UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 001-16179
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ENERGY PARTNERS, LTD.
(Exact name of registrant as specified in its charter)
Delaware 72-1409562
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification number)
201 St. Charles Avenue, Suite 3400
New Orleans, Louisiana 70170
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (504) 569-1875
---------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
As of May 2, 2005, there were 37,532,820 shares of the Registrant's Common
Stock, par value $0.01 per share, outstanding.
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-1-
TABLE OF CONTENTS
Page
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PART I FINANCIAL STATEMENTS
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 2005 and
December 31, 2004............................................... 3
Consolidated Statements of Operations for the three months ended
March 31, 2005 and 2004......................................... 4
Consolidated Statements of Cash Flows for the three months ended
March 31, 2005 and 2004......................................... 5
Notes to Consolidated Financial Statements........................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk........... 23
Item 4. Controls and Procedures.............................................. 24
PART II OTHER INFORMATION
Item 6. Exhibits............................................................. 25
-2-
ENERGY PARTNERS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31, December 31,
2005 2004
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 3,189 $ 93,537
Trade accounts receivable....................................... 62,024 59,341
Other receivables............................................... 5,681 5,600
Deferred tax assets............................................. 3,662 1,906
Prepaid expenses................................................ 1,003 2,285
----------- -----------
Total current assets.................................... 75,559 162,669
Property and equipment, at cost under the successful efforts
method of accounting for oil and natural gas properties......... 1,001,981 769,331
Less accumulated depreciation, depletion and amortization............. (329,556) (304,997)
----------- -----------
Net property and equipment.............................. 672,425 464,334
Other assets.......................................................... 13,131 15,970
Deferred financing costs -- net of accumulated amortization
of $4,421 in 2005 and $4,174 in 2004............................ 4,818 4,705
----------- -----------
$ 765,933 $ 647,678
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 31,411 $ 21,255
Accrued expenses................................................ 67,351 59,387
Fair value of commodity derivative instruments ................. 9,070 1,749
Current maturities of long-term debt............................ 191 108
----------- -----------
Total current liabilities............................... 108,023 82,499
Long-term debt........................................................ 210,000 150,109
Deferred tax liabilities.............................................. 63,081 53,686
Asset retirement obligation........................................... 47,987 45,064
Other................................................................. 3,707 1,271
----------- -----------
432,798 332,629
Stockholders' equity:
Preferred stock, $1 par value. Authorized 1,700,000 shares;
issued and outstanding: 2005 - no shares; 2004 - 344,399
shares. Aggregate liquidation value: 2004 - $34,440......... - 33,504
Common stock, par value $0.01 per share. Authorized 50,000,000
shares; issued and outstanding: 2005 - 40,813,206 shares;
2004 - 36,618,084 shares.................................... 410 367
Additional paid-in capital...................................... 334,772 296,460
Accumulated other comprehensive loss -- net of deferred taxes of
$4,140 in 2005 and $630 in 2004 ............................ (7,361) (1,119)
Retained earnings............................................... 62,692 43,215
Treasury stock, at cost. 2005 -- 3,471,896 shares;
2004 -- 3,480,441 shares.................................... (57,378) (57,378)
----------- -----------
Total stockholders' equity.............................. 333,135 315,049
Commitments and contingencies...................................
----------- -----------
$ 765,933 $ 647,678
=========== ===========
See accompanying notes to consolidated financial statements.
-3-
ENERGY PARTNERS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2005 and 2004
(Unaudited)
(In thousands, except per share data)
2005 2004
----------- -----------
Revenue:
Oil and natural gas............................................. $ 97,453 $ 63,419
Other........................................................... 25 53
----------- -----------
97,478 63,472
----------- -----------
Costs and expenses:
Lease operating................................................. 12,443 9,640
Transportation expense.......................................... 160 134
Taxes, other than on earnings................................... 2,764 2,242
Exploration expenditures and dry hole costs..................... 10,755 9,465
Depreciation, depletion and amortization........................ 25,513 18,737
General and administrative:
Stock-based compensation.................................... 1,883 857
Other general and administrative............................ 8,017 7,316
----------- -----------
Total costs and expenses............................ 61,535 48,391
----------- -----------
Income from operations................................................ 35,943 15,081
----------- -----------
Other income (expense):
Interest income................................................. 185 242
Interest expense................................................ (4,048) (3,574)
----------- -----------
(3,863) (3,332)
----------- -----------
Income before income taxes 32,080 11,749
Income taxes.......................................................... (11,659) (4,303)
----------- -----------
Net income.......................................... 20,421 7,446
Less dividends earned on preferred stock and accretion of
discount and issuance costs..................................... (944) (929)
----------- -----------
Net income available to common stockholders......... $ 19,477 $ 6,517
=========== ===========
Basic earnings per share............................................. $ 0.56 $ 0.20
=========== ===========
Diluted earnings per share........................................... $ 0.51 $ 0.20
=========== ===========
Weighted average common shares used in Computing income per share:
Basic....................................................... 35,026 32,428
Incremental common shares................................... 5,241 5,279
----------- -----------
Diluted..................................................... 40,267 37,707
=========== ===========
See accompanying notes to consolidated financial statements.
-4-
ENERGY PARTNERS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2005 and 2004
(Unaudited)
(In thousands)
2005 2004
----------- -----------
Cash flows from operating activities:
Net income...................................................... $ 20,421 $ 7,446
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization................ 25,513 18,737
Loss on disposition of oil and natural gas assets....... 92 -
Stock-based compensation................................ 1,883 906
Deferred income taxes................................... 11,309 4,303
Exploration expenditures................................ 4,728 7,810
Amortization of deferred financing costs................ 247 229
Other................................................... - 53
Changes in operating assets and liabilities:
Trade accounts receivable........................... (2,683) (14,298)
Other receivables................................... (81) -
Prepaid expenses.................................... 1,282 (407)
Other assets........................................ (1,292) 87
Accounts payable and accrued expenses............... 8,152 (3,985)
Other liabilities................................... (128) (247)
----------- -----------
Net cash provided by operating activities....... 69,443 20,634
----------- -----------
Cash flows used in investing activities:
Acquisition of business, net of cash acquired................... (863) (2,166)
Property acquisitions........................................... (169,008) (608)
Exploration and development expenditures........................ (51,176) (28,175)
Other property and equipment additions.......................... (406) (229)
----------- -----------
Net cash used in investing activities........... (221,453) (31,178)
----------- -----------
Cash flows provided by financing activities:
Repayments of long-term debt.................................... (10,026) (124)
Deferred financing costs........................................ (354) (7)
Equity offering costs........................................... (87) -
Proceeds from long-term debt.................................... 70,000 -
Exercise of stock options and warrants.......................... 2,129 1,610
----------- -----------
Net cash provided by financing activities....... 61,662 1,479
----------- -----------
Net decrease in cash and cash equivalents....... (90,348) (9,065)
Cash and cash equivalents at beginning of period...................... 93,537 104,392
----------- -----------
Cash and cash equivalents at end of period............................ $ 3,189 $ 95,327
=========== ===========
See accompanying notes to consolidated financial statements.
-5-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
Certain information and footnote disclosures normally in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to rules and regulations of the
Securities and Exchange Commission; however, management believes the disclosures
which are made are adequate to make the information presented not misleading.
These financial statements and footnotes should be read in conjunction with the
financial statements and notes thereto included in Energy Partners, Ltd.'s (the
Company) Annual Report on Form 10-K for the year ended December 31, 2004 and
Management's Discussion and Analysis of Financial Condition and Results of
Operations. The Company maintains a website at www.eplweb.com which contains
information about the Company including links to the Company's Annual Report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all
related amendments. The Company's website and the information contained in it
and connected to it shall not be deemed incorporated by reference into this
report on Form 10-Q.
The financial information as of March 31, 2005 and for the three-month
periods ended March 31, 2005 and 2004 has not been audited. However, in the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the results of operations for the
periods presented have been included therein. The results of operations for the
first three months of the year are not necessarily indicative of the results of
operations, which might be expected for the entire year.
(2) STOCK-BASED COMPENSATION
The Company has two stock award plans, the Amended and Restated 2000 Long
Term Stock Incentive Plan and the 2000 Stock Option Plan for Non-Employee
Directors (the Plans). The Company accounts for its stock-based compensation in
accordance with Accounting Principles Board's Opinion No. 25, "Accounting For
Stock Issued to Employees" (Opinion No. 25). Statement of Financial Accounting
Standards No. 123 (Statement 123), "Accounting For Stock-Based Compensation" and
Statement of Financial Accounting Standards No. 148, "Accounting For Stock-Based
Compensation - Transition and Disclosure," (Statement 148) permit the continued
use of the intrinsic value-based method prescribed by Opinion No. 25, but
require additional disclosures, including pro-forma calculations of earnings and
net earnings per share as if the fair value method of accounting prescribed by
Statement 123 had been applied. If compensation expense for the Plans had been
determined using the fair-value method in Statement 123, the Company's net
income and earnings per share would have been as shown in the pro forma amounts
below:
THREE MONTHS ENDED
MARCH 31,
2005 2004
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Net income available to common stockholders:
As reported..................................... $ 19,477 $ 6,517
Less: Pro forma net stock based employee
compensation cost, after tax................. 80 (51)
---------- ----------
Pro forma....................................... $ 19,557 $ 6,466
---------- ----------
Basic earnings per share:
As reported..................................... $ 0.56 $ 0.20
Pro forma....................................... $ 0.56 $ 0.20
Diluted earnings per share:
As reported..................................... $ 0.51 $ 0.20
Pro forma....................................... $ 0.51 $ 0.20
Stock-option based employee compensation cost,
net of tax, included in net income as reported... $ 348 $ 340
-6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(3) ACQUISITIONS
In connection with a business combination in 2002, the Company issued
among other things, $38.4 million liquidation preference of newly authorized and
issued Series D Exchangeable Convertible Preferred Stock (the Series D Preferred
Stock), with an issue date fair value of $34.7 million discounted to give effect
to the increasing dividend rate, and $38.4 million of 11% Senior Subordinated
Notes (the Notes) due 2009 (immediately callable at par). On February 28, 2005,
the Company gave notice of the redemption of all of the Series D Preferred Stock
issued in connection with the acquisition that remained outstanding on the
redemption date of March 21, 2005. The redemption price was $100 per share plus
accrued and unpaid dividends to the redemption date. Holders of record had the
right to convert their shares into shares of common stock through the close of
business on March 18, 2005. All holders exercised their right to convert their
shares and there were no preferred shares outstanding as of the close of
business on March 18, 2005.
The Company also issued warrants to purchase four million shares of the
Company's common stock in the same business combination. Of the warrants, one
million had a strike price of $9.00 and three million had a strike price of
$11.00 per share. The warrants became exercisable on January 15, 2003 and expire
on January 15, 2007. At March 31, 2005 there were 767,341 warrants outstanding
with a strike price of $9.00 per share and 2,676,224 warrants outstanding with a
strike price of $11.00 per share.
In addition, former preferred stockholders of the acquired company have
the right to receive contingent consideration based upon a percentage of the
amount by which the before tax net present value of proved reserves related, in
general, to exploratory prospect acreage held by the acquired company as of the
closing date of the acquisition (the Ring-Fenced Properties) exceeds the net
present value discounted at 30%. The potential consideration is determined
annually from March 3, 2003 until March 1, 2007. The cumulative percentage
remitted to the participants was 20% for the March 3, 2003, 30% for the March 1,
2004 and 35% for the March 1, 2005 determination dates and is 40% for the March
1, 2006 and 50% for the March 1, 2007 determination dates. The contingent
consideration, if any, may be paid in the Company's common stock or cash at the
Company's option (with a minimum of 20% in cash) and in no event will exceed a
value of $50 million. In the first three months of 2005 and 2004, the Company
capitalized, as additional purchase price, and paid additional consideration in
cash, of $0.9 million and $2.2 million related to the March 1, 2005 and the
March 1, 2004 contingent consideration determination dates, respectively. Due to
the uncertainty inherent in estimating the value of future contingent
consideration which includes annual revaluations based upon, among other things,
drilling results from the date of the prior revaluation, and development,
operating and abandonment costs and production revenues (actual historical and
future projected, as contractually defined, as of each revaluation date) for the
Ring-Fenced Properties, total final consideration will not be determined until
March 1, 2007. All additional contingent consideration will be capitalized as
additional purchase price.
On January 20, 2005, the Company closed an acquisition of properties and
reserves in south Louisiana for approximately $146.0 million in cash, after
adjustments for the exercise of preferential rights by third parties and
preliminary closing adjustments. The entire purchase price was allocated to
property and equipment. The terms of the acquisition did not contain any
contingent consideration, options or future commitments. The acquisition is
composed of nine fields, four of which were producing at the time of the closing
through 14 wells, with estimated proved reserves of 51.2 Bcfe. Also included
were interests in 22 exploratory prospects. The transaction expands the
Company's exploration opportunities in its expanded focus area and further
reduces the concentration of its reserves and production. Upon the signing of
the purchase agreement, the Company paid a $5.0 million deposit in 2004 toward
the purchase price which was recorded as other assets in the consolidated
balance sheet at December 31,2004. Concurrent with the closing, the borrowing
base under the Company's bank credit facility was increased to $150 million, of
which $60 million was drawn to fund the acquisition. In connection with the
acquisition, the Company has also entered into a two-year agreement with the
seller of the properties that defines an area of mutual interest ("AMI")
encompassing over one million acres. The Company intends to continue to explore
and develop oil and natural gas reserves in the AMI over the next two years
jointly with the seller.
-7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
The proved reserves, prospects and AMI are in the southern portions of
Terrebone, Lafourche and Jefferson Parishes in Louisiana.
The following unaudited pro forma information for the three-months ended
March 31, 2004 presents a summary of the consolidated results of operations as
if the acquisition occurred on January 1, 2004 with pro forma adjustments to
give effect to depreciation, depletion and amortization, interest expense and
related income tax effects.
THREE MONTHS ENDED
MARCH 31, 2004
------------------
(UNAUDITED, IN
THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Pro forma:
Revenue...................................... $ 68,523
Income from operations....................... 17,186
Net income................................... 9,134
Basic income per common share................ $ 0.25
Diluted income per common share.............. $ 0.24
On March 8, 2005, the Company closed the acquisition of the remaining 50%
gross working interest in South Timbalier 26 above approximately 13,000 feet
subsea that it did not already own for approximately $21.0 million after
preliminary closing adjustments from the effective date of December 1, 2004. The
entire purchase price was allocated to property and equipment. The terms of the
acquisition did not contain any contingent consideration, options or future
commitments. As a result of the acquisition, the Company now owns a 100% gross
working interest in the producing horizons in this field. The acquisition
expands the Company's interest in its core Greater Bay Marchand area and gives
the Company additional flexibility in undertaking the future development of the
South Timbalier 26 field.
The Company has included the results of operations from the acquisitions
discussed above from their respective closing dates. The Company has experienced
substantial revenue and production growth as a result of these acquisitions. For
the foregoing reasons these acquisitions will affect the comparability of the
Company's historical results of operations with future periods.
(4) EARNINGS PER SHARE
Basic earnings per share are computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is computed in the same manner as
basic earnings per share except that the denominator is increased to include the
number of additional common shares that could have been outstanding assuming the
conversion of convertible preferred stock shares, and the exercise of warrants
and stock options and the potential shares associated with restricted share
units that would have a dilutive effect on earnings per share.
-8-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
The following tables reconcile the net earnings and common shares
outstanding used in the calculations of basic and diluted earnings per share for
the three month periods ended March 31, 2005 and 2004.
WEIGHTED
NET INCOME AVERAGE
AVAILABLE COMMON
TO COMMON SHARES EARNINGS
STOCKHOLDERS OUTSTANDING PER SHARE
------------ ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three months ended March 31, 2005:
Basic..................................... $ 19,477 35,026 $ 0.56
Effect of dilutive securities:
Preferred stock..................... 944 2,205
Stock options....................... -- 1,023
Warrants............................ -- 1,889
Restricted share units.............. -- 124
--------- ------
Diluted................................... $ 20,421 40,267 $ 0.51
--------- ------
WEIGHTED
NET INCOME AVERAGE
AVAILABLE COMMON
TO COMMON SHARES EARNINGS
STOCKHOLDERS OUTSTANDING PER SHARE
------------ ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three months ended March 31, 2004:
Basic..................................... $ 6,517 32,428 $ 0.20
Effect of dilutive securities:
Preferred stock..................... 929 4,057
Stock options....................... -- 370
Warrants............................ -- 852
---------- -------
Diluted.................................. $ 7,446 37,707 $ 0.20
---------- -------
(5) HEDGING ACTIVITIES
The Company enters into hedging transactions with major financial
institutions to reduce exposure to fluctuations in the price of oil and natural
gas. Any gains or losses resulting from the change in fair value from hedging
transactions that are determined to be ineffective are recorded in other
revenue, whereas gains and losses from the settlement of hedging contracts are
recorded in oil and natural gas revenue in the statements of operations. Crude
oil hedges are settled based on the average of the reported settlement prices
for West Texas Intermediate crude on the New York Mercantile Exchange (NYMEX)
for each month. Natural gas hedges are settled based on the average of the last
three days of trading of the NYMEX Henry Hub natural gas contract for each
month. The Company also uses financially-settled crude oil and natural gas
swaps, zero-cost collars and options that provide floor prices with varying
upside price participation.
-9-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
With a financially-settled swap, the counterparty is required to make a
payment to the Company if the settlement price for any settlement period is
below the hedged price for the transaction, and the Company is required to make
a payment to the counterparty if the settlement price for any settlement period
is above the hedged price for the transaction. With a zero-cost collar, the
counterparty is required to make a payment to the Company if the settlement
price for any settlement period is below the floor price of the collar, and the
Company is required to make a payment to the counterparty if the settlement
price for any settlement period is above the cap price for the collar. In some
hedges, we may modify our collar to provide full upside participation after a
limited non-participation range.
The Company had the following hedging contracts as of March 31, 2005:
NATURAL GAS POSITIONS
- -----------------------------------------------------------------------------------------------
VOLUME (MMBTU)
------------------
REMAINING CONTRACT TERM CONTRACT TYPE STRIKE PRICE ($/MMBTU) DAILY TOTAL
- ------------------------- ------------- ---------------------- ------ ---------
04/05 - 12/05.................. Collar $4.50/$10.75 20,000 5,500,000
07/05 - 12/05.................. Collar $5.00/$10.00 15,000 2,760,000
01/06 - 12/06.................. Collar $ 5.00/$9.51 15,000 5,475,000
01/07 - 12/07.................. Collar $ 5.00/$8.00 10,000 3,650,000
CRUDE OIL POSITIONS
- -----------------------------------------------------------------------------------------------
VOLUME (BBLS)
------------------
REMAINING CONTRACT TERM CONTRACT TYPE STRIKE PRICE ($/BBL) DAILY TOTAL
- ------------------------- ------------- -------------------- ------ ---------
04/05 - 12/05.................. Collar $31.00/$44.05 2,000 550,000
Settlements of hedging contracts reduced crude oil revenues by $1.1
million in the three month period ended March 31, 2005 and reduced natural gas
and crude oil revenues by $1.7 million in the three month period ended March 31,
2004. The Company has not discontinued hedge accounting treatment in the periods
presented, and therefore, has not reclassified any gains or losses into earnings
as a result.
The following tables reconcile the change in accumulated other
comprehensive income for the three month periods ending March 31, 2005 and 2004.
THREE MONTHS ENDED
MARCH 31, 2005
------------------
(IN THOUSANDS)
Accumulated other comprehensive loss as of December 31, 2004 $ (1,119)
Net income...................................................................... $ 20,421
Other comprehensive loss - net of tax
Hedging activities
Reclassification adjustments for settled contracts - net of
of taxes of $(380).............................................. 676
Changes in fair value of outstanding hedging positions- net of
taxes of $3,891................................................. (6,918)
--------
Total other comprehensive loss............................... (6,242) (6,242)
-------- --------
Comprehensive income............................................................ $ 14,179
========
Accumulated other comprehensive loss as of March 31, 2005....................... $ (7,361)
========
-10-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31, 2004
------------------
(IN THOUSANDS)
Accumulated other comprehensive loss as of December 31, 2003 $ (2,441)
Net income...................................................................... $ 7,446
Other comprehensive loss - net of tax
Hedging activities
Reclassification adjustments for settled contracts................. 1,115
Changes in fair value of outstanding hedging positions............ (2,391)
--------
Total other comprehensive loss............................... (1,276) (1,276)
-------- --------
Comprehensive income............................................................ $ 6,170
========
Accumulated other comprehensive loss as of March 31, 2004....................... $ (3,717)
========
Based upon current prices, the Company expects to transfer approximately
$9.1 million of pretax net deferred losses in accumulated other comprehensive
loss as of March 31, 2005 to earnings during the next twelve months when the
forecasted transactions actually occur.
(6) ASSET RETIREMENT OBLIGATION
Accounting and reporting standards require entities to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred and a corresponding increase in the carrying amount of the
related long-lived asset. The following table reconciles the beginning and
ending aggregate recorded amount of the asset retirement obligation for the
three months ended March 31, 2005.
THREE MONTHS ENDED
MARCH 31, 2005
------------------
(IN THOUSANDS)
December 31, 2004.................. $ 45,064
Accretion expense............... 953
Liabilities incurred............ 2,011
Liabilities settled............. (41)
---------------
March 31, 2005..................... $ 47,987
===============
(7) COMMON STOCK
On July 16, 2004 the Company filed a universal shelf registration
statement (Shelf Registration Statement) which allowed the Company to issue an
aggregate of $300 million in common stock, preferred stock, senior debt and
subordinated debt in one or more separate offerings with the size, price and
terms to be determined at the time of the sale. On November 10, 2004 the Company
sold approximately 3.5 million shares of its common stock to the public pursuant
to this shelf registration statement leaving us with the ability to issue an
additional $239.6 million of securities under the shelf registration statement.
Concurrent with this offering, the Company entered into a stock purchase
agreement with Energy Income Fund, L.P. (EIF) in which it purchased
approximately 3.5 million shares of common stock owned by EIF at a price per
share equal to the net proceeds per share received in the offering, before
expenses. The Company therefore did not retain any of the proceeds from this
offering and the stock has been recorded as treasury stock on the consolidated
balance sheet at cost. The Company has no immediate plans to
-11-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
enter into any additional transactions under this registration statement, but
plans to use the proceeds for general corporate purposes, which may include debt
repayment, acquisitions, expansion and working capital. The Company intends to
restore the Shelf Registration Statement to $300 million in the near future.
In the first quarter of 2005, the Company reacquired 21,949 shares of its
common stock from employees. Of these shares, 4,752 are reflected in treasury
stock in the Consolidated Balance Sheet and 17,197 were retired.
(8) INDEBTEDNESS
On August 5, 2003, the Company issued $150 million of 8.75% Senior Notes
Due 2010 (the Senior Notes) in a Rule 144A private offering (the Debt Offering)
which allows unregistered transactions with qualified institutional buyers. In
October 2003, the Company consummated an exchange offer pursuant to which it
exchanged registered Senior Notes having substantially identical terms as the
Senior Notes for the privately placed Senior Notes. After discounts and
commissions and estimated offering expenses, the Company received $145.3
million, which was used to redeem all of the outstanding 11% Senior Subordinated
Notes Due 2009, that had been issued in connection with a business combination
in 2002, and to repay substantially all of the borrowings outstanding under the
Company's bank credit facility. In January 2005 the remainder of the net
proceeds were used to purchase properties in south Louisiana as discussed in
note (3).
The Senior Notes mature on August 1, 2010 with interest payable each
February 1 and August 1, commencing February 1, 2004. The indenture relating to
the Senior Notes contains certain restrictions on the Company's ability to incur
additional debt, pay dividends on its common stock, make investments, create
liens on its assets, engage in transactions with its affiliates, transfer or
sell assets and consolidate or merge substantially all of its assets. The Senior
Notes are not subject to any sinking fund requirements.
On August 3, 2004, the Company amended and extended to August 3, 2008 its
bank credit facility. Under the amendment the initial borrowing base remained
$60 million. The borrowing base was increased to $150 million at the time of the
Company's purchase of south Louisiana properties and reserves in January 2005.
At March 31, 2005 the Company had $60.0 million outstanding under the bank
credit facility. The borrowing base remains subject to redetermination based on
the proved reserves of the oil and natural gas properties that serve as
collateral for the bank credit facility as set out in the reserve report
delivered to the banks each April 1 and October 1.
(9) NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued Statement of Financial Accounting
Standards No. 151 "Inventory Costs, an amendment of ARB No. 43, Chapter 4"
(Statement 151). The amendments made by Statement 151 clarify that abnormal
amounts of idle facility expense, freight, handling costs, and wasted materials
(spoilage) should be recognized as current-period charges and require the
allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. The guidance is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years
beginning after November 23, 2004. The Company's assessment of the provisions of
Statement 151 is that it is not expected to have an impact on the financial
position, results of operations or cash flows of the Company.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 153 "Exchanges of Non-monetary assets - an amendment of APB
Opinion No. 29" (Statement 153). Statement 153 amends Accounting Principles
Board (APB) Opinion 29 to eliminate the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for exchanges
of nonmonetary assets that do not have commercial substance. A nonmonetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result
-12-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
of the exchange. Statement 153 does not apply to a pooling of assets in a joint
undertaking intended to fund, develop, or produce oil or natural gas from a
particular property or group of properties. The provisions of Statement 153
shall be effective for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. Early adoption is permitted and the provisions of
Statement 153 should be applied prospectively. The Company's assessment of the
provisions of Statement 153 is that it is not expected to have an impact on the
financial position, results of operations or cash flows of the Company.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123-Revised 2004, "Share-Based Payment," (Statement 123R). This is
a revision of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation", and supersedes APB No. 25, "Accounting for Stock
Issued to Employees." The Company currently accounts for stock-based
compensation under the provisions of APB No. 25. Under Statement 123R, the
Company will be required to measure the cost of employee services received in
exchange for stock based on the grant-date fair value (with limited exceptions).
That cost will be recognized as expense over the period during which an employee
is required to provide service in exchange for the award (usually the vesting
period). The fair value will be estimated using an option-pricing model. Excess
tax benefits, as defined in Statement 123R, will be recognized as an addition to
paid-in capital. This will be effective for the Company as of the beginning of
the first annual reporting period that begins after June 15, 2005. The Company
is currently in the process of evaluating the impact of Statement 123R on its
financial statements, including different option-pricing models. Note (2)
illustrates the current effect on net income and earnings per share if the
Company had applied the fair value recognition provisions of Statement 123.
(10) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
In connection with the Debt Offering discussed above, all of the Company's
current active subsidiaries (the Guarantor Subsidiaries) jointly, severally and
unconditionally guaranteed the payment obligations under the Debt Offering. The
following supplemental financial information sets forth, on a consolidating
basis, the balance sheet, statement of operations and cash flow information for
Energy Partners, Ltd. (Parent Company Only) and for the Guarantor Subsidiaries.
The Company has not presented separate financial statements and other
disclosures concerning the Guarantor Subsidiaries because management has
determined that such information is not material to investors.
The supplemental condensed consolidating financial information has been
prepared pursuant to the rules and regulations for condensed financial
information and does not include all disclosures included in annual financial
statements, although the Company believes that the disclosures made are adequate
to make the information presented not misleading. Certain reclassifications were
made to conform all of the financial information to the financial presentation
on a consolidated basis. The principal eliminating entries eliminate investments
in subsidiaries, intercompany balances and intercompany revenues and expenses.
-13-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2005
PARENT
COMPANY GUARANTOR
ONLY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 3,189 $ -- $ -- $ 3,189
Accounts receivable..................................................... 209,540 (141,835) -- 67,705
Other current assets.................................................... 4,607 58 -- 4,665
--------- --------- --------- -----------
Total current assets................................................ 217,336 (141,777) -- 75,559
Property and equipment..................................................... 643,536 358,445 -- 1,001,981
Less accumulated depreciation, depletion
and amortization........................................................ (241,557) (87,999) -- (329,556)
--------- --------- --------- -----------
Net property and equipment.......................................... 401,979 270,446 -- 672,425
Investment in affiliates................................................... 90,297 -- (90,297) --
Notes receivable, long-term................................................ -- 70,362 (70,362) --
Other assets............................................................... 17,970 (21) -- 17,949
--------- --------- --------- -----------
$ 727,582 $ 199,010 $(160,659) $ 765,933
========= ========= ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................................... $ 97,493 $ 1,269 $ -- $ 98,762
Fair value of commodity derivative
instruments........................................................... 9,070 -- -- 9,070
Current maturities of long-term debt.................................... -- 191 -- 191
--------- --------- --------- -----------
Total current liabilities........................................... 106,563 1,460 -- 108,023
Long-term debt............................................................. 210,000 70,362 (70,362) 210,000
Other liabilities.......................................................... 77,884 36,891 -- 114,775
--------- --------- --------- -----------
394,447 108,713 (70,362) 432,798
Stockholders' equity:
Preferred stock......................................................... -- -- -- --
Common stock............................................................ 410 -- -- 410
Additional paid-in capital.............................................. 334,772 -- -- 334,772
Accumulated other comprehensive loss.................................... (7,361) -- -- (7,361)
Retained earnings....................................................... 62,692 90,297 (90,297) 62,692
Treasury stock.......................................................... (57,378) -- -- (57,378)
--------- --------- --------- -----------
Total stockholders' equity 333,135 90,297 (90,297) 333,135
--------- --------- --------- -----------
$ 727,582 $ 199,010 $(160,659) $ 765,933
========= ========= ========= ===========
-14-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005
PARENT
COMPANY GUARANTOR
ONLY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------
(IN THOUSANDS)
Revenue:
Oil and natural gas........................... $ 71,878 $ 25,575 $ -- $ 97,453
Other......................................... 9,787 111 (9,873) 25
-------- --------- --------- ---------
81,665 25,686 (9,873) 97,478
Costs and expenses:
Lease operating expenses...................... 8,484 4,119 -- 12,603
Taxes, other than on earnings................. 519 2,245 -- 2,764
Exploration expenditures...................... 9,246 1,509 -- 10,755
Depreciation, depletion and amortization...... 17,844 7,669 -- 25,513
General and administrative.................... 9,633 4,017 (3,750) 9,900
-------- --------- --------- ---------
Total costs and expenses.................. 45,726 19,559 (3,750) 61,535
Income from operations........................... 35,939 6,127 (6,123) 35,943
Interest expense, net............................ (3,859) (4) -- (3,863)
-------- --------- --------- ---------
Income before income taxes....................... 32,080 6,123 (6,123) 32,080
Income taxes..................................... (11,659) -- -- (11,659)
-------- --------- --------- ---------
Net income....................................... $ 20,421 $ 6,123 $ (6,123) $ 20,421
======== ========= ========= =========
-15-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2005
PARENT
COMPANY GUARANTOR
ONLY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------
(IN THOUSANDS)
Net cash provided by operating activities $ (92,847) $ 162,290 $ -- $ 69,443
Cash flows used in investing activities:
Acquisition of business, net of cash
acquired................................... (863) -- -- (863)
Property acquisitions........................ (27,377) (141,631) -- (169,008)
Exploration and development
expenditures............................... (30,543) (20,633) -- (51,176)
Other property and equipment
additions.................................. (406) -- -- (406)
---------- ------------ ------------ ------------
Net cash used in investing activities........... (59,189) (162,264) -- (221,453)
---------- ------------ ------------ ------------
Cash flows provided by financing activities:
Deferred financing costs..................... (354) -- -- (354)
Repayments of long-term debt................. (10,000) (26) -- (10,026)
Equity offering costs........................ (87) -- -- (87)
Proceeds from long-term debt................. 70,000 -- -- 70,000
Exercise of stock options and warrants....... 2,129 -- -- 2,129
---------- ------------ ------------ ------------
Net cash provided by financing
activities................................... 61,688 (26) -- 61,662
---------- ------------ ------------ ------------
Net decrease in cash and cash equivalents....... (90,348) -- -- (90,348)
Cash and cash equivalents at beginning of
period....................................... 93,537 -- -- 93,537
---------- ------------ ------------ ------------
Cash and cash equivalents at end of
period....................................... $ 3,189 $ -- $ -- $ 3,189
========== ============ ============ ============
(11) CONTINGENCIES
In the ordinary course of business, the Company is a defendant in various
legal proceedings. The Company does not expect its exposure in these
proceedings, individually or in the aggregate, to have a material adverse effect
on the financial position, results of operations or liquidity of the Company.
(12) RECLASSIFICATIONS
Certain reclassifications have been made to the prior period financial
statements in order to conform to the classification adopted for reporting in
fiscal 2005.
-16-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We were incorporated in January 1998 and operate in a single segment as an
independent oil and natural gas exploration and production company. Our current
operations are concentrated in the shallow to moderate depth waters of the Gulf
of Mexico Shelf and the Gulf Coast onshore region.
During the first three months of 2005, we reported another period of
growth and progress in implementing our long-term growth strategy. Our strong
cash flow provided us the flexibility to make necessary and appropriate
investments to continue our strategy. Our long-term strategy is to increase our
oil and natural gas reserves and production while keeping our finding and
development costs and operating costs competitive with our industry peers. We
will implement this strategy through drilling exploratory and development wells
from our inventory of available prospects that we have evaluated for geologic
and mechanical risk and future reserve or resource potential and by making
acquisitions. Our drilling program contains some higher risk, higher reserve
potential opportunities as well as some lower risk, lower reserve potential
opportunities, in order to achieve a balanced program of reserve and production
growth.
We use the successful efforts method of accounting for our investment in
oil and natural gas properties. Under this method, we capitalize lease
acquisition costs, costs to drill and complete exploration wells in which proven
reserves are discovered and costs to drill and complete development wells.
Seismic, geological and geophysical and delay rental expenditures are expensed
as they are incurred. We conduct many of our exploration and development
activities jointly with others and, accordingly, recorded amounts for our oil
and natural gas properties reflect only our proportionate interest in such
activities. Our annual report on Form 10-K for the fiscal year ended December
31, 2004, includes a discussion of our critical accounting policies, which have
not changed significantly since the end of the fiscal year.
On August 5, 2003, we issued $150 million of 8.75% Senior Notes Due 2010
in a Rule 144A private offering (the "Debt Offering") which allows unregistered
transactions with qualified institutional buyers. In October 2003, we
consummated an exchange offer pursuant to which we exchanged registered 8.75%
Senior Notes Due 2010 having substantially identical terms for the privately
placed 8.75% Senior Notes due 2010. After discounts and commissions and
estimated offering expenses, we received $145.3 million, which was used to (i)
redeem all of our outstanding 11% Senior Subordinated Notes Due 2009 (the
"Notes"), which had been issued in connection with a business combination in
2002, and (ii) repay substantially all of the borrowings outstanding under our
bank credit facility. In January 2005 the remainder of the net proceeds were
used to purchase properties in south Louisiana.
On July 16, 2004, we filed a universal shelf registration statement (the
"Registration Statement") which allowed us to issue an aggregate of $300 million
in common stock, preferred stock, senior debt and subordinated debt in one or
more separate offerings with the size, price and terms to be determined at the
time of the sale. On November 10, 2004 we sold approximately 3.5 million shares
of our common stock to the public pursuant to this shelf registration statement,
leaving us with the ability to issue an additional $239.6 million of securities
under the shelf registration statement. Concurrent with this offering, we
entered into a stock purchase agreement with Energy Income Fund, L.P. ("EIF") in
which we purchased approximately 3.5 million shares of common stock owned by EIF
at a price per share equal to the net proceeds per share received in the
offering, before expenses. We did not retain any of the proceeds from the
offering and the shares are now held as treasury shares, at cost. We have no
immediate plans to enter into any additional transactions under this
registration statement, but plan to use the proceeds of any future offering
under this registration statement for general corporate purposes, which may
include debt repayment, acquisitions, expansion and working capital. We intend
to restore the Shelf Registration Statement to $300 million in the near future.
On August 3, 2004, we amended and extended to August 3, 2008 our bank
credit facility. Under the amendment our initial borrowing base remained $60
million. The borrowing base was increased to $150
-17-
million at the time of our purchase of south Louisiana properties and reserves
in January 2005. The borrowing base remains subject to redetermination based on
the proved reserves of the oil and natural gas properties that serve as
collateral for the bank credit facility.
On January 20, 2005, we closed an acquisition of properties and reserves
in south Louisiana for $146.0 million in cash, after adjustments for the
exercise of preferential rights by third parties and preliminary closing
adjustments. The acquisition is composed of nine fields, four of which were
producing at the time of the closing through 14 wells, with estimated proved
reserves of 51.2 Bcfe. Also included were interests in 22 exploratory prospects.
The transaction expands the exploration opportunities in our expanded focus area
and further reduces the concentration of our reserves and production. Upon the
signing of the purchase agreement, we paid a $5.0 million deposit in 2004 toward
the purchase price which was recorded as other assets in the consolidated
balance sheet at December 31, 2004, and concurrent with the closing, the
borrowing base under our bank credit facility was increased to $150 million, of
which $60 million was drawn to fund the acquisition. In connection with the
acquisition, we also entered into a two-year agreement with the seller of the
properties that defines an area of mutual interest ("AMI") encompassing over one
million acres. We intend to continue to explore and develop oil and natural gas
reserves in the AMI over the next two years jointly with the seller. The proved
reserves, prospects and the AMI are in the southern portions of Terrebone,
Lafourche and Jefferson Parishes in Louisiana.
On March 8, 2005, we closed the acquisition of the remaining 50% gross
working interest in South Timbalier 26 above approximately 13,000 feet subsea
that we did not already own for approximately $21.0 million after preliminary
closing adjustments from the effective date of December 1, 2004. As a result of
the acquisition, we now own a 100% gross working interest in the producing
horizons in this field. The acquisition expands our interest in our core Greater
Bay Marchand area and gives us additional flexibility in undertaking the future
development of the South Timbalier 26 field.
We have included the results of operations from the acquisitions discussed
above from their respective closing dates. We have experienced substantial
revenue and production growth as a result of these acquisitions. For the
foregoing reasons these acquisitions will affect the comparability of our
historical results of operations with future periods.
In the first quarter of 2005, we reacquired 21,949 shares of our common
stock from employees. Of these shares, 4,752 are reflected in treasury stock in
the Consolidated Balance Sheet and 17,197 were retired.
Our revenue, profitability and future growth rate depend substantially on
factors beyond our control, such as economic, political and regulatory
developments and competition from other sources of energy. Oil and natural gas
prices historically have been volatile and may fluctuate widely in the future.
Sustained periods of low prices for oil and natural gas could materially and
adversely affect our financial position, our results of operations, the
quantities of oil and natural gas reserves that we can economically produce and
our access to capital.
We currently have an extensive inventory of drillable prospects in-house,
we are generating more prospects internally and we are exploring new
opportunities through relationships with industry partners. Despite our expanded
budget in 2005, strong commodity prices together with growing production volumes
should enable us to adhere to our policy of funding our exploration and
development expenditures with internally generated cash flow. This strategy
allows us to preserve our strong balance sheet to finance acquisitions and other
capital intensive projects that might result from exploration and development
activities. In addition to the south Louisiana and South Timbalier 26 property
acquisitions already completed this year, we believe this year will provide us a
number of opportunities to acquire targeted properties, including those within
our focus area.
-18-
RESULTS OF OPERATIONS
The following table presents information about our oil and natural gas
operations.
THREE MONTHS ENDED
MARCH 31,
--------------------
2005 2004
-------- --------
Net production (per day):
Oil (Bbls).............................................. 9,978 7,989
Natural gas (Mcf)....................................... 96,172 77,134
Total barrels of oil equivalent (Boe)............... 26,007 20,845
Oil and natural gas revenues (in thousands):
Oil..................................................... $ 41,019 $ 23,171
Natural gas............................................. 56,434 40,248
Total............................................... 97,453 63,419
Average sales prices, net of hedging:
Oil (per Bbl)........................................... $ 45.68 $ 31.87
Natural gas (per Mcf)................................... 6.52 5.73
Total (per Boe)..................................... 41.64 33.43
Impact of hedging:
Oil (per Bbl)........................................... $ (1.17) $ (1.63)
Natural gas (per Mcf)................................... -- (0.08)
Average costs (per Boe):
Lease operating expense................................. $ 5.32 $ 5.08
Taxes, other than on earnings........................... 1.18 1.18
Depreciation, depletion and amortization................ 10.90 9.88
Increase in oil and natural gas revenues between periods
presented (net of hedging) due to:
Changes in prices of oil................................ $ 9,788
Changes in production volumes of oil.................... 8,060
Total increase in oil sales......................... 17,848
Changes in prices of natural gas........................ $ 5,330
Changes in production volumes of natural gas............ 10,856
Total increase in natural gas sales................. 16,186
REVENUES AND NET INCOME
Our oil and natural gas revenues increased to $97.5 million in the first
quarter of 2005 from $63.4 million in the first quarter of 2004. The increase
for this period is the result of sharply increased oil prices and higher natural
gas prices combined with an increase in production from 19 new natural gas wells
and four new oil wells brought on production since the end of the first quarter
of 2004. In addition the acquisition of the south Louisiana properties and the
additional interest in South Timbalier 26 added incremental production. These
increases were partially offset by natural reservoir declines.
We recognized net income of $20.4 million in the first quarter of 2005
compared to net income of $7.4 million in the first quarter of 2004. The
increase was primarily a result of the increase in oil and natural gas revenues
discussed above partially offset by increased costs discussed below.
OPERATING EXPENSES
Operating expenses during the three-month periods ended March 31, 2005 and
2004 were affected by the following:
- Lease operating expense increased in the first quarter of 2005 to $12.4
million compared to $9.6 million in the first quarter of 2004. This
increase is a result of new wells coming on stream as well as
acquisitions during the period.
-19-
- Taxes, other than on earnings, increased to $2.8 million in the first
quarter of 2005 from $2.2 million in the first quarter of 2004. The
increase was due to the increase in commodity prices and production
from state leases as a result of the south Louisiana property
acquisition. These taxes are expected to fluctuate from period to
period depending on our production volumes from non-federal leases and
the commodity prices received.
- Exploration expenditures, including dry hole costs, increased to $10.8
million in the first quarter of 2005 from $9.5 million in the first
quarter of 2004. The expense in the first quarter of 2005 is comprised
of $4.8 million of costs for exploratory wells which were found to be
not commercially productive and $6.0 million of seismic expenditures
and delay rentals, whereas the expense in the first quarter of 2004 is
comprised of $0.9 million of costs for exploratory wells which were
found to be not commercially productive, $6.9 million of proved
property impairments and $1.7 million for seismic expenditures and
delay rentals.
Our exploration expenditures, including dry hole charges will vary
depending on the amount of our capital budget dedicated to exploration
activities and the level of success we achieve in exploratory drilling
activities.
- Depreciation, depletion and amortization increased to $25.5 million in
the first quarter of 2005 from $18.7 million in the first quarter of
2004. The increase was due to higher production from an increased asset
base and a shift in the production contribution from our various
fields. In addition, the shift in the production contribution from our
various fields also increased our expense per Boe. Some fields carry a
higher depreciation burden than others; therefore, changes in the
sources of our production will directly impact this expense.
- Other general and administrative expenses increased to $8.0 million in
the first quarter of 2005 from $7.3 million in the first quarter of
2004. The change was due to increased personnel costs resulting from
our overall increased level of activity and expanded asset base.
- Non-cash stock-based compensation expense of $1.9 million was
recognized in the first quarter of 2005 compared to $0.9 million in the
first quarter of 2004. The increased expense relates to the increased
amortization of new restricted stock and performance share awards made
to employees in late 2004 and early 2005.
OTHER INCOME AND EXPENSE
INTEREST. Interest expense increased to $4.0 million in the first quarter
of 2005 from $3.6 million in the first quarter of 2004. The increase was a
result of interest expense on borrowings under our bank credit facility to
finance acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
The trend of increased revenues we have experienced from 2004 and into the
first three months of 2005 has continued to provide strong cash flows from
operations which totaled $69.4 million in the quarter. We intend to fund our
exploration and development expenditures from internally generated cash flows,
which we define as cash flows from operations before changes in working capital
plus total exploration expenditures. Our cash on hand at March 31, 2005 was $3.2
million. Our future internally generated cash flows will depend on our ability
to maintain and increase production through our development and exploratory
drilling program, as well as the prices we receive for oil and natural gas. We
may, from time to time, use the availability of our bank credit facility to fund
working capital needs.
Our bank credit facility, as amended on August 3, 2004, consists of a
revolving line of credit with a group of banks available through August 3, 2008
(the "bank credit facility"). The bank credit facility currently has a borrowing
base of $150 million that is subject to redetermination based on the proved
reserves of the oil and natural gas properties that serve as collateral for the
bank credit facility as set out in the reserve report delivered to the banks
each April 1 and October 1. The bank credit facility permits both prime rate
borrowings and London interbank offered rate ("LIBOR") borrowings plus a
floating spread. The spread will float up or down based on our utilization of
the bank credit facility. The spread
-20-
can range from 1.25% to 2.00% above LIBOR and 0% to 0.75% above prime. The
borrowing base under the bank credit facility is secured by substantially all of
our assets. We used our bank credit facility to fund a portion of the purchase
of the south Louisiana properties in January 2005 and the acquisition of the
additional interest in South Timbalier 26 in March 2005. As a result, at May 4,
2005 we had $70.0 million outstanding and $80.0 million of credit capacity
available under the bank credit facility. In addition, we pay an annual fee on
the unused portion of the bank credit facility ranging between 0.375% to 0.5%
based on utilization. The bank credit facility contains customary events of
default and various financial covenants, which require us to: (i) maintain a
minimum current ratio, as defined in our bank credit facility agreement, of 1.0
and (ii) maintain a minimum EBITDAX to interest ratio, as defined in our bank
credit facility agreement, of 3.5 times. We were in compliance with the bank
credit facility covenants as of March 31, 2005.
On August 5, 2003, we issued $150 million of our 8.75% senior notes due
2010 which were exchanged in October 2003 for registered 8.75% senior notes due
2010 (the "Senior Notes") with substantially the same terms. The Senior Notes
bear interest at a rate of 8.75% per annum with interest payable semi-annually
on February 1 and August 1, beginning February 1, 2004. We may redeem the Senior
Notes at our option, in whole or in part, at any time on or after August 1, 2007
at a price equal to 100% of the principal amount plus accrued and unpaid
interest, if any, plus a specified premium which decreases yearly from 4.375% in
2007 to 0% in 2009 and thereafter. In addition, at any time prior to August 1,
2006, we may redeem up to a maximum of 35% of the aggregate principal amount
with the net proceeds of certain equity offerings at a price equal to 108.75% of
the principal amount, plus accrued and unpaid interest. The notes are unsecured
obligations and rank equal in right of payment to all existing and future senior
debt, including the bank credit facility, and will rank senior or equal in right
of payment to all existing and future subordinated indebtedness. The indenture
relating to the Senior Notes contains certain restrictions on our ability to
incur additional debt, pay dividends on our common stock, make investments,
create liens on our assets, engage in transactions with our affiliates, transfer
or sell assets and consolidate or merge substantially all of our assets. The
Senior Notes are not subject to any sinking fund requirements.
Net cash of $221.5 million used in investing activities in the first three
months of 2005 consisted primarily of the acquisition of south Louisiana
properties and of an additional interest in South Timbalier 26, as well as oil
and natural gas exploration and development expenditures. Dry hole costs
resulting from exploration expenditures are excluded from operating cash flows
and included in investing activities. During the first three months of 2005, we
completed 15 drilling projects, 12 of which were successful and 7
recompletion/workover projects, all of which were successful. During the first
three months of 2004, we completed 5 drilling projects, 3 of which were
successful and 3 recompletion/workover projects, all of which were successful.
Our 2005 capital exploration and development budget is focused on
exploration, exploitation and development activities on our proved properties
combined with moderate risk and higher risk exploratory activities on
undeveloped leases and our proved properties, and does not include acquisitions.
We currently intend to allocate approximately 55% of our budget on an annual
basis to low risk development and exploitation activities, approximately 30% to
moderate risk exploration opportunities and approximately 15% to higher risk,
higher potential exploration opportunities. Our exploration and development
budget for 2005 is approximately $240 million inclusive of expected incremental
drilling expenditures on properties acquired through acquisitions closed thus
far during the year. We do not budget for acquisitions. During the first three
months of 2005, capital and exploration expenditures were approximately $238.8
million inclusive of a $0.9 million contingent consideration payment resulting
from an acquisition during 2002 and $174.0 related to the acquisition of leases
and producing assets in 2005. The level of our capital and exploration
expenditure budget is based on many factors, including results of our drilling
program, oil and natural gas prices, industry conditions, participation by other
working interest owners and the costs and availability of drilling rigs and
other oilfield goods and services. Should actual conditions differ materially
from expectations, some projects may be accelerated or deferred and,
consequently, may increase or decrease total 2005 capital expenditures.
We have experienced and expect to continue to experience substantial
working capital requirements, primarily due to our active capital expenditure
program. We believe that internally generated cash flows will be sufficient to
meet our budgeted capital requirements for at least the next twelve months.
-21-
Availability under the bank credit facility may be used to balance short-term
fluctuations in working capital requirements. However, additional financing may
be required in the future to fund our growth.
Our annual report on Form 10-K for the year ended December 31, 2004
included a discussion of our contractual obligations. There have been no
material changes to that disclosure during the three months ended March 31,
2005. In addition, we do not maintain any off balance sheet transactions,
arrangements, obligations or other relationships with unconsolidated entities or
others that are reasonably likely to have a material current or future effect on
our financial condition, changes in financial condition, revenues and expenses,
results of operations, liquidity, capital expenditures or capital resources.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued Statement of Financial Accounting
Standards No. 151 "Inventory Costs, an amendment of ARB No. 43, Chapter 4"
("Statement 151"). The amendments made by Statement 151 clarify that abnormal
amounts of idle facility expense, freight, handling costs, and wasted materials
(spoilage) should be recognized as current-period charges and require the
allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. The guidance is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years
beginning after November 23, 2004. Our assessment of the provisions of Statement
151 is that it is not expected to have an impact on our financial position,
results of operations or cash flows.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 153 "Exchanges of Non-monetary assets - an amendment of APB
Opinion No. 29" ("Statement 153"). Statement 153 amends Accounting Principles
Board ("APB") Opinion 29 to eliminate the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for exchanges
of nonmonetary assets that do not have commercial substance. A nonmonetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. Statement 153 does
not apply to a pooling of assets in a joint undertaking intended to fund,
develop, or produce oil or natural gas from a particular property or group of
properties. The provisions of Statement 153 shall be effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005. Early
adoption is permitted and the provisions of Statement 153 should be applied
prospectively. Our assessment of the provisions of Statement 153 is that it is
not expected to have an impact on our financial position, results of operations
or cash flows.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123-Revised 2004, "Share-Based Payment," ("Statement 123R"). This
is a revision of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", and supersedes APB No. 25,
"Accounting for Stock Issued to Employees." We currently account for stock-based
compensation under the provisions of APB 25. Under Statement 123R, we will be
required to measure the cost of employee services received in exchange for
stock, based on the grant-date fair value (with limited exceptions). That cost
will be recognized as expense over the period during which an employee is
required to provide service in exchange for the award (usually the vesting
period). The fair value will be estimated using an option-pricing model. Excess
tax benefits, as defined in Statement 123R, will be recognized as an addition to
paid-in capital. This will be effective for us as of the beginning of the first
annual reporting period that begins after June 15, 2005. We are currently in the
process of evaluating the impact of Statement 123R on our financial statements,
including different option-pricing models. Note (2) of the Notes to Consolidated
Financial Statements illustrates the current effect on net income and earnings
per share if we had applied the fair value recognition provisions of Statement
123.
FORWARD LOOKING INFORMATION
All statements other than statements of historical fact contained in this
Report on Form 10-Q ("Report") and other periodic reports filed by us under the
Securities Exchange Act of 1934 and other written or oral statements made by us
or on our behalf, are forward-looking statements. When used herein, the words
"anticipates", "expects", "believes", "goals", "intends", "plans", or "projects"
and similar expressions are intended to identify forward-looking statements. It
is important to note that forward-
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looking statements are based on a number of assumptions about future events and
are subject to various risks, uncertainties and other factors that may cause our
actual results to differ materially from the views, beliefs and estimates
expressed or implied in such forward-looking statements. We refer you
specifically to the section "Additional Factors Affecting Business" in Items 1
and 2 of our Annual Report on Form 10-K for the year ended December 31, 2004.
Although we believe that the assumptions on which any forward-looking statements
in this Report and other periodic reports filed by us are reasonable, no
assurance can be given that such assumptions will prove correct. All
forward-looking statements in this document are expressly qualified in their
entirety by the cautionary statements in this paragraph.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
We are exposed to changes in interest rates. Changes in interest rates
affect the interest earned on our cash and cash equivalents and the interest
rate paid on borrowings under our bank credit facility. Currently, we do not use
interest rate derivative instruments to manage exposure to interest rate
changes. At March 31, 2005, $60.0 million of our long-term debt had variable
interest rates while the remaining long-term debt had fixed interest expense. If
the market interest rates had averaged 1% higher in the first quarter of 2005,
interest rates for the period on variable rate debt would have increased, and
net income before income taxes would have decreased by approximately $0.1
million based on total variable debt outstanding during the period. If market
interest rates had averaged 1% lower in the quarter of 2005, interest expense
for the period on variable rate debt would have decreased, and net income before
income taxes would have increased by approximately $0.1 million.
COMMODITY PRICE RISK
Our revenues, profitability and future growth depend substantially on
prevailing prices for oil and natural gas. Prices also affect the amount of cash
flow available for capital expenditures and our ability to borrow and raise
additional capital. The amount we can borrow under our bank credit facility is
subject to periodic redetermination based in part on changing expectations of
future prices. Lower prices may also reduce the amount of oil and natural gas
that we can economically produce. We currently sell all of our oil and natural
gas production under price sensitive or market price contracts.
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We use derivative commodity instruments to manage commodity price risks
associated with future oil and natural gas production. As of March 31, 2005, we
had the following contracts in place:
Natural Gas Positions
- ----------------------------------------------------------------------------------------
VOLUME (MMBTU)
------------------
REMAINING CONTRACT TERM CONTRACT TYPE STRIKE PRICE ($/MMBTU) DAILY TOTAL
- ----------------------- ------------- ---------------------- ------ ---------
04/05 - 12/05.......... Collar $4.50/$10.75 20,000 5,500,000
07/05 - 12/05.......... Collar $5.00/$10.00 15,000 2,760,000
01/06 - 12/06.......... Collar $5.00/$ 9.51 15,000 5,475,000
01/07 - 12/07.......... Collar $5.00/$ 8.00 10,000 3,650,000
Crude Oil Positions
- ----------------------------------------------------------------------------------------
VOLUME (BBLS)
------------------
REMAINING CONTRACT TERM CONTRACT TYPE STRIKE PRICE ($/BBL) DAILY TOTAL
- ----------------------- ------------- -------------------- ------ ---------
04/05 - 12/05.......... Collar $31.00/$44.05 2,000 550,000
Our hedged volume as of March 31, 2005 approximated 13% of our estimated
production from proved reserves for the balance of the terms of the contracts.
Had these contracts been terminated at March 31, 2005, we estimate the pre-tax
loss would have been $11.5 million.
We use a sensitivity analysis technique to evaluate the hypothetical
effect that changes in the market value of crude oil and natural gas may have on
the fair value of our derivative instruments. At March 31, 2005, the potential
change in the fair value of commodity derivative instruments assuming a 10%
increase in the underlying commodity price was a $6.4 million increase in the
combined estimated pre tax loss.
For purposes of calculating the hypothetical change in fair value, the
relevant variables are the type of commodity (crude oil or natural gas), the
commodities futures prices and volatility of commodity prices. The hypothetical
fair value is calculated by multiplying the difference between the hypothetical
price and the contractual price by the contractual volumes.
ITEM 4. CONTROLS AND PROCEDURES
CONCLUSION REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND
PROCEDURES
Under the supervision and with the participation of certain members of our
management, including the Chief Executive Officer and Chief Financial Officer,
we completed an evaluation of the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended). Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer believe that the disclosure controls and
procedures were effective as of the end of the period covered by this report
with respect to timely communication to them and other members of management
responsible for preparing periodic reports and all material information required
to be disclosed in this report as it relates to our Company and its consolidated
subsidiaries. There was no change in our internal control over financial
reporting during the fiscal quarter ended March 31, 2005 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons or by collusion of two or more people. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, controls may become inadequate because of
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changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected. Accordingly, our disclosure controls and procedures are
designed to provide reasonable, not absolute, assurance that the objectives of
our disclosure control system are met and, as set forth above, our Chief
Executive Officer and Chief Financial Officer have concluded, based on their
evaluation as of the end of the period, that our disclosure controls and
procedures were sufficiently effective to provide reasonable assurance that the
objectives of our disclosure control system were met.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibits:
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chairman, President, and
Chief Executive Officer of Energy Partners, Ltd.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Executive Vice President and
Chief Financial Officer of Energy Partners, Ltd.
32.0 Section 1350 Certifications.
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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.
ENERGY PARTNERS, LTD.
Date: May 6, 2005 By: /s/ David R. Looney
--------------------------------------
David R. Looney
Executive Vice President and Chief
Financial Officer (Authorized Officer
and Principal Financial Officer)
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EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------- -----------------------------------------------------------------
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chairman, President,
and Chief Executive Officer of Energy Partners, Ltd.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Executive Vice President
and Chief Financial Officer of Energy Partners, Ltd.
32.0 Section 1350 Certifications.
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