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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 September 30, 2001
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 1-14344
__________________________
PATINA OIL & GAS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-2629477
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1625 Broadway
Denver, Colorado 80202
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (303) 389-3600
Title of class Name of exchange on which listed
---------------------------------- --------------------------------------
Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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 ___.
---
There were 21,184,588 shares of common stock outstanding on November 1, 2001.
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PART I. FINANCIAL INFORMATION
The financial statements included herein have been prepared in conformity
with generally accepted accounting principles. The statements are unaudited but
reflect all adjustments which, in the opinion of management, are necessary to
fairly present the Company's financial position and results of operations.
2
PATINA OIL & GAS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
December 31, September 30,
2000 2001
--------- ---------
(Unaudited)
ASSETS
Current assets
Cash and equivalents $ 2,653 $ 341
Accounts receivable 31,830 19,126
Inventory and other 4,885 3,705
Unrealized hedging gains - 31,391
--------- ---------
39,368 54,563
--------- ---------
Unrealized hedging gains - 34,723
Oil and gas properties, successful efforts method 709,248 756,230
Accumulated depletion (353,344) (388,514)
--------- ---------
355,904 367,716
--------- ---------
Gas facilities and other 4,580 5,586
Accumulated depreciation (3,098) (3,610)
--------- ---------
1,482 1,976
--------- ---------
Other assets 24,500 298
--------- ---------
$ 421,254 $ 459,276
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 23,073 $ 35,046
Income taxes payable - 12,024
Accrued liabilities 7,794 6,064
--------- ---------
30,867 53,134
--------- ---------
Senior debt 177,000 87,750
Deferred income taxes 15,776 37,429
Other noncurrent liabilities 21,165 16,806
Commitments and contingencies
Stockholders' equity
Preferred Stock, $.01 par, 5,000,000 shares
authorized, none outstanding - -
Common Stock, $.01 par, 100,000,000 shares
authorized, 20,043,859 and 21,176,467 shares
outstanding 200 212
Capital in excess of par value 151,392 144,632
Retained earnings 24,854 77,027
Other comprehensive income - 42,286
--------- ---------
176,446 264,157
--------- ---------
$ 421,254 $ 459,276
========= =========
The accompanying notes are an integral part of these statements.
3
PATINA OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- -----------------------
2000 2001 2000 2001
-------- -------- -------- ---------
(Unaudited)
Revenues
Oil and gas sales $ 35,681 $ 47,189 $ 98,524 $ 163,948
Other 455 268 1,046 2,664
-------- -------- -------- ---------
36,136 47,457 99,570 166,612
-------- -------- -------- ---------
Expenses
Direct operating 5,404 8,940 15,896 30,753
Exploration 149 176 174 396
General and administrative 1,646 2,547 5,040 7,952
Interest and other 2,271 1,390 7,226 6,173
Depletion, depreciation and amortization 9,867 12,159 29,676 35,900
-------- -------- -------- ---------
19,337 25,212 58,012 81,174
-------- -------- -------- ---------
Pretax income 16,799 22,245 41,558 85,438
-------- -------- -------- ---------
Provision for income taxes
Current - 1,599 - 12,974
Deferred 3,360 6,409 8,312 17,784
-------- -------- -------- ---------
3,360 8,008 8,312 30,758
-------- -------- -------- ---------
Net income $ 13,439 $ 14,237 $ 33,246 $ 54,680
======== ======== ======== =========
Net income per share
Basic $ 0.73 $ 0.67 $ 1.80 $ 2.64
======== ======== ======== =========
Diluted $ 0.57 $ 0.63 $ 1.43 $ 2.42
======== ======== ======== =========
Weighted average shares outstanding
Basic 17,485 21,379 16,727 20,711
======== ======== ======== =========
Diluted 23,467 22,671 22,774 22,596
======== ======== ======== =========
The accompanying notes are an integral part of these statements.
4
PATINA OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
(In thousands)
Other
Capital in Retained Comprehensive
Preferred Stock Common Stock Excess of Deferred Earnings Income
---------------- ----------------
Shares Amount Shares Amount Par Value Compensation (Deficit) (Loss) Total
------ ------ ------ ------ --------- ------------ --------- ------ -----
Balance, December 31, 1999 2,383 $ 24 16,131 $ 161 $ 188,545 $ (279) $ (22,561) $ - $ 165,890
Repurchase of common and
preferred (514) (5) (1,638) (16) (41,575) - (549) - (42,145)
Conversion of preferred
into common (1,869) (19) 4,934 49 (31) - - - (1)
Issuance of common - - 617 6 4,453 - - - 4,459
Dividends - - - - - - (4,477) - (4,477)
Net income - - - - - 279 52,441 - 52,720
------ ------ ------ ------ --------- -------- --------- --------- ---------
Balance, December 31, 2000 - - 20,044 200 151,392 - 24,854 - 176,446
Repurchase of common and
warrants - - (2,353) (23) (51,451) - - - (51,474)
Issuance of common - - 607 6 6,677 - - - 6,683
Conversion of warrants - - 2,878 29 35,946 - - - 35,975
Tax benefit from stock
options - - - - 2,068 - - - 2,068
Dividends - - - - - - (2,507) - (2,507)
Comprehensive income:
Net income - - - - - - 54,680 - 54,680
Cumulative effect of
accounting change,
net of tax - - - - - - - (25,077) (25,077)
Reclassifications -
contract settlements - - - - - - - 6,602 6,602
Change in unrealized
hedging gains - - - - - - - 60,761 60,761
------ ------ ------ ------ --------- -------- --------- --------- ---------
Total comprehensive income - - - - - - 54,680 42,286 96,966
------ ------ ------ ------ --------- -------- --------- --------- ---------
Balance, September 30, 2001
(unaudited) - $ - 21,176 $ 212 $ 144,632 $ - $ 77,027 $ 42,286 $ 264,157
====== ====== ====== ====== ========= ======== ========= ========= =========
The accompanying notes are an integral part of these statements.
5
PATINA OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended September 30,
-------------------------------
2000 2001
-------- --------
(Unaudited)
Operating activities
Net income $ 33,246 $ 54,680
Adjustments to reconcile net income to net
cash provided by operations
Exploration expense 174 396
Depletion, depreciation and amortization 29,676 35,900
Deferred income taxes 8,312 17,784
Tax benefit from stock options - 2,068
Deferred compensation expense 209 -
Amortization of deferred credits (971) 15
Amortization of loan fees 228 55
Changes in current and other assets and liabilities
Decrease (increase) in
Accounts receivable (3,800) 12,704
Inventory and other 74 1,041
Increase (decrease) in
Accounts payable 3,734 11,979
Income taxes payable - 739
Accrued liabilities 1,222 (1,773)
Other assets and liabilities 1,615 535
-------- --------
Net cash provided by operating activities 73,719 136,123
-------- --------
Investing activities
Acquisition, development and exploration (26,376) (63,130)
Disposition of oil and gas properties - 15,325
Other 1,458 (667)
-------- --------
Net cash used by investing activities (24,918) (48,472)
-------- --------
Financing activities
Decrease in indebtedness (13,000) (89,250)
Debt issuance fees - (168)
Repayment from affiliate - 24,500
Deferred credits 1,446 (13,209)
Issuance of common stock 3,449 42,146
Repurchase of common stock (22,379) (51,475)
Repurchase of preferred stock and redemption premium (13,395) -
Dividends (3,790) (2,507)
-------- --------
Net cash used by financing activities (47,669) (89,963)
-------- --------
Decrease in cash 1,132 (2,312)
Cash and equivalents, beginning of period 626 2,653
-------- --------
Cash and equivalents, end of period $ 1,758 $ 341
======== ========
The accompanying notes are an integral part of these statements.
6
PATINA OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND NATURE OF BUSINESS
Patina Oil & Gas Corporation (the "Company" or "Patina"), a Delaware
corporation, was formed in 1996 to hold the assets of Snyder Oil Corporation
("SOCO") in the Wattenberg Field and to facilitate the acquisition of Gerrity
Oil & Gas Corporation ("Gerrity"). In conjunction with the Gerrity acquisition,
SOCO received 14.0 million shares of Patina common stock. In 1997, a series of
transactions eliminated SOCO's ownership.
In November 2000, Patina acquired various property interests out of a
bankruptcy. The assets were acquired through Elysium Energy, L.L.C. ("Elysium"),
a New York limited liability company, in which Patina holds a 50% interest.
Patina invested $21.0 million of equity and provided a $60.0 million credit
facility to Elysium. See Note (9). The accompanying consolidated financial
statements were prepared on a proportionate consolidation basis, including
Patina's 50% interest in Elysium's assets, liabilities, revenues and expenses.
All significant intercompany balances and transactions have been eliminated in
consolidation.
The Company's operations currently consist of the acquisition, development,
exploitation and production of oil and gas properties. Historically, Patina's
properties were primarily located in the Wattenberg Field of Colorado's D-J
Basin. Over the past year, the Company has accumulated significant acreage
positions in three Rocky Mountain basins in efforts to expand and diversify
through grassroots projects. Through Elysium and these recently initiated
exploration and development projects, the Company now has oil and gas properties
in central Kansas, the Illinois Basin, Utah, Wyoming, Texas and the San Joaquin
Basin of California.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Producing Activities
The Company utilizes the successful efforts method to account for its oil
and gas properties. Leasehold costs are capitalized when incurred. Unproved
properties are assessed periodically within specific geographic areas and
impairments in value are charged to expense. Exploratory expenses, including
geological and geophysical expenses and delay rentals, are charged to expense as
incurred. Exploratory drilling costs are capitalized, but charged to expense if
the well is determined to be unsuccessful. Costs of productive wells,
unsuccessful developmental wells and productive leases are capitalized and
amortized on a unit-of-production basis over the life of the associated oil and
gas reserves. Oil is converted to natural gas equivalents (Mcfe) at the rate of
one barrel to six Mcf. Amortization of capitalized costs has generally been
provided on a field-by-field basis. An accrual of approximately $1.0 million has
been provided for estimated future abandonment costs on certain Elysium
properties as of September 30, 2001. No accrual has been provided for the
Wattenberg properties, as management believes the salvage value will approximate
abandonment costs.
The Company follows Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets," which requires
the Company to assess the need for an impairment of capitalized costs of oil and
gas properties on a field-by-field basis. While no impairments were recorded for
the nine months ended September 30, 2000 and 2001, changes in underlying
assumptions or the amortization units could result in impairments in the future.
Gas facilities and other
Depreciation of gas facilities is provided using the straight-line method
over five years. Equipment is depreciated using the straight-line method over
three to five years.
7
Other Assets
At December 31, 2000, Other Assets was comprised of a $24.5 million advance
to Elysium. In May 2001, Elysium entered into a credit facility with a third
party bank. The proceeds from this facility were used to repay Patina. See Note
(9).
Section 29 Tax Credits
Between 1996 and 2000, the Company entered into certain arrangements to
monetize its Section 29 tax credits. These arrangements resulted in revenue
increases of approximately $0.40 per Mcf on production volumes from qualified
properties. As the Company's profitability now allows it to utilize tax credits,
they were reacquired in March 2001. The Company recorded additional gas
revenues of $2.6 million and $602,000 related to Section 29 credits during the
nine months ended September 30, 2000 and 2001, respectively.
Gas Imbalances
The Company uses the sales method to account for gas imbalances. Under this
method, revenue is recognized based on the cash received rather than the
Company's proportionate share of gas produced. Gas imbalances at December 31,
2000 and September 30, 2001 were insignificant.
Comprehensive Income
The Company follows SFAS No. 130, "Reporting Comprehensive Income," which
establishes standards for reporting comprehensive income. In addition to net
income, comprehensive income includes all changes in equity during a period,
except those resulting from investments and distributions to the owners of the
Company. The Company had no such changes for the nine months ended September
30, 2001. The components of Other comprehensive income and related tax effects
for the nine months ended September 30, 2001 were as follows (in thousands):
Tax Net of
Gross Effect Tax
--------- --------- ---------
Cumulative effect of accounting change $(39,183) $ 14,106 $(25,077)
Change in fair value of hedges 94,939 (34,178) 60,761
Reclassification adjustments - contract settlements 10,316 (3,714) 6,602
-------- -------- --------
$ 66,072 $(23,786) $ 42,286
======== ======== ========
Financial Instruments
The book value and estimated fair value of cash and equivalents was $2.7
million and $341,000 at December 31, 2000 and September 30, 2001, respectively.
The book value and estimated fair value of the senior debt was $177.0 million
and $87.8 million at December 31, 2000 and September 30, 2001, respectively.
The book value of these assets and liabilities approximates fair value due to
the short maturity or floating rate structure of these instruments.
Derivative Instruments and Hedging Activities
From time to time, the Company enters into commodity derivative contracts
and fixed-price physical contracts to manage its exposure to oil and gas price
volatility. The contracts, which are generally placed with major financial
institutions or with counter parties of high credit quality, may take the form
of futures contracts, swaps or options. The oil and gas reference prices of
these contracts are based upon oil and natural gas futures, which have a high
degree of historical correlation with actual prices received by the Company.
Currently, the Company's oil and gas swap contracts are designated as cash flow
hedges and the remaining discussion will relate exclusively to this type of
derivative instrument.
8
The Company entered into various swap contracts for oil based on NYMEX
prices for the first nine months of 2000 and 2001, recognizing losses of $7.5
million and $437,000, respectively, related to these swap contracts. The Company
entered into various swap contracts for natural gas based on the Colorado
Interstate Gas ("CIG") index during the first nine months of 2000 and 2001,
recognizing losses of $6.3 million and $7.6 million, respectively, related to
these swap contracts.
At September 30, 2001, the Company was a party to swap contracts for oil
based on NYMEX prices covering approximately 5,250 barrels of oil per day for
the remainder of 2001 at fixed prices ranging from $23.05 to $29.87 per barrel
and 2,100 barrels of oil per day for 2002 at fixed prices ranging from $23.11 to
$27.32 per barrel. These swaps are summarized in the table below. The overall
weighted average hedged price for the swap contracts is $26.52 per barrel for
the remainder of 2001 and $25.74 per barrel for 2002. The unrecognized gains on
these contracts totaled $3.0 million based on estimated NYMEX market values at
September 30, 2001.
At September 30, 2001, the Company was a party to swap contracts for
natural gas based on CIG index prices covering approximately 49,200 MMBtu's per
day for the remainder of 2001 at fixed prices ranging from $3.13 to $5.64 per
MMBtu. The Company also entered into natural gas swap contracts for 2002, 2003,
2004 and 2005 as of September 30, 2001, which are summarized in the table below.
The unrecognized gains on these contracts totaled $63.1 million based on
estimated CIG market values at September 30, 2001.
As of September 30, 2001, the Company was a party to the following fixed
price swap and physical arrangements summarized below:
Oil Swaps (NYMEX)
------------------------------------
Daily Unrealized
Volume Gain / (Loss)
Time Period Bbl $/Bbl ($/thousand)
----------- --- ----- ------------
10/01/01 - 12/31/01......................... 5,250 26.52 $ 1,376
01/01/02 - 03/31/02........................ 4,250 26.46 1,004
04/01/02 - 06/30/02........................ 3,250 25.53 550
07/01/02 - 09/30/02........................ 500 23.65 17
10/01/02 - 12/31/02........................ 500 23.24 16
Natural Gas Swaps (CIG Index)
------------------------------------
Daily Unrealized
Volume Gain / (Loss)
Time Period MMBtu $/MMBtu ($/thousand)
----------- ----- ------- ------------
10/01/01 - 12/31/01........................ 49,200 4.02 $10,710
01/01/02 - 03/31/02........................ 40,000 5.07 9,590
04/01/02 - 06/30/02........................ 26,650 3.98 4,562
07/01/02 - 09/30/02........................ 20,000 4.04 3,539
10/01/02 - 12/31/02........................ 11,630 4.40 1,854
2003....................................... 30,000 3.78 11,808
2004....................................... 30,000 3.85 10,852
2005....................................... 30,000 3.90 10,193
9
The Company follows SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded on the balance sheet as
either an asset or liability measured at its fair value. It also requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. The Company adopted SFAS No. 133 January 1,
2001.
The balance sheet impact of adopting of SFAS No. 133 on January 1, 2001 was
as follows (in millions):
Amount
------
Unrealized hedging losses......................................................... $(43.2)
Unrealized hedging gains.......................................................... 4.0
Deferred tax liability............................................................ (1.4)
Deferred tax asset................................................................ 15.5
------
Cumulative effect of a change in accounting principle (other comprehensive loss).. $(25.1)
======
During the first nine months of 2001, net hedging losses of $10.3 million
($6.6 million after tax) were transferred from other comprehensive income and
the change in the fair value of outstanding derivative net liabilities decreased
by $94.9 million ($60.8 million after tax). As of September 30, 2001, the
Company had net unrealized hedging gains of $66.1 million ($42.3 million after
tax), including derivative assets of $66.1 million and derivative liabilities of
$43,000. The Company expects to reclassify as an increase to earnings during the
next twelve months $31.4 million ($20.1 million after tax) of net unrealized
hedging gains to Other comprehensive income based on estimated market values at
September 30, 2001.
In October 1998, the Company entered into an interest rate swap contract for
a two-year period. The contract was for $30.0 million principal with a fixed
interest rate of 4.57% payable by the Company and the variable interest rate,
the three-month LIBOR, payable by the third party. The difference between the
fixed rate and the LIBOR rate was reset and received or paid by the Company in
arrears every 90 days. The Company received $363,000 in the first nine months of
2000 pursuant to this contract, which expired in October 2000.
Stock Options and Awards
The Company accounts for its stock-based compensation plans under principles
prescribed by the Accounting Principles Board's Opinion No. 25, "Accounting for
Stock Issued to Employees." Accordingly, stock options awarded under the
Employee Plan and the non-employee Directors Plan are considered to be
"noncompensatory" and do not result in recognition of compensation expense.
However, stock awarded in 1997 and 1998 under the Restricted Stock Plan was
considered to be "compensatory" and $209,000 of non-cash general and
administrative expenses were recognized in the nine months ended September 30,
2000. No costs were incurred in 2001 as these costs were fully amortized in
2000. See Note (6).
Per Share Data
The Company uses weighted average shares outstanding in calculating earnings
per share. When dilutive, options, warrants and common stock issuable upon
conversion of convertible preferred securities are included as share equivalents
using the treasury stock method and included in the calculation of diluted
earnings per share.
10
Risks and Uncertainties
Historically, oil and gas prices have experienced significant fluctuations
and have been particularly volatile in recent years. Price fluctuations can
result from variations in weather, levels of regional or national production and
demand, availability of transportation capacity to other regions of the country
and various other factors. Increases or decreases in prices received could have
a significant impact on future results.
Other
All liquid investments with a maturity of three months or less are considered
to be cash equivalents. Certain amounts in the prior period consolidated
financial statements have been reclassified to conform to the current
classifications. The consolidated financial statements include the accounts of
the Company, its wholly owned subsidiaries and 50% of the accounts of Elysium.
All significant intercompany balances and transactions have been eliminated
in consolidation. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
In the opinion of management, those adjustments to the financial statements
(all of which are of a normal and recurring nature) necessary to present fairly
the financial position and results of operations have been made. These interim
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 2000.
(3) OIL AND GAS PROPERTIES
The cost of oil and gas properties at December 31, 2000 and September 30,
2001 included $1.1 million and $9.5 million in net unevaluated costs for certain
acreage that is generally held for exploration or development to which proved
reserves have not been assigned. The value of these properties is excluded from
amortization. The following table sets forth costs incurred related to oil and
gas properties:
Nine
Year Ended Months Ended
December 31, September 30,
2000 2001
------------ -------------
(In thousands)
Acquisition................. $49,015 $ 10,001
Development................. 39,996 52,733
Exploration and other....... 293 396
------- --------
$89,304 $ 63,130
======= ========
Disposition................. $ - $(15,325)
======= ========
Elysium sold certain properties in the Lake Washington Field in Louisiana
for $30.5 million in March 2001 ($15.25 million net to the Company).
11
(4) INDEBTEDNESS
The following indebtedness was outstanding on the respective dates:
December 31, September 30,
2000 2001
------------ -------------
(In thousands)
Bank facility - Patina $177,000 $82,000
Bank facility - Elysium, net - 5,750
Less current portion - -
-------- -------
Senior debt, net $177,000 $87,750
======== =======
In July 1999, the Company entered into an Amended Bank Credit Agreement (the
"Credit Agreement"). The Credit Agreement is a revolving credit facility in an
aggregate amount up to $200.0 million. The amount available under the facility
is adjusted semi-annually, each May 1 and November 1, and equaled $200.0 million
at September 30, 2001. Patina had $118.0 million available under the Credit
Agreement at September 30, 2001.
The Company may elect that all or a portion of the credit facility bear
interest at a rate equal to: (i) the Eurodollar rate for one, two, three or six
months plus a margin which fluctuates from 1.00% to 1.50%, determined by a debt
to EBITDA ratio or (ii) the prime rate. The average interest rate under the
facility approximated 6.3% during the first nine months of 2001 and was 5.2% at
September 30, 2001.
The Credit Agreement contains financial covenants, including but not limited
to a maximum total debt to EBITDA ratio and a minimum current ratio. It also
contains negative covenants, including but not limited to restrictions on
indebtedness; certain liens; guaranties, speculative derivatives and other
similar obligations; asset dispositions; dividends, loans and advances; creation
of subsidiaries; investments; leases; acquisitions; mergers; changes in fiscal
year; transactions with affiliates; changes in business conducted; sale and
leaseback and operating lease transactions; sale of receivables; prepayment of
other indebtedness; amendments to principal documents; negative pledge causes;
issuance of securities; and non-speculative commodity hedging. Borrowings under
the Credit Agreement mature in July 2003, but may be prepaid at anytime. The
Company has periodically extended the Credit Agreement; however, there is no
assurance it will be able to do so in the future. The Company had a restricted
payment basket under the Credit Agreement of $33.0 million as of September 30,
2001, which may be used to repurchase equity securities, pay dividends or make
other restricted payments.
The Company loaned Elysium $53.0 million at the closing of the Elysium
transaction in November 2000. In May 2001, Elysium refinanced this loan with
outside banks and entered into a Bank Credit Agreement (the "Elysium Credit
Agreement"). The Elysium Credit Agreement is a revolving credit facility in an
aggregate amount up to $60.0 million. The amount available under the facility is
adjusted semi-annually, each May 1 and November 1, and equaled $30.0 million at
September 30, 2001. Elysium had $18.5 million available under the Elysium Credit
Agreement at September 30, 2001.
The Elysium facility is non-recourse to Patina and contains financial
covenants, including but not limited to a maximum total debt to EBITDA ratio, a
minimum current ratio and minimum tangible net worth. Borrowings under the
Elysium Credit Agreement mature in May 2004, but may be prepaid at anytime.
Elysium may elect that all or a portion of the credit facility bear interest at
a rate equal to: (i) the Eurodollar for one, two, three or six months plus a
margin which fluctuates from 1.50% to 2.00%, or (ii) the prime rate plus a
margin which fluctuates from 0.25% to 0.75%. The margin is determined by a
utilization of borrowing base percentage. The average interest rate under the
facility approximated 7.2% during the first nine months of 2001 and was 4.7% at
September 30, 2001.
Scheduled maturities of indebtedness for the next five years are zero through
2002, $82.0 million in 2003 and $5.8 million in 2004. Management intends to
extend the maturity of its credit facility on a regular basis; however, there
can be no assurance it will be able to do so. Cash payments for interest totaled
$7.3 million and $6.4 million for the first nine months of 2000 and 2001,
respectively.
12
(5) STOCKHOLDERS' EQUITY
A total of 100,000,000 common shares, $0.01 par value, are authorized of
which 21,176,467 were outstanding at September 30, 2001. The common stock is
listed on the New York Stock Exchange. A quarterly cash dividend of $0.01 per
common share was initiated in 1997, increased to $0.02 per share in the fourth
quarter of 1999 and to $0.04 per share in the fourth quarter of 2000. The
Company has a stockholders rights plan designed to insure that stockholders
receive full value for their shares in the event of certain takeover attempts.
The following is a schedule of the changes in outstanding shares of the
Company's common stock since January 1, 2000:
Twelve Nine
Months Ended Months Ended
December 31, 2000 September 30, 2001
------------------ -------------------
Beginning shares...................... 16,131,300 20,043,900
Exercise of stock options............. 249,300 395,700
Issued under Stock Purchase Plan...... 52,400 98,000
Issued in lieu of salaries & bonuses.. 128,300 67,900
Issued for directors fees............. 2,800 1,200
Conversion of 7.125% preferred........ 148,000 -
Conversion of 8.50% preferred......... 4,785,600 -
Exercise of $12.50 warrants........... 2,400 2,878,000
Issued to deferred compensation plan.. 13,700 11,500
Vesting of stock grant................ 138,600 33,300
Contributed to 401(K) plan............ 29,600 -
---------- ----------
Total shares issued................... 5,550,700 3,485,600
Repurchases........................... (1,638,100) (2,353,000)
---------- ----------
Ending shares......................... 20,043,900 21,176,500
========== ==========
In the first nine months of 2001, the Company repurchased 2,353,000 shares of
its common stock for $51.5 million.
During the first nine months of 2001, 2,878,000 $12.50 warrants were
converted into common stock with the Company receiving cash proceeds of $36.0
million. The remaining warrants expired on May 2, 2001.
A total of 5,000,000 preferred shares, $0.01 par value, are authorized of
which none were issued at September 30, 2001.
In January 2000, the Company redeemed all remaining 7.125% convertible
preferred stock. Of the 564,800 shares called, 51,000 were converted into
148,000 shares of common stock and the remaining 513,800 were redeemed for $13.4
million in cash. In August 2000, the Company called for redemption the 8.50%
convertible preferred stock. The shares were converted into 4.8 million shares
of common stock, including more than 500,000 shares issued upon conversion in
June 2000. The Company paid $3.2 million in preferred dividends in the first
nine months of 2000, including $549,000 of redemption premiums paid to
shareholders that elected to redeem their 7.125% convertible preferred stock for
cash in the first quarter of 2000.
13
The Company follows SFAS 128, "Earnings per Share." The following table
specifies the calculation of basic and diluted earnings per share:
Three Months Ended September 30,
--------------------------------------------------------
2000 2001
--------------------------- ---------------------------
Net Common Per Net Common Per
Income Shares Share Income Shares Share
------- ------ ----- ------ ------ -----
Net income $13,439 17,485 $14,237 21,379
8.50% preferred dividends (678) - - -
------- ------ ------- -------
Basic net income 12,761 17,485 $ 0.73 14,237 21,379 $0.67
======= =====
Effect of dilutive securities:
8.50% preferred stock 678 3,510 - -
Stock options - 1,274 - 1,292
Stock grant - 138 - -
$12.50 warrants - 1,060 - -
------- ------ ------- -------
Diluted net income $13,439 23,467 $ 0.57 $14,237 22,671 $0.63
======= ====== ======= ======= ======= =====
Nine Months Ended September 30,
-------------------------------------------------------
2000 2001
-------------------------------------------------------
Net Common Per Net Common Per
Income Shares Share Income Shares Share
------ ------ ----- ------ ------ -----
Net income $33,246 16,727 $54,680 20,711
7.125% preferred dividends (600) - - -
8.50% preferred dividends (2,610) - - -
------- ------ ------- -------
Basic net income 30,036 16,727 $ 1.80 54,680 20,711 $2.64
======= =====
Effect of dilutive securities:
8.50% preferred stock 2,610 4,330 - -
Stock options - 1,057 - 1,244
Stock grant - 148 - 9
$12.50 warrants - 512 - 632
------- ------ ------- -------
Diluted net income $32,646 22,774 $ 1.43 $54,680 22,596 $2.42
======= ====== ======= ======= ======= =====
(6) EMPLOYEE BENEFIT PLANS
401(k) Plan
The Company maintains a 401(k) profit sharing and savings plan (the
"401(k) Plan"). Eligible employees may make voluntary contributions to the
401(k) Plan. The Company may, at its discretion, make additional matching or
profit sharing contributions to the 401(k) Plan. The Company made profit
sharing contributions of $483,000 and $589,000 for 1999 and 2000, respectively.
The profit sharing contributions were made in common stock. A total of 61,300
and 29,600 common shares were contributed in 1999 and 2000, respectively.
14
Stock Purchase Plan
The Company maintains a shareholder approved stock purchase plan ("Stock
Purchase Plan"). Pursuant to the Stock Purchase Plan, officers, directors and
certain managers are eligible to purchase common stock at prices ranging from
50% to 85% of the closing price on the trading day prior to the date of purchase
("Closing Price"). In addition, employee participants may be granted the right
to purchase shares with all or a part of their salary and bonus. A total of
500,000 shares of common stock were reserved for possible purchase under the
Stock Purchase Plan. In May 1999, the stockholders approved the annual renewal
of the 500,000 shares of common stock reserved for possible purchase under the
Plan. In 2000, the Board of Directors approved 116,300 common shares (exclusive
of shares available for purchase with participants' salaries and bonuses) for
possible purchase by participants at 75% of the Closing Price during the current
Plan Year. As of September 30, 2000, participants had purchased 85,800 shares
of common stock with participant's 1999 bonuses, at $9.19 per share ($6.89 net
price per share) and 52,400 shares of common stock at an average price of $16.92
per share ($12.69 net price per share), resulting in cash proceeds to the
Company of $665,000. The Company recorded non-cash general and administrative
expenses of $89,000 associated with these purchases in 2000. In 2001, the Board
of Directors approved 121,300 common shares (exclusive of shares available for
purchase with participants' salaries and bonuses) for possible purchase by
participants at 75% of the Closing Price during the current Plan Year. As of
September 30, 2001, participants had purchased 98,000 shares of common stock at
an average price of $26.66 per share ($19.99 net price per share), resulting in
cash proceeds to the Company of $2.0 million. The Company recorded non-cash
general and administrative expenses of $261,000 associated with these purchases
in 2001.
Stock Option and Award Plans
The Company maintains a shareholder approved stock option plan for employees
(the "Employee Plan") providing for the issuance of options at prices not less
than fair market value. Options to acquire the greater of three million shares
of common stock or 10% of outstanding diluted common shares may be outstanding
at any time. The specific terms of grant and exercise are determinable by the
Compensation Committee of the Board of Directors. The options vest over a
three-year period (30%, 60%, 100%) and expire five years from the date of grant.
The following is a summary of stock options granted under the Employee Plan:
Weighted
Range Average
Options of Exercise Exercise
Year Granted Prices Price
---- ------- ------ -----
1999............ 630,000 $ 2.94 - $ 9.13 $ 3.54
2000............ 505,000 $ 9.19 - $21.94 $ 9.34
2001............ 600,000 $22.61 - $33.03 $22.64
The Company also maintains a shareholder approved stock grant and option plan
(the "Directors' Plan") for non-employee Directors. The Directors' Plan provides
for each non-employee Director to receive common shares having a market value
equal to $2,500 quarterly in payment of half their retainer. A total of 8,600
shares were issued in 1999, 2,800 in 2000 and 1,200 in the first nine months of
2001. It also provides for 5,000 options to be granted to each non-employee
Director upon appointment and upon annual re-election, thereafter. The options
vest over a three-year period (30%, 60%, 100%) and expire five years from the
date of grant. The following is a summary of stock options granted under the
Directors' Plan:
Weighted
Range Average
Options of Exercise Exercise
Year Granted Prices Price
---- ------- ------ -----
1999............ 30,000 $ 2.94 - $ 5.13 $ 4.76
2000............ 25,000 $17.44 $17.44
2001............ 25,000 $24.59 - $32.85 $31.20
15
In 1997, shareholders approved a special stock grant and purchase plan for
certain officers and managers ("Management Investors") in conjunction with the
redistribution of SOCO's ownership in the Company. The granted shares vested
25% per year on January 1, 1998, 1999, 2000 and 2001. The non-vested granted
shares were recorded as Deferred Compensation in the equity section. The
Management Investors simultaneously purchased additional common shares from the
Company at $9.875 per share. A portion of the purchase was financed by the
Company, all of which was repaid in January 2001. See Note (9). In conjunction
with his appointment in March 1998, the Company's President was granted 100,000
restricted common shares that vested 33% per year in March 1999, 2000 and 2001.
The President simultaneously purchased 100,000 common shares from the Company
for $6.875 per share. A portion of this purchase ($584,000) was financed by the
Company. As approved by the Board of Directors, the President sold 50,000 common
shares to the Company for $23.50 per share in March 2001, utilizing a portion of
the proceeds to repay his note. See Note (9). The Company recognized $209,000
of non-cash general and administrative expenses for the nine months ended
September 30, 2000 with respect to these stock grants. No costs were incurred
in 2001 as these costs were fully amortized in 2000.
(7) FEDERAL INCOME TAXES
A reconciliation of the federal statutory tax rate to the Company's effective
tax rate for the nine months ended September 30, 2000 and 2001 follows:
2000 2001
---- ----
Federal statutory rate............................ 35% 35%
State income tax rate, net of federal benefit..... 3% 3%
Utilization of net deferred tax asset............. (15%) (2%)
Revision of prior estimate........................ (3%) -
---- ----
Effective income tax rate......................... 20% 36%
==== ====
For tax purposes, the Company had regular net operating loss carryforwards of
approximately $49.0 million and alternative minimum tax ("AMT") loss
carryforwards of approximately $7.5 million at December 31, 2000. Utilization of
$42.8 million of the regular net operating loss carryforwards is limited to
approximately $12.5 million per year as a result of the redistribution of SOCO's
majority ownership in the Company in 1997. In addition, utilization of $25.9
million regular net operating loss carryforwards is limited to $4.2 million per
year as a result of the Gerrity acquisition in 1996. These carryforwards expire
from 2008 through 2018. At December 31, 2000, the Company had AMT credit
carryforwards of $1.4 million that are available indefinitely. There were no
cash payments made by the Company for federal or state taxes during the first
nine months of 2000. The Company made cash payments of $9.4 million for federal
taxes during the first nine months of 2001.
(8) MAJOR CUSTOMERS
During the nine months ended September 30, 2000 and 2001, Duke Energy Field
Services, Inc. accounted for 33% and 30%, BP Amoco Production Company accounted
for 21% and 12%, and E-Prime accounted for 6% and 11%, of revenues,
respectively. Management believes that the loss of any individual purchaser
would not have a long-term material adverse impact on the financial position or
results of operations of the Company.
16
(9) RELATED PARTY
In 1997, certain officers and managers purchased common shares at $9.875 per
share from the Company. A portion of the purchase was financed by the Company
through the issuance of 8.50% recourse promissory notes. The notes were fully
repaid by January 2001. In conjunction with his appointment in 1998, the
President purchased 100,000 shares of common stock at $6.875 per share and was
granted 100,000 shares. The Company loaned him $584,000, represented by an 8.50%
recourse promissory note. As approved by the Board of Directors, the President
sold 50,000 common shares to the Company for $23.50 per share in March 2001,
utilizing a portion of the proceeds to repay his note.
In conjunction with the acquisition of Elysium in November 2000, Patina
agreed to loan Elysium up to $60.0 million of which $49.0 million was
outstanding at December 31, 2000. In May 2001, Elysium entered into a credit
facility with a third party bank. The proceeds from this facility were used to
repay Patina. Elysium paid $1.0 million of interest to Patina while the loan was
outstanding in 2001.
Patina provides certain administrative services to Elysium under an operating
agreement. During the first nine months of 2001, the Company was paid $334,000
for these services.
(10) COMMITMENTS AND CONTINGENCIES
The Company leases office space and certain equipment under non-cancelable
operating leases. Future minimum lease payments under such leases approximate
$750,000 per year from 2001 through 2005.
The Company is a party to various lawsuits incidental to its business, none
of which are expected to have a material adverse impact on its financial
position or results of operations.
17
PATINA OIL & GAS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three months ended September 30, 2001 compared to three months ended September
30, 2000.
Revenues for the three months ended, September 30, 2001 totaled $47.5
million, a 31% increase from the prior year period. Net income totaled $14.2
million, an increase of 6% compared to the prior year. The increases were
attributable to rising production and the benefits of the Elysium acquisition.
Average daily oil and gas production for the quarter totaled 6,933 barrels
and 112.2 MMcf (153.8 MMcfe), an increase of 32% on an equivalent basis from the
same period in 2000. During the quarter, 17 wells were drilled or deepened and
69 refracs and four recompletions were performed in Wattenberg, compared to 17
new wells or deepenings, 47 refracs and three recompletions in the same period
in 2000. Current development activity, the benefits of the Elysium acquisition
in late 2000 and continued success with the production enhancement program have
resulted in steadily increasing production. The level of development activity is
heavily dependent on the prices being received for production.
Average oil prices increased 10% from $23.64 per barrel in the third quarter
of 2000 to $25.97 in 2001. Average natural gas prices decreased 6% from $3.16
per Mcf for the third quarter of 2000 to $2.97 in 2001. The average oil prices
included a hedging loss of $2.9 million or $7.20 per barrel and a hedging gain
of $101,000 or $0.16 per barrel for the third quarters of 2000 and 2001,
respectively. The average natural gas prices included a hedging loss of $3.8
million or $0.46 per Mcf and a hedging gain of $7.9 million or $0.76 per Mcf for
the third quarters of 2000 and 2001, respectively. Direct operating expenses,
consisting of lease operating and production taxes, totaled $8.9 million or
$0.63 per Mcfe for the third quarter of 2001 compared to $5.4 million or $0.51
per Mcfe in the prior year period. The increase in direct operating expenses
was attributable to a $2.4 million increase in lease operating costs relating to
the Elysium acquisition.
General and administrative expenses, net of third party reimbursements, for
the third quarter of 2001 totaled $2.5 million, a $901,000 or 55% increase from
the same period in 2000. The increase was primarily due to the Elysium
acquisition.
Interest and other expenses totaled $1.4 million in the third quarter of
2001, a decrease of $881,000 or 39% from the prior year period. The decrease
resulted from lower average debt balances and falling interest rates. The
Company's average interest rate for the third quarter of 2001 was 5.3% compared
to 7.8% in the third quarter of 2000.
Depletion, depreciation and amortization expense for the third quarter of
2001 totaled $12.2 million, an increase of $2.3 million from the same period in
2000. Depletion expense totaled $11.9 million or $0.84 per Mcfe for the third
quarter of 2001 compared to $9.6 million or $0.90 per Mcfe in 2000. The lower
depletion rate was in response to the completion of the mid-year and year-end
2000 reserve reports reflecting additional oil and gas reserves. The increase
was due primarily to the identification of additional refrac projects and
drilling locations, upward revisions due to better performance and the increase
in oil and gas prices. Depreciation and amortization expense for the three
months ended September 30, 2001 totaled $243,000 or $0.02 per Mcfe compared to
$240,000 or $0.02 per Mcfe in 2000.
Provision for income taxes for the third quarter of 2001 totaled $8.0
million, an increase of $4.6 million from the same period in 2000. The increase
was due to higher earnings and an increase in tax rates. The Company recorded a
36% tax provision in the third quarter of 2001 compared to a 20% tax provision
in 2000. The increase in the tax rate was due primarily to the utilization of
the deferred tax asset in 2000.
18
Nine months ended September 30, 2001 compared to nine months ended September 30,
2000.
Revenues for the nine months ended September 30, 2001 totaled $166.6 million,
a 67% increase from the prior year period. Net income totaled $54.7 million, an
increase of 64% compared to the prior year. The increases were attributable to
rising production, the benefits of the Elysium acquisition and higher oil and
gas prices.
Average daily oil and gas production for the first nine months totaled 7,179
barrels and 109.6 MMcf (152.7 MMcfe), an increase of 32% on an equivalent basis
from the same period in 2000. During the period, 51 wells were drilled or
deepened and 239 refracs and seven recompletions were performed in Wattenberg,
compared to 43 new wells or deepenings, 124 refracs and eight recompletions in
the same period in 2000. Current development activity, the benefits of the
Elysium acquisition in late 2000 and continued success with the production
enhancement program have resulted in steadily increasing production. The level
of development activity is heavily dependent on the prices being received for
production.
Average oil prices increased 19% from $22.35 per barrel in the first nine
months of 2000 to $26.67 in 2001. Average natural gas prices increased 27% from
$2.93 per Mcf for the first nine months of 2000 to $3.73 in 2001. The average
oil price included hedging losses of $7.5 million or $6.26 per barrel and
$437,000 or $0.22 per barrel for the first nine months of 2000 and 2001,
respectively. The average natural gas prices included hedging losses of $6.3
million or $0.26 per Mcf and $7.6 million or $0.25 per Mcf for the first nine
months of 2000 and 2001, respectively. Direct operating expenses, consisting of
lease operating and production taxes, totaled $30.8 million or $0.74 per Mcfe
for the first nine months of 2001 compared to $15.9 million or $0.50 per Mcfe in
the prior year period. The increase in direct operating expenses was
attributable to a $5.1 million rise in production taxes due to higher average
oil and gas prices and production and a $7.4 million increase in lease operating
costs relating to the Elysium acquisition.
General and administrative expenses, net of third party reimbursements, for
the first nine months of 2001 totaled $8.0 million, a $2.9 million or 58%
increase from the same period in 2000. The increase was primarily due to the
Elysium acquisition.
Interest and other expenses totaled $6.2 million in the first nine months of
2001, a decrease of $1.1 million or 15% from the prior year period. The decrease
resulted from lower average debt balances and falling interest rates. The
Company's average interest rate for the first nine months of 2001 was 6.3%
compared to 7.6% in the first nine months of 2000.
Depletion, depreciation and amortization expense for the first nine months of
2001 totaled $35.9 million, an increase of $6.2 million from the same period in
2000. Depletion expense totaled $35.2 million or $0.84 per Mcfe for the first
nine months of 2001 compared to $28.9 million or $0.91 per Mcfe in 2000. The
lower depletion rate was in response to the completion of the mid-year and year-
end 2000 reserve reports reflecting additional oil and gas reserves due
primarily to the identification of additional refrac projects and drilling
locations, upward revisions due to over-performance and the increase in oil and
gas prices. Depreciation and amortization expense for the nine months ended
September 30, 2001 totaled $730,000 or $0.02 per Mcfe compared to $751,000 or
$0.02 per Mcfe in 2000.
Provision for income taxes for the first nine months of 2001 totaled $30.8
million, an increase of $22.4 million from the same period in 2000. The
increase was due to higher earnings and an increase in tax rates. The Company
recorded a 36% tax provision for the first nine months of 2001 compared to a 20%
tax provision in 2000. The increase in the tax rate was due primarily to the
utilization of the deferred tax asset in 2000.
19
Development, Acquisition and Exploration
During the first nine months of 2001, the Company incurred $63.1 million of
capital expenditures. A total of $47.9 million of development costs was spent
in the Wattenberg Field to drill or deepen 51 wells, perform 239 refracs and
seven recompletions. This development activity, the benefits of the Elysium
acquisition and continued success with the production enhancement program
resulted in a 32% increase in production over the first nine months of 2000. In
addition, the Company incurred $12.0 million on various grassroots projects
during the first nine months of 2001. In total, the Company anticipates spending
approximately $70.0 million on development expenditures during 2001, with an
additional $15.0 million to $20.0 million on various grassroots projects. The
decision to increase or decrease development activity is heavily dependent on
the oil and gas prices.
Financial Condition and Capital Resources
At September 30, 2001, the Company had $459.3 million of assets. Total
capitalization was $389.3 million, of which 68% was represented by stockholders'
equity, 23% by bank debt and 9% by deferred taxes. In the first nine months of
2001, net cash provided by operations totaled $136.1 million, as compared to
$73.7 million in same period in 2000 ($110.9 million and $70.9 million prior to
changes in working capital, respectively). At September 30, 2001, there were no
significant commitments for capital expenditures. The Company anticipates 2001
capital expenditures, exclusive of acquisitions, to approximate $70.0 million
with an additional $15.0 million to $20.0 million for various grassroots
projects. The level of these and other future expenditures is largely
discretionary, and the amount of funds devoted to any particular activity may
increase or decrease significantly, depending on available opportunities and
market conditions. The Company plans to finance its ongoing development,
acquisition and exploration expenditures and additional equity repurchases using
internal cash flow, proceeds from asset sales and bank borrowings. In addition,
joint ventures or future public and private offerings of debt or equity
securities may be utilized.
In the first nine months of 2001, the Company repurchased 2,353,000 shares of
its common stock for $51.5 million. The Company received proceeds totaling
approximately $36.0 million from the exercise of the $12.50 common stock
warrants in May 2001. The warrants expired on May 2, 2001.
In July 1999, the Company entered into an Amended Bank Credit Agreement (the
"Credit Agreement"). The Credit Agreement is a revolving credit facility in an
aggregate amount up to $200.0 million. The amount available under the facility
is adjusted semi-annually, each May 1 and November 1, and equaled $200.0 million
at September 30, 2001. Patina had $118.0 million available under the Credit
Agreement at September 30, 2001.
The Company may elect that all or a portion of the credit facility bear
interest at a rate equal to: (i) the Eurodollar rate for one, two, three or six
months plus a margin which fluctuates from 1.00% to 1.50%, determined by a debt
to EBITDA ratio or (ii) the prime rate. The average interest rate under the
facility approximated 6.3% during the first nine months of 2001 and was 5.2% at
September 30, 2001.
The Credit Agreement contains financial covenants, including but not limited
to a maximum total debt to EBITDA ratio and a minimum current ratio. It also
contains negative covenants, including but not limited to restrictions on
indebtedness; certain liens; guaranties, speculative derivatives and other
similar obligations; asset dispositions; dividends, loans and advances; creation
of subsidiaries; investments; leases; acquisitions; mergers; changes in fiscal
year; transactions with affiliates; changes in business conducted; sale and
leaseback and operating lease transactions; sale of receivables; prepayment of
other indebtedness; amendments to principal documents; negative pledge causes;
issuance of securities; and non-speculative commodity hedging. Borrowings under
the Credit Agreement mature in July 2003, but may be prepaid at anytime. The
Company has periodically extended the Credit Agreement; however, there is no
assurance it will be able to do so in the future. The Company had a restricted
payment basket under the Credit Agreement of $33.0 million as of September 30,
2001, which may be used to repurchase equity securities, pay dividends or make
other restricted payments.
20
The Company loaned Elysium $53.0 million at the closing of the Elysium
transaction in November 2000. In May 2001, Elysium refinanced this loan with
outside banks and entered into a Bank Credit Agreement (the "Elysium Credit
Agreement"). The Elysium Credit Agreement is a revolving credit facility in an
aggregate amount up to $60.0 million. The amount available under the facility is
adjusted semi-annually, each May 1 and November 1, and equaled $30.0 million at
September 30, 2001. Elysium had $18.5 million available under the Elysium Credit
Agreement at September 30, 2001.
The Elysium facility is non-recourse to Patina and contains financial
covenants, including but not limited to a maximum total debt to EBITDA ratio, a
minimum current ratio and minimum tangible net worth. Borrowings under the
Elysium Credit Agreement mature in May 2004, but may be prepaid at anytime.
Elysium may elect that all or a portion of the credit facility bear interest at
a rate equal to: (i) the Eurodollar for one, two, three or six months plus a
margin which fluctuates from 1.50% to 2.00%, or (ii) the prime rate plus a
margin which fluctuates from 0.25% to 0.75%. The margin is determined by a
utilization of borrowing base percentage. The average interest rate under the
facility approximated 7.2% during the first nine months of 2001 and was 4.7% at
September 30, 2001.
In October 1998, the Company entered into an interest rate swap contract for
a two-year period. The contract was for $30.0 million principal with a fixed
interest rate of 4.57% payable by the Company and the variable interest rate,
the three-month LIBOR, payable by the third party. The difference between the
fixed rate and the LIBOR rate was reset and received or paid by the Company in
arrears every 90 days. The Company received $363,000 in the first nine months of
2000 pursuant to this contract, which expired in October 2000.
In conjunction with his appointment in 1998, the Company's President
purchased 100,000 shares of common stock at $6.875 per share. The Company
loaned him $584,000, represented by an 8.50% recourse promissory note. As
approved by the Board of Directors, the President sold 50,000 common shares to
the Company for $23.50 per share in March 2001, utilizing a portion of the
proceeds to repay his note.
Between 1996 and 2000, the Company entered into certain arrangements to
monetize its Section 29 tax credits. These arrangements resulted in revenue
increases of approximately $0.40 per Mcf on production volumes from qualified
properties. As the Company's profitability now allows it to utilize tax credits,
they were reacquired in March 2001. The Company recorded additional gas
revenues of $2.6 million and $602,000 related to Section 29 credits during the
nine months ended September 30, 2000 and 2001, respectively.
The Company's primary cash requirements will be to finance acquisitions, fund
development expenditures, repurchase equity securities, repay indebtedness, and
general working capital needs. However, future cash flows are subject to a
number of variables, including the level of production and oil and gas prices,
and there can be no assurance that operations and other capital resources will
provide cash in sufficient amounts to maintain planned levels of capital
expenditures or that increased capital expenditures will not be undertaken.
The Company believes that borrowings available under its Credit Agreement,
projected operating cash flows and the cash on hand will be sufficient to cover
its working capital, capital expenditures, planned development activities and
debt service requirements for the next 12 months. In connection with
consummating any significant acquisition, additional debt or equity financing
will be required, which may or may not be available on acceptable terms.
21
Certain Factors That May Affect Future Results
Statements that are not historical facts contained in this report are
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ from projected results. Such statements address
activities, events or developments that the Company expects, believes, projects,
intends or anticipates will or may occur, including such matters as future
capital, development and exploration expenditures (including the amount and
nature thereof), drilling, deepening or refracing of wells, reserve estimates
(including estimates of future net revenues associated with such reserves and
the present value of such future net revenues), future production of oil and
natural gas, business strategies, expansion and growth of the Company's
operations, cash flow and anticipated liquidity, prospect development and
property acquisition, obtaining financial or industry partners for prospect or
program development, or marketing of oil and natural gas. Factors that could
cause actual results to differ materially ("Cautionary Disclosures") are
described, among other places, in the Marketing, Competition, and Regulation
sections in the 2000 Form 10-K and under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations." Without
limiting the Cautionary Disclosures so described, Cautionary Disclosures
include, among others: general economic conditions, the market price of oil and
gas, the risks associated with exploration, the Company's ability to find,
acquire, market, develop and produce new properties, operating hazards attendant
to the oil and natural gas business, uncertainties in the estimation of proved
reserves and in the projection of future rates of production and timing of
development expenditures, the strength and financial resources of the Company's
competitors, the Company's ability to find and retain skilled personnel,
climatic conditions, labor relations, availability and cost of material and
equipment, environmental risks, the results of financing efforts, and regulatory
developments. All written and oral forward-looking statements attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Disclosures. The Company disclaims any obligation to
update or revise any forward-looking statement to reflect events or
circumstances occurring hereafter or to reflect the occurrence of anticipated or
unanticipated events.
Market Risk Disclosures
Commodity Price Risk
The Company's major market risk exposure is in the pricing applicable to its
oil and gas production. Realized pricing is primarily driven by the prevailing
domestic price for oil and spot prices applicable to the Rocky Mountain and Mid-
Continent regions for its gas production. Historically, prices received for oil
and gas production have been volatile and unpredictable. Pricing volatility is
expected to continue. Natural gas price realizations during 2000 and the first
nine months of 2001, exclusive of hedges, ranged from a monthly low of $2.15 per
Mcf to a monthly high of $7.65 per Mcf. Oil prices, exclusive of any hedges,
ranged from a monthly low of $24.36 per barrel to a monthly high of $33.85 per
barrel during 2000 and the first nine months of 2001. A significant decline in
prices of oil or natural gas could have a material adverse effect on the
Company's financial condition and results of operations.
From time to time, the Company enters into commodity derivative contracts and
fixed-price physical contracts to manage its exposure to oil and gas price
volatility. The contracts, which are generally placed with major financial
institutions or with counter parties of high credit quality, may take the form
of futures contracts, swaps or options. The oil and gas reference prices of
these contracts are based upon oil and natural gas futures, which have a high
degree of historical correlation with actual prices received by the Company.
Currently, the Company's oil and gas swap contracts are designated as cash flow
hedges and the remaining discussion will relate exclusively to this type of
derivative instrument.
22
The Company entered into various swap contracts for oil based on NYMEX prices
for the first nine months of 2000 and 2001, recognizing losses of $7.5 million
and $437,000, respectively, related to these swap contracts. The Company
entered into various swap contracts for natural gas based on the Colorado
Interstate Gas ("CIG") index during the first nine months of 2000 and 2001,
recognizing losses of $6.3 million and $7.6 million, respectively, related to
these swap contracts.
At September 30, 2001, the Company was a party to swap contracts for oil
based on NYMEX prices covering approximately 5,250 barrels of oil per day for
the remainder of 2001 at fixed prices ranging from $23.05 to $29.87 per barrel
and 2,100 barrels of oil per day for 2002 at fixed prices ranging from $23.11 to
$27.32 per barrel. These swaps are summarized in the table below. The overall
weighted average hedged price for the swap contracts is $26.52 per barrel for
the remainder of 2001 and $25.74 per barrel for 2002. The unrecognized gains on
these contracts totaled $3.0 million based on estimated NYMEX market values at
September 30, 2001.
At September 30, 2001, the Company was a party to swap contracts for natural
gas based on CIG index prices covering approximately 49,200 MMBtu's per day for
the remainder of 2001 at fixed prices ranging from $3.13 to $5.64 per MMBtu. The
Company also entered into natural gas swap contracts for 2002, 2003, 2004 and
2005 as of September 30, 2001, which are summarized in the table below. The
unrecognized gains on these contracts totaled $63.1 million based on estimated
CIG market values at September 30, 2001.
As of September 30, 2001, the Company was a party to the following fixed
price swap and physical arrangements summarized below:
Oil Swaps (NYMEX)
--------------------------------------
Daily Unrealized
Volume Gain / (Loss)
Time Period Bbl $/Bbl ($/thousand)
----------- ------ ----- -------------
10/01/01 - 12/31/01............ 5,250 26.52 $ 1,376
01/01/02 - 03/31/02............ 4,250 26.46 1,004
04/01/02 - 06/30/02............ 3,250 25.53 550
07/01/02 - 09/30/02............ 500 23.65 17
10/01/02 - 12/31/02............ 500 23.24 16
Natural Gas Swaps (CIG Index)
--------------------------------------
Daily Unrealized
Volume Gain / (Loss)
Time Period MMBtu $/MMBtu ($/thousands)
--------------------- ------ ------- -------------
10/01/01 - 12/31/01............ 49,200 4.02 $10,710
01/01/02 - 03/31/02............ 40,000 5.07 9,590
04/01/02 - 06/30/02............ 26,650 3.98 4,562
07/01/02 - 09/30/02............ 20,000 4.04 3,539
10/01/02 - 12/31/02............ 11,630 4.40 1,854
2003........................... 30,000 3.78 11,808
2004........................... 30,000 3.85 10,852
2005........................... 30,000 3.90 10,193
23
Interest Rate Risk
At September 30, 2001, the Company had $82.0 million outstanding under its
credit facility with an average interest rate of 5.2% and $5.8 million (net)
outstanding under its Elysium credit facility with an average interest rate of
4.7%. The Company may elect that all or a portion of the credit facility bear
interest at a rate equal to: (i) the Eurodollar rate for one, two, three or six
months plus a margin which fluctuates from 1.00% to 1.50% on the Patina facility
or 1.50% to 2.00% on the Elysium facility or (ii) the prime rate plus a margin
which fluctuates from 0.00% to 0.50% on the Patina facility or 0.25% to 0.75% on
the Elysium facility. The average interest rates under the Patina and Elysium
facilities approximated 6.3% and 7.2%, respectively during the first nine months
of 2001. Assuming no change in the amount outstanding at September 30, 2001,
the annual impact on interest expense of a ten percent change in the average
interest rate would be approximately $400,000, net of tax. As the interest rate
is variable and is reflective of current market conditions, the carrying value
approximates the fair value.
Inflation and Changes in Prices
While certain costs are affected by the general level of inflation, factors
unique to the oil and gas industry result in independent price fluctuations.
Over the past five years, significant fluctuations have occurred in oil and
natural gas prices. Although it is particularly difficult to estimate future
prices of oil and gas, price fluctuations have had, and will continue to have, a
material effect on the Company.
The following table indicates the average oil and gas prices received over
the last five years and highlights the price fluctuations by quarter for 2000
and the first three quarters of 2001. Average price computations exclude hedging
gains and losses and other nonrecurring items to provide comparability. Average
prices per Mcfe indicate the composite impact of changes in oil and gas prices.
Oil production is converted to gas equivalents at the rate of one barrel per six
Mcf.
Average Prices
----------------------------------
Natural Equivalent
Oil Gas Mcf
--- --- ---
Annual (Per Bbl) (Per Mcf) (Per Mcfe)
------
1996.................. $20.47 $1.99 $2.41
1997.................. 19.54 2.25 2.55
1998.................. 13.13 1.87 1.96
1999.................. 17.71 2.21 2.40
2000.................. 29.16 3.69 3.96
Quarterly
---------
2000
----
First................. $27.30 $2.70 $3.13
Second................ 27.75 3.23 3.55
Third................. 30.85 3.63 3.96
Fourth................ 30.53 5.03 5.05
2001
----
First................. $27.86 $6.16 $5.72
Second................ 26.96 3.70 3.93
Third................. 25.81 2.21 2.77
24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information with respect to this item is incorporated by reference from
Notes to Consolidated Financial Statements in Part 1 of this report.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
10.1 Amended & Restated Patina Oil & Gas Corporation Deferred Compensation
Plan for Select Employees *
* Filed herewith
(b) No reports on Form 8-K were filed by Registrant during the quarter ended
September 30, 2001.
25
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.
PATINA OIL & GAS CORPORATION
BY /s/ David J. Kornder
--------------------
David J. Kornder, Executive Vice President
and Chief Financial Officer
November 2, 2001
26