P. RICHARD GESSINGER
--------------------------------
P. Richard Gessinger
Executive Vice President and
Chief Financial Officer
By: /s/ LLOYD V. DELANO
--------------------------------
Lloyd V. DeLano
Vice President
Chief Accounting Officer
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EXHIBIT INDEX
EXHIBT
NUMBER DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule.