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: September 30, 2004
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Number of shares of common stock outstanding at November 1, 2004 79,214,894
Page 1 of 37
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 Nine Months Ended September 30, 2004 and 2003 3
Consolidated Balance Sheets as of September 30, 2004 (unaudited)
and December 31, 2003 4
Consolidated Statements of Cash Flows (unaudited) for the
Nine Months Ended September 30, 2004 and 2003 6
Consolidated Statements of Stockholders' Equity (unaudited) for the
Nine Months Ended September 30, 2004 and 2003 7
Consolidated Statements of Comprehensive Income (unaudited) for the
Three Months and Nine Months Ended September 30, 2004 and 2003 8
Notes to Consolidated Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29
Item 4. Controls and Procedures 30
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 32
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands, except per share information)
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
REVENUES:
Oil and natural gas $ 52,951 $ 39,129 $ 149,156 $ 97,719
Interest and other 86 208 176 297
--------- --------- --------- ---------
53,037 39,337 149,332 98,016
--------- --------- --------- ---------
OPERATING COSTS AND EXPENSES:
Oil and natural gas operating 3,057 2,714 8,811 8,001
Severance and ad valorem taxes 2,176 2,025 7,005 5,392
Depletion and depreciation 28,387 22,497 77,440 52,339
Accretion expense 147 145 414 401
Write-down of securities held 195 ---- 195 ----
General and administrative 4,028 2,880 10,723 8,662
--------- --------- --------- ---------
37,990 30,261 104,588 74,795
--------- --------- --------- ---------
EARNINGS BEFORE INTEREST AND INCOME TAXES 15,047 9,076 44,744 23,221
--------- --------- --------- ---------
OTHER EXPENSES:
Interest expense 1,624 2,811 5,594 8,755
Debt conversion expense ---- ---- 1,188 ----
--------- --------- --------- ---------
1,624 2,811 6,782 8,755
--------- --------- --------- ---------
EARNINGS BEFORE INCOME TAXES 13,423 6,265 37,962 14,466
--------- --------- --------- ---------
INCOME TAXES:
Current (600) (490) 1,500 (490)
Deferred 5,500 2,100 12,500 2,100
--------- --------- --------- ---------
4,900 1,610 14,000 1,610
--------- --------- --------- ---------
EARNINGS BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 8,523 4,655 23,962 12,856
Cumulative effect of change in accounting principle ---- ---- ---- (1,309)
--------- --------- --------- ---------
NET EARNINGS 8,523 4,655 23,962 11,547
Dividends on preferred stock 737 1,690 3,144 4,937
--------- --------- --------- ---------
NET EARNINGS APPLICABLE
TO COMMON STOCKHOLDERS $ 7,786 $ 2,965 $ 20,818 $ 6,610
========= ========= ========= =========
NET EARNINGS PER SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE:
Basic $ 0.10 $ 0.06 $ 0.30 $ 0.16
Diluted $ 0.09 $ 0.05 $ 0.27 $ 0.15
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
ACCOUNTING PRINCIPLE PER SHARE:
Basic and Diluted $ ----- $ ----- $ ----- $ (0.03)
--------- --------- --------- ---------
NET EARNINGS PER SHARE:
Basic $ 0.10 $ 0.06 $ 0.30 $ 0.13
========= ========= ========= =========
Diluted $ 0.09 $ 0.05 $ 0.27 $ 0.12
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
Basic 76,678 53,532 69,690 51,274
========= ========= ========= =========
Diluted 83,359 62,014 76,852 54,764
========= ========= ========= =========
See notes to consolidated financial statements.
3
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(thousands of dollars)
SEPTEMBER 30, DECEMBER 31,
2004 2003
---- ----
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 28,448 $ 12,821
Accounts receivable, less allowance for doubtful accounts of
$303 [2004] and $251 [2003] 25,065 24,703
Due from affiliates ---- 349
Prepaid expenses and other 3,114 1,586
Assets from price risk management activities 1,439 584
---------- ----------
Total current assets 58,066 40,043
---------- ----------
PROPERTY AND EQUIPMENT:
Oil and natural gas properties, full cost method (including
$38,673 [2004] and $30,542 [2003] not
subject to depletion) 1,331,929 1,230,643
Land 478 478
Equipment and other 9,944 9,931
---------- ----------
1,342,351 1,241,052
Less accumulated depletion and depreciation 913,490 836,368
---------- ----------
Total property and equipment, net 428,861 404,684
---------- ----------
OTHER ASSETS 1,158 4,022
---------- ----------
Total assets $ 488,085 $ 448,749
========== ==========
See notes to consolidated financial statements.
4
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(thousands of dollars)
SEPTEMBER 30, DECEMBER 31,
2004 2003
---- ----
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 10,596 $ 8,692
Revenues and royalties payable 9,152 13,087
Due to affiliates 1,265 ----
Notes payable 1,598 194
Accrued liabilities 20,753 12,074
Liabilities from price risk management activities 16,125 9,768
Asset retirement obligations 648 953
Current income taxes payable 285 415
Current portion long-term debt 5,000 10,000
--------- ---------
Total current liabilities 65,422 55,183
--------- ---------
LONG-TERM DEBT 74,000 122,320
--------- ---------
9 1/2% CONVERTIBLE SUBORDINATED NOTES ---- 20,000
--------- ---------
OTHER:
Liabilities from price risk management activities ---- 2,385
Asset retirement obligations 5,069 3,149
Deferred income taxes 12,755 931
--------- ---------
17,824 6,465
--------- ---------
REDEEMABLE PREFERRED STOCK:
Preferred stock, $1.00 par value (1,500,000 shares authorized,
315,890 [2004] and 604,460 [2003] shares of Series C
Redeemable Convertible Preferred Stock issued at stated value) 31,589 60,446
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value (200,000,000 shares authorized,
79,204,834 [2004] and 61,724,597 [2003] issued and outstanding) 821 644
Additional paid-in capital 490,063 394,177
Accumulated deficit (181,674) (202,492)
Accumulated other comprehensive loss (9,546) (7,704)
Unamortized deferred compensation (414) (290)
--------- ---------
Total stockholders' equity 299,250 184,335
--------- ---------
Total liabilities and stockholders' equity $ 488,085 $ 448,749
========= =========
See notes to consolidated financial statements.
5
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands of dollars)
(unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
------------
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 23,962 $ 11,547
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Cumulative effect of change in accounting principle ---- 1,309
Debt conversion expense 1,188 -----
Depletion and depreciation 77,440 52,339
Amortization of other assets 1,468 1,280
Non-cash compensation 1,267 1,063
Write-down of securities held 195 ----
Accretion expense 414 401
Deferred income taxes 12,500 2,100
Changes in assets and liabilities:
Accounts receivable (362) (145)
Due to/from affiliates 1,614 (1,338)
Prepaid expenses and other (1,528) (1,512)
Accounts payable 1,904 (6,286)
Revenues and royalties payable (3,935) 3,099
Accrued liabilities and other 10,934 1,276
--------- ---------
Net cash provided by operating activities 127,061 65,133
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (99,899) (55,552)
Sale of property and equipment (73) 2,628
--------- ---------
Net cash used in investing activities (99,972) (52,924)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (53,320) (35,430)
Net increases of notes payable 1,404 99
Issuance of stock/exercise of options 95,009 33,605
Repurchase of common stock (49,291) ----
Payment of preferred dividends (5,248) ----
Additions to deferred loan costs (16) (171)
--------- ---------
Net cash used in financing activities (11,462) (1,897)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 15,627 10,312
Cash and cash equivalents at beginning of period 12,821 7,287
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 28,448 $ 17,599
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Non-cash financing activities:
Conversion of preferred stock $ (27,766) $ -----
Conversion of convertible subordinated debt $ (20,000) $ -----
See notes to consolidated financial statements.
6
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(in thousands)
(unaudited)
Common Stock Accumulated
----------------- Additional Accumulated Other Unamortized
Shares Paid-In Earnings Comprehensive Deferred
Value Par Capital (Deficit) Loss Compensation
----- ------- ------- --------- ---- ------------
Balance, December 31, 2002 50,089 $ 557 $ 378,215 $ (209,738) $ (4,938) $ (356)
Issuance of rights to common stock ----- 8 1,045 ----- ----- (1,053)
Company's 401(k) plan contribution 93 ----- (569) ----- ----- -----
Exercise of stock options 80 1 78 ----- ----- -----
Compensation expense ----- ----- ----- ----- ----- 1,063
Issuance of shares from stock offring 8,704 50 3,698 ----- ----- -----
Accum. other comprehensive loss ----- ----- ----- ----- (806) -----
Preferred dividends ----- ----- ----- (4,937) ----- -----
Net earnings ----- ----- ----- 11,547 ----- -----
------ ------- --------- ---------- ------------- ------------
Balance, September 30, 2003 58,966 $ 616 $ 382,467 $ (203,128) $ (5,744) $ (346)
====== ======= ========= ========== ============= ============
Balance, December 31, 2003 61,725 $ 644 $ 394,177 $ (202,492) $ (7,704) $ (290)
Issuance of rights to common stock ----- 3 1,388 ----- ----- (1,391)
Company's 401(k) plan contribution 44 ----- 275 ----- ----- -----
Exercise of stock options 25 ----- 120 ----- ----- -----
Compensation expense ----- ----- ----- ----- ----- 1,267
Accum. other comprehensive loss ----- ----- ----- ----- (2,027) -----
Write-off Inland Resources stock ----- ----- ----- ----- 185 -----
Issuance of shares from stock offering 13,800 138 94,476 ----- ----- -----
Issuance for conversion of pref stock 6,484 65 27,701 ----- ----- -----
Issuance for conversion of sub debt 4,209 42 21,146 ----- ----- -----
Repurchase of common stock ----- ----- ----- ----- ----- -----
Retirement of treasury stock (7,082) (71) (49,220) ----- ----- -----
Preferred dividends ----- ----- ----- (3,144) ----- -----
Net earnings ----- ----- ----- 23,962 ----- -----
------ ------- --------- ---------- ------------- ------------
Balance, September 30, 2004 79,205 $ 821 $ 490,063 $ (181,674) $ (9,546) $ (414)
====== ======= ========= ========== ============= ============
Treasury Stock
Shares Cost Total
------ ---- -----
Balance, December 31, 2002 3,779 $ (30,347) $ 133,393
Issuance of rights to common stock ----- ----- -----
Company's 401(k) plan contribution (93) 747 178
Exercise of stock options (22) 177 256
Compensation expense ----- ----- 1,063
Issuance of shares from stock offring (3,664) 29,423 33,171
Accum. other comprehensive loss ----- ----- (806)
Preferred dividends ----- ----- (4,937)
Net earnings ----- ----- 11,547
------ --------- ---------
Balance, September 30, 2003 ----- $ ----- $ 173,865
====== ========= =========
Balance, December 31, 2003 ----- $ ----- $ 184,335
Issuance of rights to common stock ----- ----- -
Company's 401(k) plan contribution ----- ----- 275
Exercise of stock options ----- ----- 120
Compensation expense ----- ----- 1,267
Accum. other comprehensive loss ----- ----- (2,027)
Write-off Inland Resources stock ----- ----- 185
Issuance of shares from stock offering ----- ----- 94,614
Issuance for conversion of pref stock ----- ----- 27,766
Issuance for conversion of sub debt ----- ----- 21,188
Repurchase of common stock (7,082) (49,291) (49,291)
Retirement of treasury stock 7,082 49,291 -----
Preferred dividends ----- ----- (3,144)
Net earnings ----- ----- 23,962
------ --------- ---------
Balance, September 30, 2004 ----- $ ----- $ 299,250
====== ========= =========
See notes to consolidated financial statements.
7
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(thousands of dollars)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------ ------------
2004 2003 2004 2003
---- ---- ---- ----
Net earnings applicable to common stockholders $ 7,786 $ 2,965 $ 20,818 $ 6,610
Other comprehensive income (loss), net of tax, for unrealized losses from
hedging activities:
Unrealized holding losses arising during period (4,218) 944 (10,298) (9,086)
Reclassification adjustments on settlement of contracts 3,161 1,695 8,271 8,280
-------- -------- -------- --------
(1,057) 2,639 (2,027) (806)
-------- -------- -------- --------
Total comprehensive income $ 6,729 $ 5,604 $ 18,791 $ 5,804
======== ======== ======== ========
See notes to consolidated financial statements.
8
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, 2003, as filed with the Securities and Exchange Commission.
The financial statements included herein as of September 30, 2004, and for the
three and nine month periods ended September 30, 2004 and 2003, are unaudited,
and in the opinion of management, the information furnished reflects all
material adjustments, consisting of normal recurring adjustments, necessary for
a fair presentation of financial position and of the results for the interim
periods presented. Certain minor reclassifications of prior period statements
have been made to conform to current reporting practices. The results of
operations for interim periods are not necessarily indicative of results to be
expected for a full year.
2. DEBT
CREDIT FACILITY. During August 2002, the Company replaced its Chase Manhattan
Bank Credit Facility with a new three-year $175 million underwritten senior
secured credit agreement (the "Credit Agreement") with Societe Generale as
administrative agent, lead arranger and book runner, and Fortis Capital
Corporation ("Fortis"), as co-lead arranger and documentation agent. The
borrowing base is currently set at $127.5 million effective on October 31, 2004.
Credit facility payments of $48.3 million have been made during the first nine
months of 2004, bringing the outstanding balance to $74 million as of September
30, 2004. Borrowings under the Credit Agreement mature on November 15, 2005, as
extended by an amendment dated November 8, 2004. The amendment is subject to an
extension fee of $450,000 to be paid in the event the Credit Facility has not
been paid or refinanced by January 3, 2005. During October 2004, the Company and
Fortis entered into a term sheet whereby Fortis will serve as lead arranger and
administrative agent on a new four year $200 million senior secured credit
facility. The new facility is expected to close before December 31, 2004, at
which time the existing facility will be repaid in full.
In addition to the scheduled quarterly borrowing base redeterminations, the
lenders or borrower, under the Credit Agreement, have the right to redetermine
the borrowing base at any time, once during each calendar year. Borrowings under
the Credit Agreement are secured by pledges of outstanding capital stock of the
Company's subsidiaries and a mortgage on the Company's oil and natural gas
properties of at least 90% of its present value of proved properties. On October
25, 2004, the Company notified Societe Generale that the present value of the
mortgaged oil and gas properties total 86%. The Company has received a waiver of
the 90% test in anticipation of the new Fortis senior secured credit facility
requiring only a 75% mortgage test. The Credit Agreement contains other
restrictive covenants, including, among other items, maintenance of certain
financial ratios and restrictions on cash dividends on Common Stock and under
certain circumstances Preferred Stock, and an unqualified audit report on the
Company's consolidated financial statements, with all of which the Company is in
compliance.
9
Under the Credit Agreement, the Company may secure either (i) (a) an alternative
base rate loan that bears interest at a rate per annum equal to the greater of
the administrative agent's prime rate; or (b) federal funds-based rate plus -1/2
of 1%, plus an additional 0.5% to 1.5% depending on the ratio of the aggregate
outstanding loans and letters of credit to the borrowing base or; (ii) a
Eurodollar base rate loan that bears interest, generally, at a rate per annum
equal to the London interbank offered rate ("LIBOR") plus 1.5% to 2.5%,
depending on the ratio of the aggregate outstanding loans and letters of credit
to the borrowing base. At September 30, 2004, the three-month LIBOR interest
rate was 2.02%. The Credit Agreement also provides for commitment fees ranging
from 0.375% to 0.5% per annum.
SUBORDINATED CREDIT AGREEMENT. The Company extended and amended a short-term
subordinated credit agreement with Fortis Capital Corporation for $25 million on
April 5, 2002, with a maturity date of December 31, 2004. The notes are
unsecured and contain customary events of default, but do not contain any
maintenance or other restrictive covenants. The interest rate is LIBOR plus 5.5%
from January 1, 2003, through August 31, 2003, and LIBOR plus 6.5% from
September 1, 2003, through December 31, 2004. At September 30, 2004, the
three-month LIBOR interest rate was 2.02%. A note payment of $5 million was made
during April 2004, with the remaining $5 million payable on December 31, 2004.
The Company is in compliance with the terms of this agreement.
9 -1/2% CONVERTIBLE SUBORDINATED NOTES. During March 2004, the notes were
converted into 4.0 million shares of the Company's Common Stock at a conversion
price of $5.00 per share, and included an additional non-cash conversion expense
of approximately $1.2 million that was incurred and paid via the issuance of
Common Stock priced at market.
3. 8.5% REDEEMABLE CONVERTIBLE PREFERRED STOCK
A private placement of $66.85 million of 8.5% redeemable convertible preferred
stock was completed during May 2002. The preferred stock is convertible into
shares of the Company's Common Stock at a conversion price of $4.45 per share.
Dividends are payable semi-annually in cash or additional preferred stock. At
the option of the Company, one-third of the preferred shares can be forced to
convert to Common Stock if the closing price of the Company's Common Stock
exceeds 150% of the conversion price for 30 out of 40 consecutive trading days
on the New York Stock Exchange. The preferred stock is subject to redemption at
the option of the Company after March 2005, and mandatory redemption on March
31, 2009. The holders of the preferred stock have been granted registration
rights with respect to the shares of Common Stock issued upon conversion of the
preferred stock.
In June 2004, the Company exercised its right, as described above, to convert
one-third of its remaining issued and outstanding preferred stock into shares of
Common Stock. The conversion was completed on a pro rata basis and included a
cash payment for accrued and unpaid dividends through the June 8, 2004,
conversion date, at which time dividends ceased to accrue on the converted
shares.
4. COMMITMENTS AND CONTINGENCIES
LITIGATION.
ENVIRONMENTAL LITIGATION. Various landowners have filed claims against the
Company and numerous other oil companies in four similar lawsuits concerning the
Weeks Island, Gibson, Bayou Pigeon and Napoleonville Fields. The lawsuits seek
injunctive relief and other relief, including unspecified amounts in both actual
and punitive damages for alleged breaches of mineral leases and alleged failure
to restore the plaintiffs' lands from alleged contamination and otherwise from
the defendants' oil and gas operations.
There are no other material legal proceedings which exceed our insurance limits
to which the Company or
10
any of its subsidiaries is a party or to 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.
5. STOCKHOLDERS' EQUITY
COMMON STOCK. In August 2003, the Company completed a private offering of
8,703,537 shares of Common Stock at a price of $3.87 per share. The total
proceeds of the offering, net of issuance costs, received by the Company were
approximately $33.0 million. The Company used the majority of these funds to
retire $31.8 million in long-term debt, with the remainder of the proceeds being
used for exploration activities and other general corporate purposes. As
previously noted, during the nine months ended September 30, 2004, approximately
6.5 million shares of Common Stock were issued upon the conversion of a portion
of the 8.5% Redeemable Convertible Preferred Stock and approximately 4.2 million
shares of Common Stock were was issued for the early conversion and retirement
of the 9 -1/2% Convertible Subordinated Notes.
In August 2004, the Company completed a public offering of 13,800,000 shares of
Common Stock at a price of $7.25 per share. The total proceeds of the offering,
net of issuance costs, received by the Company were approximately $94.6 million.
The Company repurchased all of the 7,082,030 shares of its Common Stock that
were beneficially owned by Shell Oil Company for $49.3 million and a portion of
the remaining proceeds of that equity offering were used to repay borrowings
under the Company's senior secured credit agreement, which resulted in an
increase in funds available to the Company to accelerate planned capital
expenditures for drilling activities and related pipeline construction. The
repurchased 7,082,030 shares of Common Stock that were held in Treasury Stock
were retired as of September 30, 2004.
11
6. EARNINGS PER SHARE (in thousands, except per share)
The following tables set forth the computation of basic and diluted net earnings
per share:
THREE MONTHS ENDED
SEPTEMBER 30,
2004 2003
---- ----
Numerator:
Net earnings applicable to common stockholders $ 7,786 $ 2,965
Plus income impact of assumed conversions:
Preferred stock dividends N/A N/A
Interest on convertible subordinated notes ----- 309
------- -------
Net earnings applicable to common stockholders
plus assumed conversions $ 7,786 $ 3,274
------- -------
Denominator:
Denominator for basic earnings per
share - weighted-average shares outstanding 76,678 53,532
Effect of potentially dilutive common shares:
Warrants 4,838 3,726
Employee and director stock options 1,842 756
Convertible subordinated notes ----- 4,000
Redeemable preferred stock N/A N/A
------- -------
Denominator for diluted earnings per
share - weighted-average shares outstanding
and assumed conversions 83,359 62,014
======= =======
Basic earnings per share $ 0.10 $ 0.06
======= =======
Diluted earnings per share $ 0.09 $ 0.05
======= =======
NINE MONTHS ENDED
SEPTEMBER 30,
2004 2003
---- ----
Numerator:
Net earnings applicable to common stockholders $20,818 $ 6,610
Plus income impact of assumed conversions:
Preferred stock dividends N/A N/A
Interest on convertible subordinated notes 270 N/A
------- -------
Net earnings applicable to common stockholders
plus assumed conversions $21,088 $ 6,610
------- -------
Denominator:
Denominator for basic earnings per
share - weighted-average shares outstanding 69,690 51,274
Effect of potentially dilutive common shares:
Warrants 4,439 3,238
Employee and director stock options 1,584 252
Convertible subordinated notes 1,139 N/A
Redeemable preferred stock N/A N/A
------- -------
Denominator for diluted earnings per
share - weighted-average shares outstanding
and assumed conversions 76,852 54,764
======= =======
Basic earnings per share $ 0.30 $ 0.13
======= =======
Diluted earnings per share $ 0.27 $ 0.12
======= =======
12
7. OIL AND NATURAL GAS HEDGING ACTIVITIES
The Company may address market risk by selecting instruments with value
fluctuations which correlate strongly with the underlying commodity being
hedged. The Company enters into swaps and other derivative contracts to hedge
the price risks associated with a portion of anticipated future oil and gas
production. These swaps allow the Company to predict with greater certainty the
effective oil and natural gas prices to be received for our hedged 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 are exchanged for physical delivery contracts. The
Company 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, the Company would be
exposed to price risk. The Company 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.
The Company's results of operations and operating cash flows are impacted by
changes in market prices for oil and natural gas. To mitigate a portion of the
exposure to adverse market changes, the Company has entered into various swap
agreements. Although derivatives often fail to achieve 100% effectiveness for
accounting purposes, these derivative instruments continue to be highly
effective in achieving the risk management objectives for which they were
intended. These swaps have been designated as cash flow hedges as provided by
Statement of Financial Accounting Standards ("SFAS") 133 and any changes in fair
value are recorded in other comprehensive income until earnings are affected by
the variability in cash flows of the designated hedged item. Any changes in fair
value resulting from the ineffectiveness of the hedge are reported in the
consolidated statement of operations as a component of revenues.
The estimated September 30, 2004, fair value of the Company's oil and natural
gas swaps was an unrealized loss of $14.6 million ($9.5 million net of tax)
which is recognized in other comprehensive income. Based upon September 30,
2004, oil and natural gas commodity prices, approximately $14.6 million of the
loss deferred in other comprehensive income could potentially lower gross
revenues over the next twelve months. The swap agreements expire at various
dates through July 31, 2005.
Net settlements under these swap agreements reduced oil and natural gas revenues
by $4,863,000 and $2,608,000 for the three months ended September 30, 2004 and
2003, respectively, and by $12,724,000 and $12,739,000 for the nine months ended
September 30, 2004 and 2003, respectively, as a result of hedging transactions.
The "Notional Amount" is equal to the total net volumetric hedge position of the
Company during the periods presented. The positions effectively hedge
approximately 9% of our proved developed natural gas production and 49% of our
proved developed oil production during the respective terms of the swap
agreements. The fair values of the hedges are based on the difference between
the strike price and the New York Mercantile Exchange future prices for the
applicable trading months.
13
The estimated fair value of our oil and natural gas hedges as of September 30,
2004, is provided below:
Weighted Average Fair Value (unrealized)
Notional Strike Price at September 30, 2004
Amount ($ per unit) (in thousands)
------ ------------ --------------
Natural Gas (mmbtu)
October 2004 - June 2005 1,570,000 $ 3.74 $ (4,989)
Oil (bbls)
October 2004 - July 2005 413,000 $ 23.26 $ (9,697)
------------
$ (14,686)
------------
8. STOCK-BASED COMPENSATION
SFAS 123, "Accounting for Stock-Based Compensation," as amended by SFAS 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure,"
established accounting and disclosure requirements using a fair value-based
method of accounting for stock-based employee compensation plans. As provided
for under SFAS 123, there has been no amount of compensation expense recognized
for the Company's stock option plans. The Company accounts for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion 25, "Accounting for Stock Issued to Employees."
Compensation expense is recorded for restricted stock awards over the requisite
vesting periods based upon the market value on the date of the grant. No
stock-based compensation expense was recorded in the three and nine month
periods ended September 30, 2004 and 2003.
The following is a reconciliation of reported earnings and earnings per share as
if the Company used the fair value method of accounting for stock-based
compensation. Fair value is calculated using the Black-Scholes option-pricing
model.
(In thousands, except per share data)
Three Months Ended September 30,
-------------------------------
2004 2003
---- ----
Net earnings applicable to common stockholders as reported $ 7,786 $ 2,965
Stock-based compensation (expense) benefit determined under
fair value method for all awards, net of tax (66) 16
-------- --------
Net earnings applicable to common stockholders pro forma $ 7,720 $ 2,981
======== ========
Basic earnings per share:
As reported $ 0.10 $ 0.06
Pro forma $ 0.10 $ 0.06
Diluted earnings per share:
As reported $ 0.09 $ 0.05
Pro forma $ 0.09 $ 0.05
14
(In thousands, except per share data)
Three Months Ended September 30,
-------------------------------
2004 2003
---- ----
Net earnings applicable to common stockholders as reported $ 20,818 $ 6,610
Stock-based compensation (expense) benefit determined under
fair value method for all awards, net of tax (74) 48
-------- --------
Net earnings applicable to common stockholders pro forma $ 20,744 $ 6,658
======== ========
Basic earnings per share:
As reported $ 0.30 $ 0.13
Pro forma $ 0.30 $ 0.13
Diluted earnings per share:
As reported $ 0.27 $ 0.12
Pro forma $ 0.27 $ 0.12
9. ASSET RETIREMENT OBLIGATIONS
On January 1, 2003, the Company adopted SFAS 143, "Accounting for Asset
Retirement Obligations." This statement requires entities to record the fair
value of a liability for legal obligations associated with the retirement
obligations of tangible long-lived assets in the period in which it is incurred.
The fair value of asset retirement obligation liabilities has been calculated
using an expected present value technique. Fair value, to the extent possible,
should include a market risk premium for unforeseeable circumstances. No market
risk premium was included in the Company's asset retirement obligations fair
value estimate since a reasonable estimate could not be made. When the liability
is initially recorded, the entity increases the carrying amount of the related
long-lived asset. Over time, accretion of the liability is recognized each
period, and the capitalized cost is amortized over the useful life of the
related asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon settlement.
This standard requires the Company to record a liability for the fair value of
our dismantlement and abandonment costs, excluding salvage values.
Upon adoption, the Company recorded transition amounts for liabilities related
to our wells, and the associated costs to be capitalized. A liability of $4.5
million was recorded to long-term liabilities and a net asset of $3.2 million
was recorded to oil and natural gas properties on January 1, 2003. This resulted
in a cumulative effect of an accounting change of ($1.3) million. Accretion
expenses subsequent to the adoption of this accounting statement decreased net
earnings $414,000 and $401,000 in the first nine months of 2004 and 2003,
respectively.
15
The pro forma effect of the application of SFAS 143 as if the statement had been
adopted on January 1, 2002, is presented below (thousands of dollars except per
share information):
Three Months Ended Sept 30, Nine Months Ended Sept 30,
--------------------------- --------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net earnings applicable to common
stockholders $ 7,786 $ 2,965 $ 20,818 $ 6,610
Additional accretion expense ----- ----- -----
Cumulative effect of accounting change ----- ----- 1,309
---------- ---------- ---------- ----------
Pro forma net earnings $ 7,786 $ 2,965 $ 20,818 $ 7,919
Basic $ 0.10 $ 0.06 $ 0.30 $ 0.16
Diluted $ 0.09 $ 0.05 $ 0.27 $ 0.15
The following table describes the change in the Company's asset retirement
obligations for the period ended September 30, 2004, and the pro forma amounts
for the year ended December 31, 2002 (thousands of dollars):
Asset retirement obligation at December 31, 2002 $ 4,523
Additional retirement obligations recorded in 2003 338
Reduction due to property sale in 2003 (1,010)
Other revisions during 2003 (416)
Accretion expense for 2003 667
----------
Asset retirement obligation at December 31, 2003 4,102
----------
Additional retirement obligations recorded in 2004 790
Other revisions during 2004 411
Accretion expense for 2004 414
----------
Asset retirement obligation at September 30, 2004 $ 5,717
==========
10. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 141,
"Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets."
SFAS 141 addresses accounting and reporting for business combinations and is
effective for all business combinations initiated after June 30, 2001. SFAS 142
addresses the accounting and reporting for goodwill subsequent to acquisition
and other intangible assets. The new standard eliminates the requirement to
amortize acquired goodwill; instead, such goodwill is required to be reviewed at
least annually for impairment. The new standard also requires that, at a
minimum, all intangible assets be aggregated and presented as a separate line
item in the balance sheet. The adoption of SFAS 141 and SFAS 142 had no impact
on the Company's financial position or results of operations. In April 2004, the
FASB issued FASB Staff Position FAS 142-1 and EITF Issue No. 04-2, "Whether
Mineral Rights Are Tangible or Intangible Assets," which amends SFAS 142 to
exclude mineral use rights from the intangible category. The Company will
continue to monitor this issue and continue to classify oil and natural gas
leaseholds as oil and natural gas properties until further guidance is provided.
In June 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations." SFAS 143 requires the fair value of a liability for an asset
retirement obligation to be recognized in the period in which it is incurred if
a reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
SFAS 143 was effective for the Company on January 1, 2003. See Note 9 for
discussion of the impact on the Company's consolidated financial statements.
During December 2003, the FASB issued Interpretation No. 46R, "Consolidation of
Variable Interest Entities" ("FIN 46"), which requires the consolidation of
certain entities that are determined to be variable
16
interest entities ("VIE's"). An entity is considered to be a VIE when either (i)
the entity lacks sufficient equity to carry on its principal operations, (ii)
the equity owners of the entity cannot make decisions about the entity's
activities or (iii) the entity's equity neither absorbs losses or benefits from
gains. Meridian owns no interests in variable interest entities, and therefore
this new interpretation has not affected the Company's consolidated financial
statements.
In May 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities." SFAS 149 amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS 149 is generally effective for contracts entered into or modified after
June 30, 2003, and for hedging relationships designated after June 30, 2003. The
adoption of this statement did not have a material effect on the Company's
financial statements.
In May 2003, the FASB issued SFAS 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS 150
establishes the standards on how companies classify and measure certain
financial instruments with characteristics of both liabilities and equity. The
statement requires that the Company classify as liabilities the fair value of
all mandatorily redeemable financial instruments that had previously been
recorded as equity or elsewhere in the consolidated financial statements. This
statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise effective for all existing financial instruments
beginning in the third quarter of 2003. This statement did not have any
significant impact on the Company's consolidated financial statements.
ACCOUNTING PRONOUNCEMENTS. In March 2004, the FASB issued an exposure draft
entitled "Share-Based Payment, an Amendment of FASB Statement No. 123 and 95."
This proposed statement addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments or that may be settled by
the issuance of such equity instruments. The proposed statement would eliminate
the ability to account for share-based compensation transactions using APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and generally would
require instead that such transactions be accounted for using a fair-value-based
method. As proposed, this statement would be effective for the Company on
January 1, 2005. The impact on the results of operations would be similar to the
pro forma disclosures made above.
II. SUBSEQUENT EVENT
On October 29, 2004, the Company entered into a series of hedge contracts on a
portion of its expected gas production for 2004 and 2005. The hedge contracts
were completed in the form of costless collars. The costless collars provide the
Company with a lower limit "floor" price and an upper limit "ceiling" price on
the hedged volumes. The floor price represents the lowest price the Company will
receive for the hedged volumes while the ceiling price represents the highest
price the Company will receive for the hedged volumes. The hedges are settled
monthly based on the closing NYMEX price of natural gas for each respective
month. These transactions will be accounted for as cash flow hedges as provided
by SFAS 133. The following table summarizes the contracted volumes and price for
the costless collars:
CONTRACTED VOLUME FLOOR PRICE CEILING PRICE
PRODUCTION MONTH (MMBtu) ($ / MMBtu) ($ / MMBtu)
------- ----------- -----------
Dec.'04 - Mar.'05 3,940,000 $ 7.00 $ 13.00
Apr.'05 - Oct.'05 2,600,000 $ 6.50 $ 7.90
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of The Meridian Resource Corporation and its
subsidiaries ("Meridian" or the "Company") financial operations for the three
and nine months ended September 30, 2004 and 2003. 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, 2003 (and the notes attached thereto),
should be read in conjunction with this discussion.
GENERAL.
BUSINESS ACTIVITIES. The Company continues to pursue its business plan, focusing
on growth primarily through its exploration and exploitation/development
drilling program, as well as the acquisition of reserves with an upside
component of future drilling activities. During the first nine months of 2004,
Meridian's capital expenditures have totaled approximately $100 million and have
been focused primarily in the Company's Biloxi Marshlands and Weeks Island
project areas. As a result of the Company's exploration activities, the average
daily production for the first nine months of 2004 increased by 37% to 99.5
Mmcfe compared to an average daily rate of 72.9 Mmcfe for the first nine months
of 2003. As a result of the increased production and an increase in oil and
natural gas prices, the Company's revenues for the first nine months increased
in excess of 52% when compared to the corresponding period of 2003. In addition,
net cash provided by operating activities increased in excess of 94% for the
same period and net earnings increased over 84%.
During 2004, the Company has drilled fifteen new wells in its Biloxi Marshlands
("BML") project area. Of the fifteen wells drilled ten have resulted in
successful wells, representing a 67% success rate. Since the Company began its
initial operations in the BML project area during late 2002, the Company has
drilled twenty-one wells in the field of which 15 have been successfully
completed and placed on production representing a 71% success rate. The most
recent discovery in the BML project area was the BML No. 31-1 well which was
drilled to a total depth of approximately 12,400 feet and logged 21 feet of net
gas pay between 11,981 and 12,002 feet. The well was recently tested into the
sales line at 3.3 Mmcfe of gas per day through a 16/64 inch choke. Flowing
tubing pressure was measured at 2,995 psi and shut-in tubing pressure was
measured at 3,503 psi. Current gross production from the field is totaling
approximately 78.8 Mmcfe per day (48.8 Mmcfe, net).
OPERATIONS. Currently, the Company has three drilling rigs working in the BML
project area. On the Hornets Nest prospect, the Company is drilling the BML No.
28-1 well. The well will be drilled to test the TexW and BigHum sand intervals
and will be drilled to a total depth of approximately 11,000 feet. The well is
currently drilling at approximately 10,100 feet and is expected to take
approximately 15 days to reach its total depth. If successful the BML No. 28-1
well will setup five additional locations in the Hornets Nest prospect during
the remainder of 2004 and early 2005. The Company moved a third drilling rig to
the BML project area and expects to drill an average of 2-3 wells per month for
the remainder of 2004 and 2005.
In addition to its drilling activities in the BML project area, during early
2004 the Company extended its proprietary 3-D seismic data base with the
shooting of 264 square miles of new data, the total of which will ultimately
provide approximately 540 square miles covering approximately 400,000 acres in
St. Bernard Parish, Louisiana. The data is in the early stages of being
processed and merged into the Company's existing data set. It is anticipated
that the Biloxi Marshlands project area will comprise a substantial portion of
the Company's future drilling inventory over the next several years as it
continues to work the entire 3-D data set ranging in depths from the shallow
Deltaic sand formations to the deep Cretaceous sand formations for new prospect
opportunities.
18
In the Weeks Island field, the Company has drilled four wells during 2004. The
Smith Goodrich Cocke #10 well on the Camille prospect was recently drilled to a
total depth of approximately 10,482 feet. Electric logs indicated apparent oil
pay in the "I" sand between 10,218 and 10,238 feet. Upon completion of drilling
operations on the Smith Goodrich Cocke #10 well, the Company mobilized the
drilling rig to the BML project area to begin drilling the BML No. 28-1 well.
The Company expects to have a completion rig available for the Smith Goodrich
Cocke #10 well within the next three weeks.
During July 2004, drilling operations began on the Hosemann #1 well on the
Enterprise prospect in the Riceville area. The well was drilled to a total depth
of approximately 18,500 feet and encountered a buried fault, kicking the well to
an up-thrown position. The operator of the well is currently sidetracking the
well to attempt to get the well bore on the down-thrown side of the fault. The
Company elected not to participate in the sidetrack and will be subject to
industry standard non-consent penalties if the well proves to be successful.
Also in the Riceville area, the Company is preparing to spud its F. Boudreaux
No. 1 well on the Zwan prospect. The well will be drilled to a total depth of
approximately 13,600 feet to test the Zwan sand interval. The Company will be
operator of the well and will have a 59.5% working interest.
Also during July 2004, the Company began drilling the CL&F A-2 well on the North
Turtle Bayou prospect. The well is an updip location to a well that encountered
mechanical problems. The well is currently drilling at 15,220 feet and will be
drilled to a total depth of 15,500 feet. The Company holds a 96.5% working
interest in the well.
In the Turtle Bayou field, the Company recently drilled the CL&F No. 68 well to
test an amplitude at 6,300 feet, true vertical depth. The well was drilled,
logged and is currently awaiting completion. Finally, during the fourth quarter
the Company plans to drill two additional wells in the Turtle Bayou/Ramos area.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES. The Company's discussion and
analysis of its financial condition and results of operation are based upon
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted and adopted in the United States. The
preparation of these financial statements requires the Company to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses. See the Company's Annual Report on Form 10-K for the year ended
December 31, 2003, for further discussion.
19
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2003
OPERATING REVENUES. Third quarter 2004 oil and natural gas revenues increased
$13.8 million (35%) as compared to third quarter 2003 revenues due to a 16%
increase in production volumes primarily from the Company's previously announced
drilling results in the Biloxi Marshlands ("BML") project area and Weeks Island
coupled with successful workover operations in the Company's Ramos and Weeks
Island fields, offset by natural production declines and storm-related shut-ins
due to hurricane Ivan. Further, revenues were enhanced by a 16% increase in
average commodity prices on a natural gas equivalent basis. The drilling and
workover success increased our average daily production from 90 Mmcfe during the
third quarter of 2003 to 105 Mmcfe for the third quarter of 2004. Oil and
natural gas production volume totaled 9,671 Mmcfe for the third quarter of 2004,
compared to 8,302 Mmcfe for the comparable period of 2003. Current production is
ranging between 95 Mmcfe and 100 Mmcfe per day.
The following table summarizes the Company's operating revenues, production
volumes and average sales prices for the three months ended September 30, 2004
and 2003:
THREE MONTHS ENDED
SEPTEMBER 30, INCREASE
2004 2003 (DECREASE)
---- ---- ----------
Production Volumes:
Oil (Mbbl) 320 338 (5%)
Natural gas (MMcf) 7,753 6,275 24%
Mmcfe 9,671 8,302 16%
Average Sales Prices:
Oil (per Bbl) $ 30.26 $ 24.46 24%
Natural gas (per Mcf) $ 5.58 $ 4.92 13%
Mmcfe $ 5.48 $ 4.71 16%
Operating Revenues (000's):
Oil $ 9,683 $ 8,268 17%
Natural gas 43,268 30,861 40%
------- -------
Total Operating Revenues $52,951 $39,129 35%
======= =======
OPERATING EXPENSES. Oil and natural gas operating expenses on an aggregate basis
increased $0.4 million (13%) to $3.1 million during the third quarter of 2004,
compared to $2.7 million in 2003. However, on a unit basis, lease operating
expenses decreased $0.01 per Mcfe to $0.32 per Mcfe for the third quarter of
2004 from $0.33 per Mcfe for the third quarter of 2003. Oil and gas operating
expenses include additional operating expenses associated with the Biloxi
Marshlands project area, offset by savings resulting from sold properties,
combined with other cost savings.
SEVERANCE AND AD VALOREM TAXES. Severance and ad valorem taxes increased $0.2
million (7%) to $2.2 million for the third quarter of 2004, compared to $2.0
million during the same period in 2003 primarily because of an increase in
natural gas production and a higher natural gas tax rate. Meridian's oil and
natural gas production is primarily from Louisiana, and is therefore subject to
Louisiana severance tax. The severance tax rates for Louisiana are 12.5% of
gross oil revenues and $0.208 per Mcf for natural gas for the third quarter of
2004, an increase from $0.171 per Mcf for the third quarter of 2003. The
Company's increase was primarily due to the increase in natural gas production
and the increase in the natural gas tax rate, partially offset by a tax refund
from Louisiana for prior periods. On an equivalent unit of production basis,
20
severance and ad valorem taxes decreased to $0.22 per Mcfe from $0.24 per Mcfe
for the comparable three-month period.
DEPLETION AND DEPRECIATION. Depletion and depreciation expense increased $5.9
million (26%) during the third quarter of 2004 to $28.4 million, from $22.5
million for the same period of 2003. This was primarily the result of the 16%
increase in production volumes in 2004 over 2003 levels, and an increase in the
depletion rate as compared to the 2003 period. On a unit basis, depletion and
depreciation expense increased by $0.23 per Mcfe, to $2.94 per Mcfe for the
three months ended September 30, 2004, compared to $2.71 per Mcfe for the same
period in 2003.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense increased
$1.1 million to $4.0 million compared to $2.9 million for 2003 primarily due to
an increase in professional fees and higher volume activity. On an equivalent
unit of production basis, general and administrative expenses increased $0.07
per Mcfe to $0.42 per Mcfe for the third quarter of 2004 compared to $0.35 per
Mcfe for the comparable 2003 period.
INTEREST EXPENSE. Interest expense decreased $1.2 million (42%), to $1.6 million
for the third quarter of 2004 in comparison to the third quarter of 2003. The
decrease is primarily a result of reduction in long-term debt. With the
conversion of the $20 million convertible subordinated notes into common stock
and the 2004 repayments of $53.3 million of debt, the Company will realize
additional future savings in interest.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2003
OPERATING REVENUES. Oil and natural gas revenues during the nine months ended
September 30 2004, increased $51.4 million (53%) as compared to 2003 revenues
due to a 37% increase in production volumes primarily from the Company's
previously announced drilling results in the Biloxi Marshlands ("BML") project
area and Weeks Island coupled with successful workover operations in the
Company's Ramos and Weeks Island fields, offset by natural production declines
and property sales. Further, revenues were enhanced by an 11% increase in
average commodity prices on a natural gas equivalent basis. The drilling and
workover success increased our average daily production from 72.9 Mmcfe during
the first nine months of 2003 to 99.5 Mmcfe for the first nine months of 2004.
Oil and natural gas production volume totaled 27,269 Mmcfe for the first nine
months of 2004, compared to 19,899 Mmcfe for the comparable period of 2003.
21
The following table summarizes the Company's operating revenues, production
volumes and average sales prices for the nine months ended September 30, 2004
and 2003:
NINE MONTHS ENDED
SEPTEMBER 30, INCREASE
2004 2003 (DECREASE)
---- ---- ----------
Production Volumes:
Oil (Mbbl) 977 1,082 (10%)
Natural gas (MMcf) 21,409 13,407 60%
Mmcfe 27,269 19,899 37%
Average Sales Prices:
Oil (per Bbl) $ 27.61 $ 24.95 11%
Natural gas (per Mcf) $ 5.71 $ 5.28 8%
Mmcfe $ 5.47 $ 4.91 11%
Operating Revenues (000's):
Oil $ 26,957 $ 26,995 -%
Natural gas 122,199 70,724 73%
-------- --------
Total Operating Revenues $149,156 $ 97,719 53%
======== ========
OPERATING EXPENSES. Oil and natural gas operating expenses on an aggregate basis
increased $0.8 million (10%) to $8.8 million during the first nine months of
2004, compared to $8.0 million in 2003. However, on a unit basis, lease
operating expenses decreased $0.08 per Mcfe to $0.32 per Mcfe for the first nine
months of 2004 from $0.40 per Mcfe for the first nine months of 2003. Oil and
gas operating expenses include additional operating expenses associated with the
Biloxi Marshlands project area, offset by savings resulting from sold
properties, combined with other cost savings.
SEVERANCE AND AD VALOREM TAXES. Severance and ad valorem taxes increased $1.6
million (30%) to $7.0 million for the first nine months of 2004, compared to
$5.4 million during the same period in 2003 primarily because of an increase in
natural gas production and a higher natural gas tax rate, partially offset by a
tax refund from Louisiana for prior periods. Meridian's oil and natural gas
production is primarily from Louisiana, and is therefore subject to Louisiana
severance tax. The severance tax rates for Louisiana are 12.5% of gross oil
revenues and $0.208 per Mcf (effective July 1, 2004) for natural gas. For the
first six months of 2004, and the last six months of 2003, the rate was $0.171
per Mcf for natural gas, an increase from $0.122 per Mcf for the first half of
2003. On an equivalent unit of production basis, severance and ad valorem taxes
decreased to $0.26 per Mcfe from $0.27 per Mcfe for the comparable nine-month
period, reflecting a shift in the mix between oil and natural gas production.
DEPLETION AND DEPRECIATION. Depletion and depreciation expense increased $25.1
million (48%) during the first nine months of 2004 to $77.4 million, from $52.3
million for the same period of 2003. This was primarily the result of the 37%
increase in production volumes in 2004 over 2003 levels, and an increase in the
depletion rate as compared to the 2003 period. On a unit basis, depletion and
depreciation expense increased by $0.21 per Mcfe, to $2.84 per Mcfe for the nine
months ended September 30, 2004, compared to $2.63 per Mcfe for the same period
in 2003.
22
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense increased
$2.0 million to $10.7 million compared to $8.7 million for 2003 due to an
increase in professional fees and higher volume activity. On an equivalent unit
of production basis, general and administrative expenses decreased $0.05 per
Mcfe to $0.39 per Mcfe for the first nine months of 2004 compared to $0.44 per
Mcfe for the comparable 2003 period.
INTEREST EXPENSE. Interest expense decreased $3.2 million (36%), to $5.6 million
for the first nine months of 2004 in comparison to the same period for 2003. The
decrease is primarily a result of reduction in long-term debt. With the
conversion of the $20 million convertible subordinated notes into common stock
and the 2004 repayments of $53.3 million of debt, the Company will realize
additional future savings in interest.
ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 143. On January 1,
2003, the Company adopted Statement of Financial Accounting Standards No. 143
("SFAS 143"), "Accounting for Asset Retirement Obligations." As a result, the
Company recorded a long-term liability of $4.5 million representing the
discounted present value of the estimated retirement obligations and an increase
in capitalized oil and gas properties of $3.2 million. The liability will be
accreted to its future value in subsequent reporting periods and will be charged
to earnings on the Company's Consolidated Statement of Operations as "Accretion
Expense." As a result of adoption of SFAS 143, the Company has charged
approximately $0.4 million to earnings as accretion expense during the 2004 and
2003 periods. The cumulative effect of the change in accounting principle for
prior years totaled $1.3 million, or $0.03 per share, and was charged to
earnings in the first quarter of 2003.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL. During the first nine months of 2004, Meridian's capital
expenditures were internally financed with cash from operations. As of September
30, 2004, the Company had a cash balance of $28.4 million and a working capital
deficit of $7.4 million. This deficit was made up primarily of $5.0 million of
current maturities of long-term debt, and a $16.1 million net current liability
associated with price risk management activities which will be offset by future
revenues. As of September 30, 2004, the Company had unutilized borrowing
capacity of $53.5 million from our credit facility.
CASH FLOWS. Net cash provided by operating activities was $127.1 million for the
nine months ended September 30, 2004, as compared to $65.1 million for the same
period in 2003. The increase of $62.0 million was primarily due to the increase
in revenues from oil and natural gas of $51.2 million in the first nine months
of 2004, over the first nine months of 2003.
Net cash used in investing activities was $100.0 million during the nine months
ended September 30, 2004, versus $52.9 million in the first nine months of 2003.
The increase in capital expenditures of $44.3 million was primarily associated
with the acquisition of the Company's new 264-square mile 3-D survey at the
Biloxi Marshlands project area, coupled with expenditures for drilling and
related activities.
Cash flows used in financing activities during the first nine months of 2004
were $11.5 million, compared to cash used in financing activities of $1.9
million during the first nine months of 2003. This additional cash used in
financing activities was primarily due to cash payments of $5.2 million in
preferred stock dividends coupled with the debt repayments of $53.3 million.
With the preferred stock conversion of approximately $29 million during the
first nine months of 2004, the Company will see an annualized $2.0 million
reduction of dividend payments.
CREDIT FACILITY. During August 2002, the Company replaced its Chase Manhattan
Bank Credit Facility with a new three-year $175 million underwritten senior
secured credit agreement (the "Credit Agreement") with Societe Generale as
administrative agent, lead arranger and book runner, and Fortis Capital
Corporation, as
23
co-lead arranger and documentation agent. Borrowings under the Credit Agreement
mature on November 15, 2005, as extended by an amendment dated November 8, 2004.
The amendment is subject to an extension fee of $450,000 to be paid in the event
the Credit Facility has not been paid or refinanced by January 3, 2005. During
October 2004, the Company and Fortis entered into a term sheet whereby Fortis
will serve as lead arranger and administrative agent on a new four year $200
million senior secured credit facility. The new facility is expected to close
before December 31, 2004, at which time the existing facility will be repaid in
full.
The borrowing base is currently set at $127.5 million effective on October 31,
2004. Credit Facility payments of $48.3 million have been made during the first
nine months of 2004, bringing the outstanding balance to $74 million as of
September 30, 2004. The Company made additional debt repayments of $40 million
in August 2004, which brought our unutilized borrowing capacity to $53.5
million.
In addition to the scheduled quarterly borrowing base redeterminations, the
lenders or borrower, under the Credit Agreement, have the right to redetermine
the borrowing base at any time, once during each calendar year. Borrowings under
the Credit Agreement are secured by pledges of outstanding capital stock of the
Company's subsidiaries and a mortgage on the Company's oil and natural gas
properties of at least 90% of its present value of proved properties. On October
25, 2004, the Company notified Societe Generale that the present value of the
mortgaged oil and gas properties total 86%. The Company has received a waiver of
the 90% test in anticipation of the new Fortis senior secured credit facility
requiring only a 75% mortgage test. The Credit Agreement contains various
restrictive covenants, including, among other items, maintenance of certain
financial ratios and restrictions on cash dividends on Common Stock and under
certain circumstances Preferred Stock, and an unqualified audit report on the
Company's consolidated financial statements.
Under the Credit Agreement, the Company may secure either (i) (a) an alternative
base rate loan that bears interest at a rate per annum equal to the greater of
the administrative agent's prime rate; or (b) federal funds-based rate plus
0.5%, plus an additional 0.5% to 1.5% depending on the ratio of the aggregate
outstanding loans and letters of credit to the borrowing base or; (ii) a
Eurodollar base rate loan that bears interest, generally, at a rate per annum
equal to the London interbank offered rate ("LIBOR") plus 1.5% to 2.5%,
depending on the ratio of the aggregate outstanding loans and letters of credit
to the borrowing base. At September 30, 2004, the three-month LIBOR interest
rate was 2.02%. The Credit Agreement also provides for commitment fees ranging
from 0.375% to 0.5% per annum.
SUBORDINATED CREDIT AGREEMENT. The Company extended and amended a short-term
subordinated credit agreement with Fortis Capital Corporation for $25 million on
April 5, 2002, with a maturity date of December 31, 2004. The notes are
unsecured and contain customary events of default, but do not contain any
maintenance or other restrictive covenants. The interest rate is LIBOR plus 5.5%
from January 1, 2003, through August 31, 2003, and LIBOR plus 6.5% from
September 1, 2003, through December 31, 2004. At September 30, 2004, the
three-month LIBOR interest rate was 2.02%. A note payment of $5 million was made
during April 2004, with the remaining $5 million payable on December 31, 2004.
The Company is in compliance with the terms of this agreement.
8.5% REDEEMABLE CONVERTIBLE PREFERRED STOCK A private placement of $66.85
million of 8.5% redeemable convertible preferred stock was completed during May
2002. The preferred stock is convertible into shares of the Company's Common
Stock at a conversion price of $4.45 per share. Dividends are payable
semi-annually in cash or additional preferred stock. At the option of the
Company, one-third of the preferred shares can be forced to convert to Common
Stock if the closing price of the Company's Common Stock exceeds 150% of the
conversion price for 30 out of 40 consecutive trading days on the New York Stock
Exchange. The preferred stock is subject to redemption at the option of the
Company after March 2005, and mandatory redemption on March 31, 2009. The
holders of the preferred stock have been granted registration rights with
respect to the shares of Common Stock issued upon conversion of the preferred
stock.
24
In June 2004, we exercised our right, as described above, to convert one-third
of our remaining issued and outstanding preferred stock into shares of our
Common Stock. The conversion was completed on a pro rata basis and included a
cash payment for accrued and unpaid dividends through the June 8, 2004,
conversion date, at which time dividends ceased to accrue on the converted
shares. Based on this conversion and other voluntary conversions, our
outstanding Series C preferred stock has been reduced from a high stated value
of approximately $72.7 million as of June 30, 2003 to approximately $31.6
million as of September 30, 2004, representing a future cash savings in
dividends of approximately $3.4 million on an annualized basis.
COMMON STOCK. In August 2003, the Company completed a private offering of
8,703,537 shares of Common Stock at a price of $3.87 per share. The total
proceeds of the offering, net of issuance costs, received by the Company were
approximately $33.0 million. The Company used the majority of these funds to
retire $31.8 million in long-term debt, with the remainder of the proceeds being
used for exploration activities and other general corporate purposes. As
previously noted, during the nine months ended September 30, 2004, approximately
6.5 million shares of Common Stock were issued upon the conversion of a portion
of the 8.5% Redeemable Convertible Preferred Stock and approximately 4.2 million
shares of Common Stock were was issued for the early retirement of the 9 -1/2%
Convertible Subordinated Notes.
In August 2004, the Company completed a public offering of 13,800,000 shares of
Common Stock at a price of $7.25 per share. The total proceeds of the offering,
net of issuance costs, received by the Company were approximately $94.6 million.
The Company repurchased all of the 7,082,030 shares of its Common Stock that
were beneficially owned by Shell Oil Company for $49.3 million and a portion of
the remaining proceeds of that equity offering were used to repay borrowings
under the Company's senior secured credit agreement, which resulted increased
funds available to the Company to accelerate planned capital expenditures for
drilling activities and related pipeline construction. The repurchased 7,082,030
shares of Common Stock that were held in Treasury Stock were retired as of
September 30, 2004.
OIL AND NATURAL GAS HEDGING ACTIVITIES. The Company may address market risk by
selecting instruments whose value fluctuations correlate strongly with the
underlying commodity being hedged. The Company enters into swaps and other
derivative contracts to hedge the price risks associated with a portion of
anticipated future oil and gas production. These swaps allow the Company to
predict with greater certainty the effective oil and natural gas prices to be
received for our hedged 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. The Company 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, the Company would be exposed to price risk. The Company 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.
These swaps have been designated as cash flow hedges as provided by SFAS No. 133
and any changes in fair value of the cash flow hedge resulting from
ineffectiveness of the hedge is reported in the consolidated statement of
operations as revenues.
25
CAPITAL EXPENDITURES. Total capital expenditures for this period approximated
$99.9 million. Although the Company plans to commence additional drilling during
the remainder of 2004, such operations will depend primarily on achieving
anticipated cash flows, permitting of wells and the availability of suitable
drilling rigs. Meridian recently completed the final field work on its
264-square mile 3-D seismic survey at its Biloxi Marshlands acreage and
preliminary indications are that a number of additional drilling locations are
present in the area encompassing the new survey which will form the basis for
its future drilling activities during 2004 and 2005.
Based on internal projections, using its internal risked analysis of production
based on an expected capital expenditures program for 2004 of $135 million, the
Company believes that it can further improve its balance sheet while, at the
same time, continuing its scheduled capital expenditure program, drilling 15 to
20 low-risk wells and acquiring additional 3-D seismic data over its Biloxi
Marshlands project and other exploration areas targeted for exploration growth.
DIVIDENDS. It is our policy to retain existing cash for reinvestment in our
business, and therefore, we do not anticipate that dividends will be paid with
respect to the Common Stock in the foreseeable future. During May 2002, the
Company completed the private placement of $67 million of 8.5% redeemable
convertible preferred stock and dividends are payable semi-annually. A
semi-annual cash dividend of $3.1 million was paid in January 2004. On June 29,
2004, a cash dividend of $0.8 million was paid for accrued dividends on
converted shares. In July 2004, a semi-annual cash dividend of $1.4 million was
paid. Under the terms of the Credit Agreement, dividend payments required during
2003 on the preferred stock were paid-in-kind through our issuance of additional
preferred stock.
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 and plans to sell properties, anticipated results from
third party disputes and litigation, expectations regarding future financing and
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.
26
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 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 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.
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 we cannot measure in an exact manner, and
the accuracy of any reserve estimate is a function of the quality of those
accumulations of data and of engineering and geological interpretation and
judgment. 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. 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.
27
BORROWING BASE FOR THE CREDIT FACILITY. The Credit Agreement with Societe
Generale and Fortis Capital Corporation is presently scheduled for borrowing
base redetermination dates on a quarterly basis with the next such
redetermination scheduled for January 31, 2005. The borrowing base is
redetermined on numerous factors including current reserve estimates, reserves
that have recently been added, current commodity prices, current production
rates and estimated future net cash flows. These factors have associated risks
with each of them. Significant reductions or increases in the borrowing base
will be determined by these factors, which, to a significant extent, are not
under the Company's control.
28
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.
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 principal due December 31,
2004 under our Subordinated Credit Agreement. Since interest charged borrowings
under the Credit Facility floats 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 $74.0 million remains borrowed under the Credit Facility and
$5 million remains borrowed under the Subordinated Credit Agreement, we estimate
our annual interest expense will change by $0.74 million for each 100 basis
point change in the applicable interest rates utilized under the Credit Facility
and $5 million from the Subordinated Credit Agreement. 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.
HEDGING CONTRACTS
Meridian may address market risk by selecting instruments whose value
fluctuations correlate strongly with the underlying commodity being hedged. From
time to time, we may enter into swaps and other derivative contracts to hedge
the price risks associated with a portion of anticipated future oil and natural
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, the Company
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.
In 2002, we entered into certain swap agreements as summarized in the table
below. The Notional Amount is equal to the total net volumetric hedge position
of the Company during the periods presented. The positions effectively hedge
approximately 9% of our proved developed natural gas production and 49% of our
proved developed oil production during the respective terms of the swap
agreements. The fair values of the hedges are based on the difference between
the strike price and the New York Mercantile Exchange future prices for the
applicable trading months.
Weighted Average Fair Value (unrealized)
Notional Strike Price at September 30, 2004
Amount ($ per unit) (in thousands)
------ ------------ --------------
Natural Gas (mmbtu)
October 2004 - June 2005 1,570,000 $ 3.74 $ (4,989)
Oil (bbls)
October 2004 - July 2005 413,000 $ 23.26 $ (9,697)
---------
$ (14,686)
---------
29
ITEM 4. CONTROLS AND PROCEDURES
We conducted an evaluation under the supervision and with the participation of
Meridian's management, including our Chief Executive Officer and Chief
Accounting Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934) as of the end of the third quarter of 2004.
Based upon that evaluation, our Chief Executive Officer and Chief Accounting
Officer concluded that the design and operation of our disclosure controls and
procedures are effective. There have been no significant changes in our internal
controls or in other factors during the third quarter of 2004 that could
significantly affect these controls.
30
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
ENVIRONMENTAL LITIGATION. Various landowners have filed claims against Meridian
(along with numerous other oil companies) in four similar lawsuits concerning
the Weeks Island, Gibson, Bayou Pigeon and Napoleonville Fields. The lawsuits
seek injunctive relief and other relief, including unspecified amounts in both
actual and punitive damages for alleged breaches of mineral leases and alleged
failure to restore the plaintiffs' lands from alleged contamination and
otherwise from the defendants' oil and gas operations.
There are no other material legal proceedings which exceed our insurance limits
to which Meridian or any of its subsidiaries is a party or to 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In August 2004, the Company repurchased all of the 7,082,030 shares of its
common stock that were beneficially owned by Shell Oil Company for $49.3
million. See Note 5 to the Notes to Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - General - Common Stock."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Stock Purchase Agreement, dated July 21, 2004, between The
Meridian Resource Corporation and SWEPI, LP, a Delaware
limited partnership (incorporated by reference to Exhibit 10.1
of the Company's Current Report on Form 8-K dated August 4,
2004).
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act
of 1934, as amended.
31.2 Certification of President pursuant to Rule 13a-14(a) or Rule
15d-14(a) under the Securities Exchange Act of 1934, as
amended.
31.3 Certification of Chief Accounting Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act
of 1934, as amended.
32.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act
of 1934, as amended, and 18 U.S.C. Section 1350.
32.2 Certification of President pursuant to Rule 13a-14(b) or Rule
15d-14(b) under the Securities Exchange Act of 1934, as
amended, and 18 U.S.C. Section 1350.
32.3 Certification of Chief Accounting Officer pursuant Rule
13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act
of 1934, as amended, and 18 U.S.C. Section 1350.
31
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.
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
--------------------------------------------------
(Registrant)
Date: November 9, 2004 By: /s/ Lloyd V. DeLano
----------------------------------
Lloyd V. DeLano
Senior Vice President
Chief Accounting Officer
32
EXHIBIT INDEX
10.1 Stock Purchase Agreement, dated July 21, 2004, between The
Meridian Resource Corporation and SWEPI, LP, a Delaware
limited partnership (incorporated by reference to Exhibit 10.1
of the Company's Current Report on Form 8-K dated August 4,
2004).
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act
of 1934, as amended.
31.2 Certification of President pursuant to Rule 13a-14(a) or Rule
15d-14(a) under the Securities Exchange Act of 1934, as
amended.
31.3 Certification of Chief Accounting Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act
of 1934, as amended.
32.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act
of 1934, as amended, and 18 U.S.C. Section 1350.
32.2 Certification of President pursuant to Rule 13a-14(b) or Rule
15d-14(b) under the Securities Exchange Act of 1934, as
amended, and 18 U.S.C. Section 1350.
32.3 Certification of Chief Accounting Officer pursuant Rule
13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act
of 1934, as amended, and 18 U.S.C. Section 1350.
33