1
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: June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission file number: 1-10671
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 August 8, 2000 47,707,231
Page 1 of 21
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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 and Six Months Ended June 30, 2000 and 1999 3
Consolidated Balance Sheets as of June 30, 2000 (unaudited)
and December 31, 1999 4
Consolidated Statements of Cash Flows (unaudited) for the
Six Months Ended June 30, 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 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
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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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- -------------------------
REVENUES: 2000 1999 2000 1999
------------ ----------- ---------- ----------
Oil and natural gas $ 51,544 $ 30,805 $ 99,474 $ 53,909
Interest and other 346 164 477 366
51,890 30,969 99,951 54,275
------------ ----------- ---------- ----------
OPERATING COSTS AND EXPENSES:
Oil and natural gas operating 4,289 4,046 8,714 8,216
Severance and ad valorem taxes 3,653 2,742 7,893 4,981
Depletion and depreciation 17,332 12,728 35,632 25,415
General and administrative 4,115 3,110 8,028 5,904
------------ ----------- ---------- ----------
29,389 22,626 60,267 44,516
------------ ----------- ---------- ----------
EARNINGS BEFORE INTEREST
AND INCOME TAXES 22,501 8,343 39,684 9,759
OTHER EXPENSES:
Interest expense 6,452 5,553 12,784 10,608
Taxes on income ----- ----- ----- -----
------------ ----------- ---------- ----------
NET EARNINGS (LOSS) 16,049 2,790 26,900 (849)
DIVIDENDS ON PREFERRED STOCK 1,350 1,350 2,700 2,700
------------ ----------- ---------- ----------
NET EARNINGS (LOSS) APPLICABLE
TO COMMON STOCKHOLDERS $ 14,699 $ 1,440 $ 24,200 $ (3,549)
============ =========== ========== ==========
NET EARNINGS (LOSS) PER SHARE:
Basic $ 0.31 $ 0.03 $ 0.52 $ (0.08)
============ =========== ========== ==========
Diluted $ 0.25 $ 0.03 $ 0.43 $ (0.08)
============ =========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES:
Basic 46,668 45,862 46,562 45,839
============ =========== ========== ==========
Diluted 65,204 48,323 64,662 45,839
============ =========== ========== ==========
See notes to consolidated financial statements.
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THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(thousands of dollars)
(unaudited)
JUNE 30, DECEMBER 31,
2000 1999
--------------- ----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 33,670 $ 6,617
Accounts receivable, less allowance for doubtful
accounts $891 [2000] and $1,003 [1999] 30,778 28,478
Due from affiliates 880 165
Prepaid expenses and other 963 1,234
--------------- ----------------
Total current assets 66,291 36,494
--------------- ----------------
PROPERTY AND EQUIPMENT:
Oil and natural gas properties, full cost method
(including $43,172 [2000] and
$62,686 [1999] not subject to depletion) 932,072 916,495
Land 478 478
Equipment 10,330 8,737
--------------- ----------------
942,880 925,710
Accumulated depletion and depreciation 524,835 489,203
--------------- ----------------
418,045 436,507
--------------- ----------------
OTHER ASSETS 4,015 4,718
--------------- ----------------
$ 488,351 $ 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)
JUNE 30, DECEMBER 31,
2000 1999
--------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 15,475 $ 21,359
Revenues and royalties payable 6,081 4,728
Accrued liabilities 17,937 17,772
--------------- ----------------
Total current liabilities 39,493 43,859
--------------- ----------------
LONG-TERM DEBT 239,000 250,000
--------------- ----------------
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, 46,707,231 [2000] and
46,409,980 [1999] issued) 478 472
Additional paid-in capital 276,084 274,298
Accumulated deficit (221,147) (245,347)
Unrealized loss on securities held for resale (185) (185)
Unamortized deferred compensation (372) (378)
--------------- ----------------
Total stockholders' equity 189,858 163,860
--------------- ----------------
$ 488,351 $ 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)
SIX MONTHS ENDED
JUNE 30,
---------------------------------
2000 1999
------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 26,900 $ (849)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depletion and depreciation 35,632 25,415
Amortization of other assets 646 609
Non-cash compensation 1,796 1,033
Changes in assets and liabilities:
Accounts receivable (2,300) 6,391
Due from affiliates (715) 3,158
Prepaid expenses and other 273 (2,284)
Accounts payable (5,884) 8,106
Revenues and royalties payable 1,353 (1,400)
Accrued liabilities and other 165 (8,102)
------------- --------------
Net cash provided by operating activities 57,866 32,077
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (42,315) (55,490)
Sale of property and equipment 25,145 9,546
------------- --------------
Net cash used in investing activities (17,170) (45,944)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 2,000 35,000
Reductions in long-term debt (13,000) (10,084)
Preferred dividends (2,700) (2,700)
Additions to deferred loan costs 57 (941)
------------- --------------
Net cash provided (used) in financing activities (13,643) 21,275
------------- --------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 27,053 7,408
Cash and cash equivalents at beginning of period 6,617 9,478
------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 33,670 $ 16,886
============= ==============
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 June 30, 2000, and for the three
and six month periods ended June 30, 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. Due
to the property sales of $24.7 million during the second quarter of 2000, $11
million was applied to the Company's Credit Facility; correspondingly, the
borrowing base was reduced to $239 million.
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 JUNE 30,
----------------------------------
2000 1999
------------- -------------
Numerator:
Net earnings (loss) $ 16,049 $ 2,790
Less: Preferred dividend requirement 1,350 1,350
------------- -------------
Net earnings (loss) used in per share calculation $ 14,699 $ 1,440
Denominator:
Denominator for basic net earnings (loss) per
share - weighted-average shares outstanding 46,668 45,862
Effect of potentially dilutive common shares:
Convertible preferred stock 12,837 N/A
Convertible subordinated notes 2,857 -----
Employee and director stock options 949 893
Warrants 1,893 1,562
------------- -------------
Denominator for diluted net earnings (loss) per
share - weighted-average shares outstanding
and assumed conversions 65,204 48,323
============= =============
Basic net earnings (loss) per share $ 0.31 $ 0.03
============= =============
Diluted net earnings (loss) per share $ 0.25 $ 0.03
============= =============
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SIX MONTHS ENDED JUNE 30,
----------------------------------
2000 1999
------------- -------------
Numerator:
Net earnings (loss) $ 26,900 $ (849)
Less: Preferred dividend requirement 2,700 2,700
------------- -------------
Net earnings (loss) used in per share calculation $ 24,200 $ (3,549)
Denominator:
Denominator for basic net earnings (loss) per
share - weighted-average shares outstanding 46,562 45,839
Effect of potentially dilutive common shares:
Convertible preferred stock 12,837 N/A
Convertible subordinated notes 2,857 -----
Employee and director stock options 587 N/A
Warrants 1,819 N/A
------------- -------------
Denominator for diluted net earnings (loss) per
share - weighted-average shares outstanding
and assumed conversions 64,662 45,839
============= =============
Basic net earnings (loss) per share $ 0.52 $ (0.08)
============= =============
Diluted net earnings (loss) per share $ 0.43 $ (0.08)
============= =============
5. SALE OF PROPERTIES
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 selected properties represented
about 88 Bcfe, or approximately 24% of the Company's 365 Bcfe in reserves. As of
June 30, 2000, six transactions have been closed, covering a net total of 15.3
Bcfe for a total of $24.7 million, or an average price of $1.61 Mcfe, $11
million of which was used to reduce bank debt in the second quarter. Additional
sales are being negotiated, with the next package representing 14.5 Bcfe
scheduled to close on or about August 28, 2000, and another property sale
representing 22.7 Bcfe with a scheduled close date of around September 15, 2000.
There is no assurance that such additional closings will take place or that the
prices realized on any such sales will be comparable to previous property sales.
In addition, the Company may elect to retain several properties if the expected
revenue generated from continued operations exceeds the value of the offer.
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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
and six months ended June 30, 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. During the second quarter, Meridian's drilling activities
have been focused in the Weeks Island Field, North Turtle Bayou/Ramos Field,
Thornwell Field, Turtle Bayou Field and South Timbalier Block 139. Each of these
fields has contributed to the 12% increase in our net average daily production
rates of 153.7 MMcfe per day for the first six months of 2000 as compared to
137.1 MMcfe per day for the first six months of 1999 and 149.4 MMcfe per day as
scheduled on the year end reserve report.
During the first six months of 2000, we have completed and placed on production
nine of eleven wells drilled in the Weeks Island, North Turtle Bayou, South
Thornwell and West Lake Verret fields, which contributed to the increase in the
daily average production rate.
Approximately $24.5 million of the 2000 capital budget was spent on drilling and
workover activities during the first six months, which substantially replaced
the reserves produced during the period. Of the capital expenditures made during
the first six months, approximately 39% was for land, seismic, geological and
geophysical development of future projects to support the Company's growth.
The Company expanded workover activities beyond the reserve report operations
(as reported on 12/31/99) to take advantage of high commodity prices. Our
strategy to blend exploration drilling activities with high- confidence workover
and development projects selected from our broad asset inventory added to our
daily production during a high commodity price environment. This strategy
brought on production sooner than the drilling of deep, higher risk exploration
wells. The workover additions came from our key producing fields, primarily West
Lake Verret, Weeks Island, and Good Hope.
The balance of $43 million of the $85 million capital expenditure budget will be
spent primarily on 10 prospects, including both exploration and development
wells with an emphasis on low risk exploration in the Company's North Turtle
Bayou/Ramos Field, Weeks Island Field, and Oakley Field area, a newly developed
exploration play. Two exploration wells (Tex Emma No. 1 and Avoca No. 5-1),
which were scheduled for drilling during mid-to-late fourth quarter have been
accelerated for the mid-third quarter and are anticipated to begin drilling
August 21 and September 1, respectively. Development wells in both North Turtle
Bayou and Weeks Island will be drilled during the second half of 2000.
Meridian's drilling activities, combined with strong commodity prices and
reduced lifting costs, have resulted in increased profitability. Earnings
increased from $1.4 million during the second quarter of 1999 to $14.6 million
in the second quarter of 2000. We believe we have a competitive advantage
created by our dominant acreage and seismic positions in our niche region of
south Louisiana. In addition, our technical team is focused and disciplined in
screening drilling prospects, which results in fewer, but larger-potential,
projects that form the basis of our future growth. We have developed a strong
asset base, generally covered by 3-D seismic, that enables us to utilize
internal funding for exploration and development activities. This asset base
gives Meridian financial flexibility and reduces our dependence on external
funding to finance future high-potential, low-risk drilling projects. Our
efforts to reduce our lifting costs have also been successful, resulting in a
reduction in costs from $0.33/Mcfe during the first six months of 1999 to
$0.31/Mcfe for the first six months of 2000. These efforts to reduce costs,
along with our goal to reduce debt, will remain an integral part of management's
business plan.
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We are proceeding with the sale of non-strategic assets announced in January
2000, and have closed six transactions to date (see Liquidity and Capital
Resources, Potential Sale of Properties). The property sales that have closed
since January 2000 included a total of approximately 11 MMcfe in daily
production; however, since the transactions were closed at various times during
the quarter, the net reduction on the quarterly production rates from the first
quarter 2000 to the second quarter was 5.4 MMcfe per day. When viewed from a
year over year perspective, production rates in the second quarter of 2000 are
up 9% from the second quarter of 1999. In comparing the first quarter of 2000 to
the second quarter, however, the tradeoff between sales proceeds and slightly
reduced production becomes more apparent, with a change in production rates from
157 MMcfe per day in the first quarter of 2000 to 150 MMcfe per day in the
second quarter.
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 June 30, 2000, was
$24.24 per barrel compared to $24.30 per barrel for the three months ended March
31, 2000, and $15.87 per barrel for the three months ended June 30, 1999. Our
average oil price for the six months ended June 30, 2000, was $24.27 per barrel
compared to $13.73 per barrel for the six months ended June 30, 1999. Our
average natural gas price for the three months ended June 30, 2000, was $3.57
per Mcf compared to $2.69 per Mcf for the three months ended March 31, 2000, and
$2.28 per Mcf for the three months ended June 30, 1999. Our average natural gas
price for the six months ended June 30, 2000, was $3.13 per Mcf compared to
$2.04 per Mcf for the six months ended June 30, 1999.
Meridian no longer has any oil collar agreements in place and has not entered
into any agreements that fix the price of natural gas, opening the way for the
Company to take advantage of the current strength in commodity prices, which
should result in higher net prices going forward. 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 JUNE 30, 2000, COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
OPERATING REVENUES. Second quarter 2000 oil and natural gas revenues increased
$20.7 million as compared to second quarter 1999 revenues, primarily due to
production volumes increasing 9% and average commodity prices increasing 53%,
both on a natural gas equivalent basis. The production increase, net of
reductions from property sales and natural declines, was a direct result of new
wells being placed on production and an aggressive work over program 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 June 30, 2000 and
1999:
THREE MONTHS ENDED
JUNE 30, 2000 PERCENTAGE
----------------------- INCREASE INCREASE
2000 1999 (DECREASE) (DECREASE)
---------- --------- ---------- --------
Production Volumes:
Oil (Mbbl) 1,018 1,120 (102) (9%)
Natural gas (MMcf) 7,519 5,728 1,791 31%
MMcfe 13,627 12,448 1,179 9%
Average Sales Prices:
Oil (per Bbl) $ 24.24 $ 15.87 $ 8.37 53%
Natural gas (per Mcf) $ 3.57 $ 2.28 $ 1.29 57%
MMcfe $ 3.78 $ 2.47 $ 1.31 53%
Operating Revenues (000's):
Oil $ 24,673 $ 17,771 $ 6,902 39%
Natural gas 26,871 13,034 13,837 106%
---------- --------- ----------
Total Operating Revenues $ 51,544 $ 30,805 $ 20,739 67%
========== ========= ==========
OPERATING EXPENSES. Oil and natural gas operating expenses increased $0.3
million to $4.3 million for the three months ended June 30, 2000, compared to
$4.0 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 previous twelve months. On an Mcfe
basis, operating expenses have decreased in the three months ended June 30,
2000, to $0.31 from $0.33 for the three months ended June 30, 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 $0.9
million to $3.6 million for the second quarter of 2000, compared to $2.7 million
during the same period in 1999. Meridian's oil and natural gas production is
primarily from southern Louisiana, and is therefore 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 second quarter increase of $0.9
million was primarily due to the increase in natural gas production compared to
the same period in 1999 and the 53% increase in the average sales price of oil
over 1999.
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DEPLETION AND DEPRECIATION. Depletion and depreciation expense increased $4.6
million during the second quarter of 2000 to $17.3 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 the movement of $15 million from the unevaluated costs to the
full cost pool subject to depletion.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense increased
by $1.0 million to $4.1 million for three months ended June 30, 2000, compared
to $3.1 million during the comparable period last year. This increase was
primarily a result of our expanded exploration and production activities; costs
included additional salaries, wages, other compensation, and related employee
expenses.
INTEREST EXPENSE. Interest expense increased $0.9 million to $6.5 million during
the second quarter of 2000 compared to $5.6 million in the comparable period in
1999. The increase is primarily a result of the issuance of the Subordinated
Notes during June 1999 and due to the Federal Reserve Bank's increase in over
all interest rate over the last twelve months has lead to an increase in the
average interest rates on the credit facility, partially offset by a decrease of
$11 million under our credit facility during the quarter.
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SIX MONTHS ENDED JUNE 30, 2000, COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
OPERATING REVENUES. Oil and natural gas revenues during the six months ended
June 30, 2000, increased $45.6 million as compared to revenues during the six
months ended June 30, 1999, due to production volumes increasing by 13% and
average sales prices increasing 64%, both on a natural gas equivalent basis. The
production increase, net of reductions from property sales and natural declines,
was a direct result of the inclusion of new wells being placed on production and
an aggressive work over program during the previous twelve months.
The following table summarizes production volumes, average sales prices and
gross revenues for the six months ended June 30, 2000 and 1999.
SIX MONTHS ENDED 2000
JUNE 30, 2000 PERCENTAGE
------------------------ INCREASE INCREASE
2000 1999 (DECREASE) (DECREASE)
---------- ---------- ----------- -----------
Production Volumes:
Oil (Mbbl) 2,158 2,164 (6) -----
Natural gas (MMcf) 15,024 11,837 3,187 27%
MMcfe 27,974 24,821 3,153 13%
Average Sales Prices:
Oil (Bbl) $ 24.27 $ 13.73 $ 10.54 77%
Natural gas (Mcf) $ 3.13 $ 2.04 $ 1.09 53%
MMcfe $ 3.56 $ 2.17 $ 1.39 64%
Gross Revenues (000's):
Oil $ 52,384 $ 29,714 $ 22,670 76%
Natural gas 47,090 24,195 22,895 95%
---------- ---------- -----------
Total $ 99,474 $ 53,909 $ 45,565 85%
========== ========== ===========
OPERATING EXPENSES. Oil and natural gas operating expenses increased $0.5
million to $8.7 million for the six months ended June 30, 2000, compared to $8.2
million for the six months ended June 30, 1999. This increase was primarily the
result of the inclusion of new wells brought on production in the last year.
However, on a Mcfe basis, operating expenses were down to $0.31 per Mcfe for the
first half of 2000 compared to $0.33 per Mcfe for the comparable period last
year. This reduction reflects the results of a cost reduction program that we
implemented to reduce the operating costs on our properties.
SEVERANCE AND AD VALOREM TAXES. Severance and ad valorem taxes increased $2.9
million to $7.9 million for the six months ended June 30, 2000, compared to $5.0
million for the six months ended June 30, 1999. This increase is largely
attributable to the increase in natural gas production over the same period in
1999 and the 77% increase in the average sales price of oil over 1999.
Meridian's production is primarily from southern Louisiana, and, therefore, is
subject to a tax rate of 12.5% of gross oil revenues and $0.078 per Mcf for
natural gas.
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DEPLETION AND DEPRECIATION. Depletion and depreciation expense increased $10.2
million to $35.6 million during the first six months of 2000 from $25.4 million
from the same period last year. This increase was primarily a result of the 13%
increase in production on an Mcfe basis over the comparable period in 1999 and
an increase in the depletion rate reflecting the movement of $20 million from
the unevaluated to the full cost pool subject to depletion.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense increased
$2.1 million to $ 8.0 million for the first six months of 2000 compared to $5.9
million during the first six months of 1999. This increase was primarily a
result of our expanded exploration and production activities; costs included
additional salaries, wages and other compensation and related employee expenses.
INTEREST EXPENSE. Interest expense increased $2.2 million to $12.8 million
during the first six months of 2000 compared to $10.6 million during the
comparable period of 1999. The increase is primarily a result of the issuance of
the Subordinated Notes in June 1999, and due to the Federal Reserve Bank's
increase in overall interest rates has lead to an increase in the average
interest rate on the credit facility.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL. During the second quarter of 2000, Meridian's liquidity
improved significantly. Capital expenditures were internally financed from the
Company's cash flow generated from operations. As of June 30, 2000, we had a
cash balance of $33.7 million and working capital of $26.8 million.
This improvement in working capital demonstrates our commitment to de-levering
the balance sheet by using available cash flow to reduce payables and other
debt. We have effectively reduced trade debt and have held spending to budgeted
amounts. Our strategy is to grow the Company prudently, taking advantage of the
strong asset base built over the years (including seismic, acreage and the
acquisitions of the Shell and Cairn properties) to add reserves through the
drill bit while maintaining a disciplined approach to costs. We plan to allocate
excess cash to two key areas, accelerating drilling where it is most promising
and repurchasing the Shell preferred and common stock (see Stock Rights and
Restrictions Agreement).
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. Due to the property sales during the second quarter of 2000 the borrowing
base was reduced 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. The Credit Facility contains various restrictive
covenants, including certain minimum financial ratios and restrictions on cash
dividends. Borrowings under the Credit Facility mature on May 22, 2003.
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 0.3% to 0.5% 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. The line of credit
also provides for commitment fees of 0.5% per annum.
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As of June 30, 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. Approximately $24.5 million of the 2000 capital budget was
spent on drilling and workover activities during the first six months, which
substantially replaced the reserves produced during the period. Of the capital
expenditures made during the first six months, approximately 39% was for land,
seismic, geological and geophysical development of future projects to support
the Company's growth.
The Company expanded workover activities beyond the reserve report operations
(as reported on 12/31/99) to take advantage of high commodity prices. Our
strategy to blend exploration drilling activities with high- confidence workover
and development projects selected from our broad asset inventory added to our
daily production during a high commodity price environment. This strategy
brought on production sooner than the drilling of deep, higher risk exploration
wells. The workover additions came from our key producing fields, primarily West
Lake Verret, Weeks Island, and Good Hope.
The balance of $43 million of the $85 million capital expenditure budget will be
spent primarily on 10 prospects, including both exploration and development
wells with an emphasis on low risk exploration in the Company=s North Turtle
Bayou / Ramos Field, Weeks Island Field, and Oakley Field area, a newly
developed exploration play. Two exploration wells (Tex Emma No. 1 and Avoca No.
5-1), which were scheduled for drilling during mid-to-late fourth quarter have
been accelerated for the mid-third quarter and are anticipated to begin drilling
August 21 and September 1, respectively. Development wells in both North Turtle
Bayou and Weeks Island will be drilled during the second half of 2000.
POTENTIAL SALE OF PROPERTIES. 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 selected
properties represented about 88 Bcfe, or approximately 24% of the Company's 365
Bcfe in reserves. As of June 30, 2000, six transactions have been closed,
covering a net total of 15.3 Bcfe for a total of $24.7 million, or an average
price of $1.61 Mcfe, $11 million of which was used to reduce bank debt in the
second quarter. Additional sales are being negotiated, with the next package
representing 14.5 Bcfe scheduled to close on or about August 28, 2000 and
another property sale representing 22.7 Bcfe with a scheduled close date of
around September 15, 2000. There is no assurance that such additional closings
will take place or that the prices realized on any such sales will be comparable
to previous property sales. In addition, the Company may elect to retain several
properties if the expected revenue generated from continued operations exceeds
the value of the offer.
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STOCK RIGHTS AND RESTRICTIONS AGREEMENT. In June of 1998, Meridian acquired
substantially all of Shell's onshore south Louisiana oil and gas properties. In
consideration of the purchase, Meridian issued to Shell Louisiana Onshore
Properties, Inc. ("SLOPI"), 12.1 million shares of Common Stock plus Preferred
Stock with a stated value of $135 million. The terms of the original Stock
Rights and Restrictions Agreement allowed for the conversion of the Preferred
Stock into Common Stock at any time and beginning July 1, 2000, the potential
for 25% of Shell's common stock holdings to be sold per year each subsequent
year.
Meridian and SLOPI, on July 18, 2000, announced the signing of a definitive
agreement granting Meridian an option to repurchase all of the outstanding
shares of Meridian Preferred Stock (convertible into 12.8 million shares of
Common Stock), plus six million shares of Meridian Common Stock, for an
aggregate cash price of $114 million. The "Option and Standstill Agreement" is
exercisable in a single transaction through January 31, 2001. As consideration
for the option, Meridian has issued Shell one million shares of Meridian Common
Stock. If Meridian exercises the option, Shell will remain Meridian's largest
shareholder, with approximately 7.1 million shares of Common Stock. The
agreement is intended to benefit all shareholders, both by potentially reducing
the number of outstanding shares and by eliminating the uncertainty resulting
from the unknown amount of dilution related to the "make whole" provision of the
Preferred Stock. We believe that exercise of the option will simplify our
capital structure.
If the option is exercised, we would expect to finance the transaction using
cash on hand, internal cash flow, proceeds from previously announced property
sales, and, if necessary, borrowings under the Company's bank facility or other
capital market transactions, including the sale of Common Stock. To provide
maximum flexibility in financing the stock buyback option, we have filed a shelf
registration with the Securities and Exchange Commission. The shelf registration
permits issuance of equity or debt securities. We do not expect that exercising
this option will impact the 2000 capital spending budget of $85 million, which
was established at the beginning of this year, nor our capital spending plans
for 2001.
DIVIDENDS. It is Meridian's policy to retain its existing cash for reinvestment
in its business, and therefore, we do not anticipate paying dividends with
respect to the Common Stock in the foreseeable future. The Preferred Stock
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 $2.7 million were accrued for the first six months of 2000, of which
none had been paid as of June 30, 2000.
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
ability to raise sufficient public and/or private capital and terms thereof; 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.
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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 against which we are not
fully insured 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 self insured against risks for which either insurance is not
available or not cost effective. 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.
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 from time to time exposed to market risk from changes in interest
rates and hedging contracts. A discussion of the market risk exposure in
financial instruments follows.
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.
HEDGING CONTRACTS
Meridian addresses market risk by selecting instruments whose value fluctuations
correlate strongly with the underlying commodity being hedged. From time to
time, 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.
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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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the annual meeting of shareholders held on June 27, 2000, the Company's
shareholders (including preferred stockholders) elected Class I Directors. The
following summarizes the number of votes for and against each nominee.
Broker
Nominee For Against Abstain Non-Vote
------- --- ------- ------- --------
James T. Bond 49,017,501 0 147,273 0
Jack A. Prizzi 49,017,501 0 147,273 0
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 second 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: August 14, 2000 By: P. RICHARD GESSINGER
---------------------------
P. Richard Gessinger
Executive Vice President and
Chief Financial Officer
By: LLOYD V. DELANO
----------------------
Lloyd V. DeLano
Vice President
Chief Accounting Officer
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EXHIBIT INDEX
EXHIBITS DESCRIPTION
-------- -----------
27.1 -- Financial Data Schedule.