1
================================================================================
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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 001-16093
WESTPORT RESOURCES CORPORATION
(Exact Name of Registrant as specified in its charter)
DELAWARE 23-3020832
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
410 SEVENTEENTH STREET, SUITE 2300
DENVER, COLORADO 80202
(Address of principal executive offices)
(Zip Code)
(303) 573-5404
(Registrant's telephone number, including area code)
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 [ ] No [X]
As of November 13, 2000, 37,384,041 shares of the issuer's common
stock, par value $0.01 per share, were outstanding.
================================================================================
2
WESTPORT RESOURCES CORPORATION
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION............................................................................ 1
Item 1. Financial Statements............................................................................. 1
Consolidated Balance Sheets as of December 31, 1999 and September 30, 2000
(unaudited)...................................................................................... 1
Consolidated Statements of Operations for the three months and nine months
ended September 30, 1999 and 2000 (unaudited).................................................... 2
Consolidated Statements of Cash Flows for the nine months ended September 30,
1999 and 2000 (unaudited)........................................................................ 3
Notes to Consolidated Financial Statements....................................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk....................................... 18
PART II - OTHER INFORMATION............................................................................... 19
Item 1. Legal Proceedings................................................................................ 19
Item 2. Changes in Securities and Use of Proceeds........................................................ 19
Item 3. Defaults Upon Senior Securities.................................................................. 19
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 20
Item 5. Other Information................................................................................ 20
Item 6. Exhibits and Reports on Form 8-K................................................................. 20
Signatures ............................................................................................... 21
i
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WESTPORT RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents ............................................ $ 19,475 $ 35,507
Accounts receivable, net ............................................. 14,645 44,232
Prepaid expenses ..................................................... 1,712 1,572
------------ -------------
Total current assets ............................................. 35,832 81,311
------------ -------------
Property and equipment, at cost:
Oil and natural gas properties, successful efforts method:
Proved properties .................................................. 307,068 540,128
Unproved properties ................................................ 18,089 45,350
Office furniture and equipment ....................................... 2,182 2,466
Leasehold improvements ............................................... 488 501
------------ -------------
......................................................................... 327,827 588,445
Less accumulated depletion, depreciation and amortization ................ (92,950) (134,924)
------------ -------------
Net property and equipment ....................................... 234,877 453,521
------------ -------------
Other assets ............................................................. 768 1,449
------------ -------------
Total assets ..................................................... $ 271,477 $ 536,281
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ..................................................... $ 8,482 $ 12,740
Accrued expenses ..................................................... 10,574 6,644
Ad valorem taxes payable ............................................. 2,606 4,769
Current portion of long-term debt .................................... 1,333 333
------------ -------------
Total current liabilities ........................................ 22,995 24,486
------------ -------------
Long-term debt ........................................................... 105,462 145,462
Deferred income taxes .................................................... -- 26,386
Other liabilities ........................................................ 3,009 1,584
------------ -------------
Total liabilities ................................................ 131,466 197,918
------------ -------------
Stockholders' equity:
Common stock , $0.01 par value; 70,000,000 authorized; 15,630,501 and
30,884,041 shares issued and outstanding at December 31, 1999 and
September 30, 2000, respectively .................................. 156 309
Additional paid-in capital ........................................... 198,295 366,884
Accumulated deficit .................................................. (58,440) (28,830)
------------ -------------
Total stockholders' equity ....................................... 140,011 338,363
------------ -------------
Total liabilities and stockholders' equity ....................... $ 271,477 $ 536,281
============ =============
The accompanying notes are an integral part of these
consolidated financial statements.
1
4
WESTPORT RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- ------------------------
1999 2000 1999 2000
----------- ----------- ---------- -----------
Operating revenues:
Oil and natural gas sales............................... $ 19,302 $ 63,176 $ 51,193 $ 140,724
Operating costs and expenses:
Lease operating expense................................. 6,211 8,130 16,350 23,609
Production taxes........................................ 1,614 2,816 3,800 7,460
Exploration............................................. 1,182 1,347 3,274 7,610
Depletion, depreciation and amortization................ 2,919 19,439 19,228 42,015
Impairment of unproved properties....................... 1,409 366 1,411 1,908
Stock compensation expense.............................. -- 299 -- 3,682
General and administrative.............................. 1,020 2,073 4,015 5,277
----------- ----------- ---------- -----------
Total operating expenses........................... 14,355 34,470 48,078 91,561
----------- ----------- ---------- -----------
Operating income .................................. 4,947 28,706 3,115 49,163
----------- ----------- ---------- -----------
Other income (expense):
Interest expense........................................ (2,338) (3,166) (6,916) (8,454)
Interest income......................................... 93 239 308 614
Gain (loss) on sale of assets, net...................... (500) 3,390 3,898 3,379
Other................................................... 85 68 106 100
----------- ----------- ---------- -----------
(2,660) 531 (2,604) (4,361)
----------- ----------- ---------- -----------
Income before income taxes.................................. 2,287 29,237 511 44,802
Provision for income taxes.................................. -- (10,233) -- (15,192)
----------- ----------- ---------- -----------
Net income ................................................. $ 2,287 $ 19,004 $ 511 $ 29,610
=========== =========== ========== ===========
Weighted average number of common shares outstanding:
Basic ............................................. 15,631 30,871 14,418 25,474
=========== =========== ========== ===========
Diluted............................................ 15,875 31,235 14,529 25,729
=========== =========== ========== ===========
Net income per common share:
Basic ............................................. $ .15 $ .62 $ .04 $ 1.16
=========== =========== ========= ===========
Diluted............................................ $ .14 $ .61 $ .04 $ 1.15
=========== =========== ========= ===========
The accompanying notes are an integral part of these
consolidated financial statements.
2
5
WESTPORT RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE NINE MONTHS ENDED
-------------------------
SEPTEMBER 30,
1999 2000
---------- ----------
Cash flows from operating activities:
Net income .............................................................. $ 511 $ 29,610
Adjustments to reconcile net income to cash provided by operating
activities:
Depletion, depreciation and amortization .............................. 19,228 42,015
Exploratory dry hole costs ............................................ 502 1,976
Impairment of unproved properties ..................................... 1,411 1,908
Deferred income taxes ................................................. -- 15,192
Director retainers settled for stock .................................. -- 50
Stock compensation expense ............................................ -- 299
Loss (gain) on sale of assets ......................................... (3,898) (3,379)
Changes in assets and liabilities, net of effects of acquisitions:
Increase in accounts receivable .................................... (3,678) (21,891)
Decrease (increase) in prepaid expenses ............................ (155) 140
Increase (decrease) in accounts payable ............................ (1,949) 2,123
Increase in ad valorem taxes payable ............................... 275 2,164
Decrease in accrued expenses ....................................... (3,046) (3,930)
Decrease in other liabilities ...................................... (492) (1,424)
---------- ----------
Net cash provided by operating activities ................................... 8,709 64,853
---------- ----------
Cash flows from investing activities:
Additions to property and equipment ................................... (5,935) (49,682)
Proceeds from sales of assets ......................................... 24,979 6,259
Merger with EPGC ...................................................... -- (42,403)
Other acquisitions .................................................... 448 (1,454)
Other ................................................................. 24 (682)
---------- ----------
Net cash provided by (used in) investing activities ......................... 19,516 (87,962)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock .................................. 16,400 141
Proceeds from long-term debt ............................................ -- 50,000
Repayment of long-term debt ............................................. (42,000) (11,000)
---------- ----------
Net cash provided by (used in) financing activities ......................... (25,600) 39,141
---------- ----------
Net increase in cash and cash equivalents ................................... 2,625 16,032
Cash and cash equivalents, beginning of period .............................. 10,148 19,475
---------- ----------
Cash and cash equivalents, end of period .................................... $ 12,773 $ 35,507
========== ==========
Supplemental cash flow information:
Cash paid for interest .................................................. $ 7,335 $ 6,912
========== ==========
Cash paid for income taxes .............................................. $ -- $ --
========== ==========
Supplemental schedule of noncash investing and financing activities:
Common stock issued in connection with the EPGC merger .................. $ -- $ 165,356
========== ==========
Liabilities assumed in connection with the EPGC merger .................. $ -- $ 1,850
========== ==========
EPGC merger expenses paid by parent ..................................... $ -- $ 2,895
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
3
6
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND NATURE OF BUSINESS
On April 7, 2000, Westport Oil and Gas Company, Inc. merged with
Equitable Production (Gulf) Company ("EPGC"), an indirect subsidiary of
Equitable Resources, Inc. that held certain Gulf of Mexico assets (the "EPGC
Properties"). This transaction was effected by a merger between a newly-formed
subsidiary of EPGC and Westport Oil and Gas Company, Inc., resulting in Westport
Oil and Gas Company, Inc. becoming a wholly-owned subsidiary of EPGC, which
subsequently changed its name to Westport Resources Corporation (the "Company").
The Company is owned 50.4% by Westport Energy LLC and 49.4% by ERI Investments,
Inc. The remaining 0.2% is owned by two executive officers and three directors
of the Company (the "Merger"). Business activities of the Company include the
exploration for and production of oil and natural gas primarily in the Rocky
Mountains, the Gulf Coast, the West Texas/Mid Continent area and the Gulf of
Mexico.
2. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring items) necessary to present fairly the financial position of the
Company as of September 30, 2000 and the results of operations and cash flows
for the periods presented. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the Securities
and Exchange Commission's rules and regulations. The results of operations for
the periods presented are not necessarily indicative of the results to be
expected for the full year. Management believes the disclosures made are
adequate to ensure that the information is not misleading, and suggests that
these financial statements be read in conjunction with the Company's December
31, 1999 audited financial statements set forth in the Company's Registration
Statement on Form S-1, as amended (No. 333-40422).
3. STOCK OPTION REPURCHASE
On March 24, 2000, the Company repurchased and cancelled 1,344,510
stock options, representing all outstanding stock options, from employees and
directors for approximately $3.4 million. The cost to repurchase the stock
options is included in general and administrative expense in the accompanying
statement of operations for the nine months ended September 30, 2000. The cost
to repurchase the stock options was based on the difference between $10.85 and
the exercise prices of $8.00 and $10.67 of such options. See Note 7.
4. MERGER
The Merger was accounted for using purchase accounting with Westport
Oil and Gas as the surviving entity. The Company paid $50 million in cash from
bank borrowings, issued 15.236 million shares of common stock valued at $10.85
per share and assumed liabilities of $1.85 million to consummate the Merger.
The total purchase price of $217.2 million was allocated as follows (in
thousands):
Acquisition Costs:
Common stock issued .......................... $165,356
Cash paid/Long-term debt incurred ............ 50,000
Liabilities assumed .......................... 1,850
--------
Total acquisition costs ............... $217,206
========
Allocation of Acquisition Costs:
Oil and gas properties - proved .............. $193,603
Oil and gas properties - unproved ............ 23,603
--------
Total ................................. $217,206
========
4
7
The value of the common shares issued to consummate the Merger was determined
utilizing a valuation model to determine a Net Asset Value ("NAV") for each
company based on the pre-tax discounted future net revenues of the companies'
oil and gas reserves, derived from third party engineering reports, adjusted for
the companies' other assets and liabilities. The EPGC Properties consist of 37
producing properties and 30 undeveloped blocks in the Gulf of Mexico. The
results of operations of EPGC have been included in the Company's statement of
operations since the closing date of April 7, 2000.
Pro Forma Results of Operations
The following table reflects the pro forma results of operations for
the nine-month periods ended September 30, 2000 and 1999 as though the Merger
had occurred as of January 1, 1999. The pro forma amounts are not necessarily
indicative of the results that may be reported in the future.
2000 1999
-------- -------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Revenues....................................... $159,656 $97,466
Net income..................................... 32,934 7,565
Basic net income per share..................... 1.07 0.25
Diluted net income per share................... 1.06 0.25
5. DEBT
The Company entered into a credit agreement as of March 31, 2000 among
a syndicate of banks led by Bank of America, N.A. in the aggregate amount of
$325.0 million. The amount available for borrowing under the credit facility is
limited to an initial borrowing base of $200.0 million, but will be redetermined
semi-annually beginning on October 1, 2000. The credit agreement matures on
April 4, 2003 and is secured by substantially all of the Company's oil and gas
properties. Advances under the credit agreement can be in the form of either a
base rate loan or a Eurodollar loan. The interest on a base rate loan is a
fluctuating rate equal to (i) the higher of (a) the Federal funds rate plus 0.5%
and (b) Bank of America's prime rate, plus (ii) a margin of either 0% or 0.25%
depending on the amounts outstanding under the credit agreement. The interest on
a Eurodollar loan is equal to the sum of (i) a margin of between 1.00% and 1.75%
depending on the amount outstanding under the credit agreement and (ii) the rate
obtained by dividing the Eurodollar rate by one minus the reserve requirement
for the Eurodollar loan. The credit agreement contains various covenants and
restrictive provisions including two financial covenants that require the
Company to maintain a current ratio of not less than 1.0 to 1.0 and a ratio of
EBITDA to consolidated interest expense for the preceding four consecutive
fiscal quarters of not less than 2.5 to 1.0.
6. HEDGING ACTIVITY
The Company periodically enters into commodity derivative contracts and
fixed-price physical contracts to manage its exposure to oil and gas price
volatility. The Company primarily utilizes price swaps which are generally
placed with major financial institutions or with counterparties of high credit
quality that the Company believes are minimal credit risks. The oil and gas
reference prices of these commodity derivatives contracts are based upon crude
oil and natural gas futures which have a high degree of historical correlation
with actual prices received by the Company. The Company accounts for its
commodity derivatives contracts using the hedge (deferral) method of accounting.
Under this method, realized gains and losses from the Company's price risk
management activities are recognized in oil and gas revenue when the associated
production occurs. Gains and losses from commodity derivatives contracts that
are closed before the hedged production occurs are deferred until the production
month originally hedged. In the event of a loss of correlation between changes
in oil and gas reference prices under a commodity derivatives contract and
actual oil and gas prices, a gain or loss would be recognized currently to the
extent the commodity derivatives contract did not offset changes in actual oil
and gas prices.
The Company recognized losses of $15.7 million and $3.6 million from
hedging activities for the nine months ended September 30, 2000 and 1999,
respectively.
5
8
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 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. SFAS No. 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. During the third quarter of 2000, the
Company began a process to identify its derivative contracts. Based upon this
initial assessment, if the Company had adopted SFAS No. 133 on October 1, 2000,
it would not have had a material effect on the Company's results of operations
based on current derivative activity.
7. STOCK OPTION GRANTS
The Company granted options to purchase 1,548,163 shares of common
stock on May 8, 2000 to certain employees and directors at an exercise price of
$10.85 per share. The employee options vest ratably over three years from the
date of grant and have a term of 10 years. Of the 1,548,163 options granted,
1,344,510 options were deemed to be replacement options (the "Replacement
Options") for those options repurchased by the Company on March 24, 2000. See
Note 3.
In March 2000, the FASB issued FASB Interpretation No. 44 (the
"Interpretation"), "Accounting for Certain Transactions involving Stock
Compensation," an interpretation of APB Opinion No. 25. The Interpretation
clarifies (a) the definition of an employee for purposes of applying APB Opinion
No. 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various modifications to
the terms of previously fixed stock options or awards, and (d) the accounting
for an exchange of stock options and/or awards in a business combination. The
Company began applying the provisions of the Interpretation on July 1, 2000.
Under provisions of the Interpretation, the Company is required to account for
1,025,723 of the Replacement Options outstanding at September 30, 2000 as
variable awards from July 1, 2000 until the date the options are exercised,
forfeited or expire unexercised. Compensation cost will be measured at the end
of each fiscal quarter for increases in the Company's stock price after July 1,
2000 and recognized over the remaining vesting period of the options. Any
decreases in the Company's stock price measured at the end of any fiscal quarter
subsequent to July 1, 2000 will be recognized as a decrease in compensation
cost, limited to the amount of compensation cost previously recognized. The
Company recognized approximately $299,000 of compensation expense during the
three months ended September 30, 2000 as a result of applying the provisions of
the Interpretation.
As of September 30, 2000, options to purchase an additional 514,737
shares of the Company's common stock were outstanding. These options will not be
subject to variable accounting.
8. SUBSEQUENT EVENT - INITIAL PUBLIC OFFERING
On October 19, 2000, an initial public offering was completed of 9.15
million shares of common stock at $15.00 per share. Of the total 9.15 million
shares, 6.5 million shares were offered by the Company and 2.65 million shares
were offered by selling stockholders. After payment of underwriting discounts,
the Company initially received net proceeds of $90.9 million. Anticipated other
expenses of issuance and distribution should approximate $1.2 million. The
proceeds were used to repay a portion of the Company's outstanding debt.
Prior to completion of the initial public offering, the Board of
Directors approved a restated certificate of incorporation in Delaware.
Subsequent to filing of the restated certificate, the Company split the common
stock on a three-for-two basis by way of a stock dividend. All par value,
authorized shares, common share and common per share amounts have been
retroactively restated in the accompanying consolidated financial statements to
reflect the stock split.
6
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion is intended to assist you in understanding our
results of operations and our present financial condition. Our consolidated
financial statements and the accompanying notes contain additional detailed
information that should be referred to when reviewing this material. Statements
in this discussion may be forward-looking. Such forward-looking statements
involve risks and uncertainties that could cause actual results to differ
significantly from those expressed. See "Special Note Regarding Forward-Looking
Statements."
On April 7, 2000, Westport Oil and Gas merged with EPGC. As a result of
the merger, Westport Oil and Gas became a wholly-owned subsidiary of EPGC, which
subsequently changed its name to Westport Resources Corporation, and the
stockholders of Westport Oil and Gas became the majority stockholders of EPGC.
The senior management team of Westport Oil and Gas became the management team
for the combined company, complemented by certain key managers from EPGC. In
connection with this merger, we issued 15.2 million shares of common stock, paid
cash of $50.0 million and assumed liabilities of $1.8 million. We increased our
proved reserves by 129.8 Bcfe and our Gulf of Mexico leasehold by 157,000 net
acres.
Our results of operations are significantly impacted by the price of
oil and natural gas. The prices we receive for our oil vary from NYMEX prices
based on the location and quality of the crude oil. The prices we receive for
our natural gas are based on Henry Hub prices reduced by transportation and
processing fees.
RESULTS OF OPERATIONS
The merger between EPGC and Westport Oil and Gas was accounted for
using purchase accounting with Westport Oil and Gas as the surviving entity.
Westport Resources Corporation began consolidating the results of EPGC with the
results of Westport Oil and Gas as of the April 7, 2000 closing date. The
discussion below includes a comparison of our results of operations for the
three months and nine months ended September 30, 2000 and 1999.
REVENUES. Oil and natural gas revenues for the three months ended
September 30, 2000 increased by $43.9 million, or 227%, from $19.3 million to
$63.2 million. Production from the acquired EPGC properties accounted for $33.7
million of the increase and the remaining increase resulted from increases of
54% and 81% in realized oil and natural gas prices, respectively. The increase
of 7,850 Mmcfe in production volumes from 8,098 Mmcfe in the 1999 quarter to
15,948 Mmcfe in the 2000 quarter was primarily due to 7,462 Mmcfe from the
acquired EPGC properties. Hedging transactions had the effect of reducing oil
and natural gas revenues by $7.2 million and $3.5 million, or $0.45 and $0.44
per Mcfe, for the three months ended September 30, 2000 and 1999, respectively.
We have no hedges extending beyond 2000.
Oil and natural gas revenues for the nine months ended September 30,
2000 increased by $89.5 million, or 175%, from $51.2 million to $140.7 million.
Production from the acquired EPGC properties accounted for $59.2 million of the
increase and the remaining increase resulted from increases of 88% and 87% in
realized oil and natural gas prices, respectively. The increase of 14,933 Mmcfe
in production volumes from 24,761 Mmcfe in the 1999 period to 39,694 Mmcfe in
the 2000 period was primarily due to 14,675 Mmcfe from the acquired EPGC
properties. Hedging transactions had the effect of reducing oil and natural gas
revenues by $15.7 million and $3.6 million, or $0.39 and $0.14 per Mcfe, for the
nine months ended September 30, 2000 and 1999, respectively.
LEASE OPERATING EXPENSE. Lease operating expense for the three months
ended September 30, 2000 increased by $1.9 million, or 31%, from $6.2 million to
$8.1 million. Lease operating expenses from the acquired EPGC properties
accounted for $1.8 million of the increase. On a per Mcfe basis, lease operating
expense decreased from $0.77 to $0.51, primarily due to the lower lease
operating expense associated with the acquired EPGC properties.
Lease operating expense for the nine months ended September 30, 2000
increased by $7.3 million, or 44%, from $16.3 million to $23.6 million. Lease
operating expenses from the acquired EPGC properties accounted for $3.9 million
of the increase and additional well reactivations and well maintenance work
performed during the nine
7
10
months ended September 30, 2000 after the recovery of oil and natural gas prices
in the second half of 1999 accounted for the balance. On a per Mcfe basis, lease
operating expense decreased from $0.66 to $0.59, primarily as a result of the
lower lease operating expense associated with the acquired EPGC properties.
PRODUCTION TAXES. Production taxes for the three months ended September
30, 2000 increased by $1.2 million, or 74%, from $1.6 million to $2.8 million.
The increase in production taxes is primarily attributable to an increase in the
average realized price of oil and natural gas. As a percent of oil and natural
gas revenues (excluding the effects of hedges), production taxes decreased from
7.1% to 4.0%. The decrease in production taxes as a percent of revenue is
primarily the result of the EPGC merger, which increased the number of offshore
properties we own that are not subject to production taxes.
Production taxes for the nine months ended September 30, 2000 increased
by $3.7 million, or 96%, from $3.8 million to $7.5 million. The increase in
production taxes is primarily attributable to an increase in the average
realized price of oil and natural gas. As a percent of oil and natural gas
revenues (excluding the effects of hedges), production taxes decreased from 6.9%
to 4.8%. The decrease in production taxes as a percent of revenue is primarily
the result of the EPGC merger, which increased the number of offshore properties
we own that are not subject to production taxes.
EXPLORATION COSTS. Exploration costs for the three months ended
September 30, 2000 and 1999 were comparable at $1.3 million and $1.2 million,
respectively.
Exploration costs increased $4.3 million, or 132%, during the nine
months ended September 30, 2000, from $3.3 million to $7.6 million. The increase
was primarily attributable to 3-D seismic data purchased in the Gulf of Mexico
related to the acquired EPGC properties and two unsuccessful wells drilled in
the first half of 2000.
DEPLETION, DEPRECIATION AND AMORTIZATION (DD&A) EXPENSE. DD&A expense
increased $16.5 million during the three months ended September 30, 2000 from
$2.9 million to $19.4 million. Depletion related to the acquired EPGC properties
caused DD&A expense to increase $11.9 million. The remaining increase was due to
the additions in oil and natural gas properties since September 30, 1999.
DD&A expense increased $22.8 million during the nine months ended
September 30, 2000 from $19.2 million to $42.0 million. Depletion related to the
acquired EPGC properties caused DD&A expense to increase $22.2 million. The
remaining increase was due to the additions in oil and natural gas properties
since September 30, 1999, offset partially by a lower depletion rate resulting
from an increase in estimated proved reserves resulting from higher oil and
natural gas prices at September 30, 2000 as compared to September 30, 1999.
IMPAIRMENT OF UNPROVED PROPERTIES. During the three months ended
September 30, 2000, we recognized unproved property impairments of $0.4 million,
as a result of an assessment of the exploration opportunities existing on such
properties. The $0.4 million consisted of leases held in North Dakota and
Wyoming. During the three months ended September 30, 1999, we recognized
unproved property impairments of $1.4 million of which $1.3 million was
associated with a prospect off the coast of Argentina.
During the nine months ended September 30, 2000, we recognized unproved
property impairments of $1.9 million, as a result of an assessment of the
exploration opportunities existing on such properties. The $1.9 million
consisted of $0.6 million for leases held offshore, $0.4 million for leases held
in Kansas, $0.3 million for leases held in North Dakota and $0.6 million for
various leases held in Louisiana and Wyoming. During the nine months ended
September 30, 1999, we recognized unproved property impairments of $1.4 million
of which $1.3 million was associated with a prospect off the coast of Argentina.
STOCK COMPENSATION EXPENSE. During the three months ended September 30,
2000, we recognized $0.3 million of stock compensation expense as a result of
applying the provisions of FASB Interpretation No 44. There was no stock
compensation expense recorded for the three months ended September 30, 1999.
During the nine months ended September 30, 2000, we recognized $3.7
million of stock compensation expense primarily due to a one-time stock
compensation expense of $3.4 million related to the repurchase of
8
11
employee stock options. There was no stock compensation expense recorded for the
nine months ended September 30, 1999.
GENERAL AND ADMINISTRATIVE (G&A) EXPENSE. G&A expense increased $1.1
million, or 103%, during the three months ended September 30, 2000, from $1.0
million to $2.1 million. In connection with the EPGC merger, additional
employees were hired in the Houston office which accounted for a $1.3 million
increase in G&A expense.
G&A expense increased $1.3 million, or 31%, during the nine months
ended September 30, 2000, from $4.0 million to $5.3 million. The additional
employees hired in connection with the EPGC merger accounted for a $2.5 million
increase. Offsetting the increase in G&A expense was a $0.6 million increase in
overhead recoveries from additional drilling in 2000 and $0.5 million additional
costs incurred in 1999 related to closing down an office acquired in an
acquisition.
OTHER INCOME (EXPENSE). Other income (expense) for the three months
ended September 30, 2000 was $0.5 million compared to ($2.7 million) for the
three months ended September 30, 1999. Interest expense increased $0.8 million
from $2.4 million in the three months ended September 30, 1999 to $3.2 million
in the three months ended September 30, 2000 as a result of $50 million in
additional borrowings relating to the EPGC merger. The increased interest
expense recorded in the three months ended September 30, 2000 was offset by a
$3.4 million gain on the sale of assets.
Other income (expense) for the nine months ended September 30, 2000 was
($4.4 million) compared to ($2.6 million) for the nine months ended September
30, 1999. Interest expense increased $1.6 million from $6.9 million for the nine
months ended September 30, 1999 to $8.5 million for the nine months ended
September 30, 2000 as a result of $50 million in additional borrowings relating
to the EPGC merger and an increase in interest rates. Interest expense recorded
in the nine months ended September 30, 2000 was offset by a $3.4 million gain on
the sale of assets, while interest expense recorded in the nine months ended
September 30, 1999 was offset by a $3.9 million gain on the sale of assets.
INCOME TAXES. We recorded income tax expense of $10.2 million for the
three months ended September 30, 2000 and no income tax expense or benefit for
the three months ended September 30, 1999. The difference between the income tax
expense (benefit) for those periods and the amounts that would be calculated by
applying statutory income tax rates to income before income taxes is due
primarily to the credits from applying enhanced recovery methods.
We recorded income tax expense of $15.2 million for the nine months
ended September 30, 2000 and no income tax expense or benefit for the nine
months ended September 30, 1999. The difference between the income tax expense
(benefit) for those periods and the amounts that would be calculated by applying
statutory income tax rates to income before income taxes is due primarily to the
credits from applying enhanced recovery methods.
NET INCOME. Net income for the three months ended September 30, 2000
was $19.0 million compared to a net income of $2.3 million for the three months
ended September 30, 1999. The variance was primarily attributable to an increase
in revenues of $43.9 million, partially offset by increases of $20.1 million in
operating expenses and $10.2 million in income tax expense.
Net income for the nine months ended September 30, 2000 was $29.6
million compared to a net income of $0.5 million for the nine months ended
September 30, 1999. The variance was primarily attributable to an increase in
revenues of $89.5 million, partially offset by increases of $43.5 million in
operating expenses and $15.2 million in income tax expense.
LIQUIDITY AND CAPITAL RESOURCES
Principal uses of capital have been for the exploitation, acquisition
and exploration of oil and natural gas properties.
9
12
Cash flow from operating activities was $64.9 million for the nine
months ended September 30, 2000 compared to $8.7 million for the nine months
ended September 30, 1999. The operating cash flow in the nine month period
increased compared to the prior period due to the increase in commodity prices
and increase in production as a result of the merger with EPGC.
Cash flow used in investing activities was $88.0 million for the nine
months ended September 30, 2000 compared to cash flow generated from investing
activities of $19.5 million for the nine months ended September 30, 1999.
Investing activities for the nine months ended September 30, 2000 include
capital expenditures of $93.5 million, $42.4 million of which resulted from the
merger with EPGC, offset by proceeds from sales of properties of $6.3 million.
For the nine months ended September 30, 1999, capital expenditures totaled $5.9
million offset by proceeds from sales of properties of $25.0 million.
Net cash generated from financing activities was $39.1 million for the
nine months ended September 30, 2000 compared to net cash used in financing
activities of $25.6 million for the nine months ended September 30, 1999.
Financing activities for the nine months ended September 30, 2000 reflect
borrowings of $50.0 million utilized to consummate the merger with EPGC offset
by repayments of long-term debt of $11.0 million. For the nine months ended
September 30, 1999, repayments of long-term debt was $42.0 million offset by
proceeds of $16.4 million from the sale of common stock. The long-term debt
balance at September 30, 2000 was $145.5 million. As of September 30, 2000, the
Company was in compliance with all credit agreement covenants.
On October 19, 2000, an initial public offering was completed of 9.15
million shares of our common stock at $15.00 per share. Of the total 9.15
million shares, 6.5 million shares were offered by the Company and 2.65 million
shares were offered by selling stockholders. After payment of underwriting
discounts, the Company initially received net proceeds of $90.9 million.
Anticipated other expenses of issuance and distribution should approximate $1.2
million. The proceeds from the offering and available cash were used to repay
$105.0 million of our outstanding debt. As of November 3, 2000 the outstanding
balance under our credit facility was $40.5 million, leaving $159.5 million
available under our credit agreement.
RISK FACTORS
In addition to the other information included in this report, the
following risk factors should be considered in evaluating our business and
future prospects.
OIL AND NATURAL GAS PRICES FLUCTUATE WIDELY, AND LOW PRICES COULD HARM OUR
BUSINESS.
Our revenues, operating results and future rate of growth are
substantially dependent upon the prevailing prices of, and demand for, oil and
natural gas. Declines in the prices of, or demand for, oil and natural gas may
adversely affect our financial condition, liquidity, ability to finance planned
capital expenditures and results of operations. Lower oil and natural gas prices
may also reduce the amount of oil and natural gas that we can produce
economically. Historically, the markets for oil and natural gas have been
volatile and are likely to continue to be volatile in the future. We have had
considerable losses in previous years as a result, in part, of this commodity
price volatility. Prices for oil and natural gas are subject to wide
fluctuations in response to relatively minor changes in the supply of and demand
for oil and natural gas, market uncertainty and a variety of additional factors
that are beyond our control, including:
o worldwide and domestic supplies of oil and natural gas;
o the ability of the members of the Organization of Petroleum
Exporting Countries to agree to and maintain oil prices and
production controls;
o political instability or armed conflict in oil-producing regions;
o the price and level of foreign imports;
o the level of consumer demand;
o the price and availability of alternative fuels;
o the availability of pipeline capacity;
o weather conditions;
o domestic and foreign governmental regulations and taxes; and
o the overall economic environment.
10
13
WE ARE VULNERABLE TO RISKS ASSOCIATED WITH OPERATING IN THE GULF OF MEXICO
BECAUSE A SUBSTANTIAL PORTION OF OUR EXPLORATION AND PRODUCTION ACTIVITIES IS
CONDUCTED IN THAT AREA.
Our operations and financial results are significantly impacted by
conditions in the Gulf of Mexico because we currently explore and produce
extensively in that area, including, in particular, our operations in the West
Cameron 180/198 complex. This concentration of activity makes us more vulnerable
than some of our competitors to the risks associated with operating in the Gulf
of Mexico, including those relating to:
o adverse weather conditions;
o oil field service costs and availability;
o compliance with environmental and other laws and regulations; and
o failure of equipment or facilities.
In addition, some of our exploration is in the deep waters of the Gulf
of Mexico, where operations are more difficult and costly than in shallower
waters. The deep waters in the Gulf of Mexico lack the physical and oil field
service infrastructure present in the shallower waters of the Gulf of Mexico. As
a result, deep water operations may require a significant amount of time between
a discovery and the time that we can market the oil or natural gas, thereby
increasing the risk involved with these operations.
Further, production of reserves from reservoirs in the Gulf of Mexico
generally declines more rapidly than from reservoirs in many other producing
regions of the world. This results in recovery of a relatively higher percentage
of reserves from properties in the Gulf of Mexico during the initial few years
of production, and as a result, our reserve replacement needs from new prospects
are greater. Also, our revenues and return on capital will depend significantly
on prices prevailing during these relatively short production periods.
EXPLORATION IS A HIGH-RISK ACTIVITY. THE SEISMIC DATA AND OTHER ADVANCED
TECHNOLOGIES WE USE ARE EXPENSIVE AND CANNOT ELIMINATE EXPLORATION RISK.
Our future success depends in part on the success of our exploratory
drilling program. Poor results from our exploration activities could affect our
future results of operations and harm our financial condition. Exploration
activities involve numerous risks, including the risk that no commercially
productive oil or natural gas reservoirs will be discovered. In addition, we
often are uncertain as to the future cost or timing of drilling, completing and
producing wells. Further, our drilling operations may be curtailed, delayed or
canceled as a result of a variety of factors, including:
o unexpected drilling conditions;
o title problems;
o pressure or irregularities in formations;
o equipment failures or accidents;
o adverse weather conditions;
o compliance with environmental and other governmental requirements;
and
o cost of, or shortages or delays in the availability of, drilling
rigs and equipment.
We rely to a significant extent on seismic data and other advanced
technologies in conducting our exploration activities. Even when used and
properly interpreted, seismic data and visualization techniques only assist
geoscientists in identifying subsurface structures and hydrocarbon indicators.
They do not allow the interpreter to know conclusively if hydrocarbons are
present or economically producible. The use of seismic data and other
technologies also requires greater pre-drilling expenditures than traditional
drilling strategies. We could incur losses as a result of these expenditures.
11
14
THE FAILURE TO REPLACE OUR RESERVES WOULD ADVERSELY AFFECT OUR OPERATIONS AND
FINANCIAL CONDITION.
In general, the volume of production from oil and natural gas
properties declines as reserves are depleted. If we fail to replace our
reserves, our operations and financial condition could be adversely affected.
Except to the extent we acquire properties containing proved reserves or conduct
successful exploitation and exploration activities, our proved reserves will
decline as reserves are produced. Our future oil and natural gas production is,
therefore, highly dependent upon our success in finding or acquiring additional
reserves at attractive rates of return. In order to increase reserves and
production, we must continue development drilling and recompletion programs,
pursue exploration and drilling programs or undertake other replacement
activities. Our planned exploitation and exploration projects and acquisition
activities may not result in significant additional reserves, and our efforts to
drill productive wells at favorable finding costs may not be successful.
RESERVE ESTIMATES ARE INHERENTLY UNCERTAIN. ANY MATERIAL INACCURACIES IN OUR
RESERVE ESTIMATES OR UNDERLYING ASSUMPTIONS, SUCH AS THE DISCOUNT RATE USED,
COULD CAUSE THE QUANTITIES AND NET PRESENT VALUE OF OUR RESERVES TO BE
OVERSTATED.
There are numerous uncertainties inherent in estimating quantities of
proved reserves, including many factors beyond our control, that could cause the
quantities and net present value of our reserves to be overstated. Our reserve
information represents estimates based on reports prepared by independent
petroleum engineers. Petroleum engineering is not an exact science. Estimates of
economically recoverable oil and natural gas reserves and of future net cash
flows necessarily depend upon a number of variable factors and assumptions, any
of which may cause these estimates to vary considerably from actual results,
such as:
o historical production from the area compared with production from
other producing areas;
o assumed effects of regulation by governmental agencies and
assumptions concerning future oil and natural gas prices;
o future operating costs;
o severance and excise taxes;
o capital expenditures; and
o workover and remedial costs.
Estimates of reserves based on risk of recovery and estimates of
expected future net cash flows prepared by different engineers, or by the same
engineers at different times, may vary substantially. Actual production,
revenues and expenditures with respect to our reserves will likely vary from
estimates, and the variance may be material. Net present values should not be
construed as the current market value of the estimated oil and natural gas
reserves attributable to our properties. In accordance with requirements of the
Securities and Exchange Commission, or SEC, the estimated discounted net cash
flows from proved reserves are generally based on prices and costs as of the
date of the estimate, whereas actual future prices and costs may be materially
higher or lower.
COMPETITION IN OUR INDUSTRY IS INTENSE, AND MANY OF OUR COMPETITORS HAVE GREATER
FINANCIAL, TECHNOLOGICAL AND OTHER RESOURCES THAN WE DO.
We operate in the highly competitive areas of oil and natural gas
exploitation, exploration and acquisition. The oil and natural gas industry is
characterized by rapid and significant technological advancements and
introductions of new products and services using new technologies. We face
intense competition from independent, technology- driven companies as well as
from both major and other independent oil and natural gas companies in each of
the following areas:
o seeking to acquire desirable producing properties or new leases for
future exploration;
o marketing our oil and natural gas production;
o integrating new technologies; and
o seeking to acquire the equipment and expertise necessary to develop
and operate our properties.
12
15
Many of our competitors have financial, technological and other
resources substantially greater than ours. These companies may be able to pay
more for exploratory prospects and productive oil and natural gas properties and
may be able to define, evaluate, bid for and purchase a greater number of
properties and prospects than our financial or human resources permit. For
example, we have historically participated in property auctions, including the
Federal offshore lease auctions. To the extent our competitors are able to pay
more for auction properties than we are, we will be at a competitive
disadvantage. Further, many of our competitors may enjoy technological
advantages and may be able to implement new technologies more rapidly than we
can. Our ability to explore for oil and natural gas prospects and to acquire
additional properties in the future will depend upon our ability to successfully
conduct operations, implement advanced technologies, evaluate and select
suitable properties and consummate transactions in this highly competitive
environment.
WE ARE SUBJECT TO COMPLEX LAWS AND REGULATIONS, INCLUDING ENVIRONMENTAL
REGULATIONS, THAT CAN ADVERSELY AFFECT THE COST, MANNER OR FEASIBILITY OF DOING
BUSINESS.
Exploration for and exploitation, production and sale of oil and
natural gas in the United States, and especially in the Gulf of Mexico, are
subject to extensive Federal, state and local laws and regulations, including
complex tax laws and environmental laws and regulations. Failure to comply with
these laws and regulations may result in the suspension or termination of our
operations and subject us to administrative, civil and criminal penalties.
Further, these laws and regulations could change in ways that substantially
increase our costs. We cannot be certain that existing laws or regulations, as
currently interpreted or reinterpreted in the future, or future laws or
regulations will not harm our business, results of operations and financial
condition. We may be required to make large expenditures to comply with
environmental and other governmental regulations. Matters subject to regulation
include:
o discharge permits for drilling operations;
o drilling bonds;
o spacing of wells;
o unitization and pooling of properties;
o environmental protection;
o reports concerning operations; and
o taxation.
Under these laws and regulations, we could be liable for:
o personal injuries;
o property damage
o oil spills;
o discharge of hazardous materials;
o well reclamation costs;
o remediation and clean-up costs; and
o other environmental damages.
WE CANNOT CONTROL THE ACTIVITIES ON PROPERTIES WE DO NOT OPERATE.
Other companies operate a substantial percentage of the net present
value of our reserves. As a result, we have limited ability to exercise
influence over operations for these properties or their associated costs. Our
dependence on the operator and other working interest owners for these projects
and our limited ability to influence operations and associated costs could
prevent the realization of our targeted returns on capital in drilling or
acquisition activities. The success and timing of drilling and exploitation
activities on properties operated by others therefore depend upon a number of
factors that are outside of our control, including:
o timing and amount of capital expenditures;
o the operator's expertise and financial resources;
o approval of other participants in drilling wells; and
o selection of technology.
13
16
OUR BUSINESS INVOLVES MANY OPERATING RISKS WHICH MAY RESULT IN SUBSTANTIAL
LOSSES. INSURANCE MAY BE UNAVAILABLE OR INADEQUATE TO PROTECT US AGAINST THESE
RISKS.
Our operations are subject to hazards and risks inherent in drilling
for, producing and transporting oil and natural gas, such as:
o fires;
o natural disasters;
o explosions;
o formations with abnormal pressures;
o casing collapses;
o embedded oilfield drilling and service tools;
o uncontrollable flows of underground natural gas, oil and formation
water;
o blowouts;
o surface cratering;
o pipeline ruptures or cement failures; and
o environmental hazards such as natural gas leaks, oil spills and
discharges of toxic gases.
Any of these risks can cause substantial losses resulting from:
o injury or loss of life;
o damage to and destruction of property, natural resources and
equipment;
o pollution and other environmental damage;
o regulatory investigations and penalties;
o suspension of our operations; and
o repair and remediation costs.
In addition, our offshore operations in the Gulf of Mexico are subject
to a variety of operating risks peculiar to the marine environment, such as
capsizing, collisions and damage or loss from hurricanes or other adverse
weather conditions. These conditions can cause substantial damage to our
facilities and could interrupt production. For example, some of our offshore
facilities in the Gulf of Mexico were damaged by a hurricane in 1998. If we
experience any of these problems, our business and operations may be harmed and
our ability to acquire, explore and develop properties may be reduced or
eliminated.
As protection against operating hazards, we maintain insurance coverage
against some, but not all, potential losses. However, losses could occur for
uninsurable or uninsured risks, or in amounts in excess of existing insurance
coverage. The occurrence of an event that is not fully covered by insurance
could harm our financial condition and results of operations.
OUR EXPLOITATION, ACQUISITION AND EXPLORATION OPERATIONS REQUIRE SUBSTANTIAL
CAPITAL, AND WE MAY BE UNABLE TO OBTAIN NEEDED FINANCING ON SATISFACTORY TERMS.
We make and will continue to make substantial capital expenditures in
exploitation, acquisition and exploration projects. We intend to finance these
capital expenditures with cash flow from operations and our existing financing
arrangements. Additional financing sources may be required in the future to fund
our developmental and exploratory drilling. We cannot be certain that financing
will continue to be available under existing or new financing arrangements, or
that we will be able to obtain necessary financing on acceptable terms, if at
all. If additional capital resources are not available, we may be forced to
curtail our drilling, acquisition and other activities or be forced to sell some
of our assets on an untimely or unfavorable basis.
14
17
THE ACQUISITION OF OIL AND NATURAL GAS PROPERTIES IMPOSES SUBSTANTIAL RISKS.
We constantly evaluate acquisition opportunities and frequently engage
in bidding and negotiation for acquisitions, many of which are substantial. We
may not be successful in identifying or acquiring any material property
interests, which could prevent us from replacing our reserves and adversely
affect our operations and financial condition. If successful in this process, we
may be required to alter or increase substantially our capitalization to finance
these acquisitions through the use of cash on hand, issuance of additional debt
or equity securities, the sale of production payments, borrowing of additional
funds or otherwise. Our existing credit agreement includes covenants limiting
our ability to incur additional indebtedness. If we were to proceed with one or
more acquisitions for stock, our stockholders would suffer dilution of their
interests. These additional capitalization requirements may significantly affect
our risk profile. The acquisition of properties that are substantially different
in operating or geologic characteristics or geographic locations from our
existing properties could change the nature of our operations and business.
While we intend to concentrate on acquiring producing properties with
exploitation and exploration potential located in our current areas of
operation, we may decide to acquire properties located in other geographic
regions.
HEDGING OUR PRODUCTION MAY RESULT IN LOSSES.
To reduce our exposure to fluctuations in the prices of oil and natural
gas, we currently and may in the future enter into hedging arrangements. We have
incurred losses as a result of hedging arrangements in the past. Hedging
arrangements expose us to a risk of financial loss in some circumstances,
including the following:
o production is less than expected;
o the counter-party to the hedging contract defaults on its contract
obligations; or
o there is a change in the expected differential between the
underlying price in the hedging agreement and actual prices
received.
In addition, these hedging arrangements may limit the benefit we would receive
from increases in the prices for oil and natural gas. If we choose not to engage
in hedging arrangements in the future, we may be more adversely affected by
changes in oil and natural gas prices than our competitors who engage in hedging
arrangements.
OUR OPERATIONS REQUIRE US TO ATTRACT AND RETAIN EXPERIENCED TECHNICAL PERSONNEL.
Our exploratory drilling success depends, in part, on our ability to
attract and retain experienced explorationists and other professional personnel.
We currently employ explorationists and engineers, engineering consultants and
geology/geophysical consultants, all of whom have experience in the geographic
areas to which we have assigned them. Competition for experienced
explorationists and engineers is extremely intense. If we cannot retain these
personnel or attract additional experienced personnel, our ability to compete in
the geographic regions in which we conduct our operations could be harmed.
THE LOSS OF OUR CHIEF EXECUTIVE OFFICER OR OTHER KEY PERSONNEL COULD ADVERSELY
AFFECT US.
We depend to a large extent on the efforts and continued employment of
Donald D. Wolf, our chief executive officer and chairman, Barth E. Whitham, our
president and chief operating officer, and other key personnel. The loss of the
services of Messrs. Wolf or Whitham or other key personnel could adversely
affect our business. In addition, it is a default under our credit agreement if
both Mr. Wolf and Mr. Whitham cease to act in their current capacities as
officers of Westport.
THE MARKETABILITY OF OUR PRODUCTION IS DEPENDING UPON FACTORS OVER WHICH WE HAVE
NO CONTROL.
The marketability of our production depends in part upon the
availability, proximity and capacity of pipelines, natural gas gathering systems
and processing facilities. Any significant change in market factors affecting
these infrastructure facilities could adversely impact our ability to deliver
the oil and natural gas we produce to market in an efficient manner, which could
harm our financial condition and results of operations. We deliver oil
15
18
and natural gas through gathering systems and pipelines that we do not own.
These facilities may not be available to us in the future. Our ability to
produce and market oil and natural gas is affected and may be also harmed by:
o Federal and state regulation of oil and natural gas production;
o transportation, tax and energy policies;
o changes in supply and demand; and
o general economic conditions.
OUR PRINCIPAL STOCKHOLDERS OWN A SIGNIFICANT AMOUNT OF COMMON STOCK, GIVING THEM
A CONTROLLING INFLUENCE OVER CORPORATE TRANSACTIONS AND OTHER MATTERS.
Westport Energy LLC (formerly Westport Energy Corporation) and ERI
Investments, Inc. (an affiliate of Equitable Production Company), our principal
stockholders beneficially own a significant amount of our outstanding common
stock. Accordingly, these stockholders, acting together, are able to control the
outcome of stockholder votes, including votes concerning the election of
directors, the adoption or amendment of provisions in our certificate of
incorporation or bylaws and the approval of mergers and other significant
corporate transactions. This concentrated ownership makes it unlikely that any
other holder or group of holders of common stock will be able to affect the way
we are managed or the direction of our business. These factors may also delay or
prevent a change in the management or voting control of Westport.
In addition, we entered into an agreement with our principal
stockholders in connection with the merger on April 7, 2000 between Westport Oil
and Gas Company, Inc. and Equitable Production (Gulf) Company, an indirect,
wholly-owned subsidiary of Equitable Resources, Inc., that allows these
stockholders to maintain their position of control by, among other things,
addressing how these stockholders will vote their shares in the election of
directors.
OUR STOCK PRICE MAY FLUCTUATE SIGNIFICANTLY.
The trading price of our common stock, and the price at which we may
sell securities in the future, could be subject to significant fluctuations in
response to government regulations, variations in quarterly operating results,
the prices of oil and natural gas and other factors. For example, changes in
regulations applicable to the Gulf of Mexico could adversely affect our business
and operations, and, thus, result in significant fluctuations in the trading
price of our common stock.
WE HAVE NOT PAID DIVIDENDS AND DO NOT ANTICIPATE PAYING ANY DIVIDENDS ON OUR
COMMON STOCK IN THE FORESEEABLE FUTURE.
We anticipate that we will retain all future earnings and other cash
resources for the future operation and development of our business. Accordingly,
we do not intend to declare or pay any cash dividends in the foreseeable future.
Payment of any future dividends will be at the discretion of our board of
directors after taking into account many factors, including our operating
results, financial condition, current and anticipated cash needs and plans for
expansion. The declaration and payment of any future dividends is currently
prohibited by our credit agreement and may be similarly restricted in the
future.
OUR CERTIFICATE OF INCORPORATION CONTAINS PROVISIONS THAT COULD DISCOURAGE AN
ACQUISITION OR CHANGE OF CONTROL OF WESTPORT.
Our certificate of incorporation authorizes the issuance of preferred
stock without stockholder approval. Our board of directors has the power to
determine the price and terms of any preferred stock. The ability of our board
of directors to issue one or more series of preferred stock without stockholder
approval could deter or delay unsolicited changes of control by discouraging
open market purchases of our common stock or a non-negotiated tender or exchange
offer for our common stock. Discouraging open market purchases may be
disadvantageous to our stockholders who may otherwise desire to participate in a
transaction in which they would receive a premium for their shares.
16
19
In addition, some provisions of our certificate of incorporation and
bylaws may also discourage a change of control by means of a tender offer, open
market purchase, proxy contest or otherwise. These provisions include:
o a board that is divided into three classes, which are elected to
serve staggered three-year terms;
o provisions under which generally only our chairman, president or
secretary may call a special meeting of the stockholders;
o provisions that permit our board of directors to increase the number
of directors up to fifteen directors and to fill these positions
without a vote of the stockholders;
o provisions under which no director may be removed at any time except
for cause and by a majority vote of the outstanding shares of voting
stock; and
o provisions under which stockholder action may be taken only at a
stockholders meeting and not by written consent of the stockholders.
These provisions may have the effect of discouraging takeovers, even if the
change of control might be beneficial to our stockholders.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
Sales of a substantial number of shares of our common stock in the
public market, or the perception that these sales may occur, could cause the
market price of our common stock to decline. In addition, the sale of these
shares could impair our ability to raise capital through the sale of additional
common or preferred stock.
As of November 13, 2000, we had 37,384,041 shares of common stock
outstanding. Some of our current stockholders are subject to agreements that
limit their ability to sell their common stock. These holders cannot sell or
otherwise dispose of any shares of common stock until April 17, 2001 without the
prior written approval of Credit Suisse First Boston Corporation, which could,
in its sole discretion, elect to permit resale of shares by existing
stockholders prior to such date.
In addition, some of our current stockholders have "demand" and/or
"piggyback" registration rights in connection with future offerings of our
common stock. "Demand" rights enable the holders to demand that their shares be
registered and may require us to file a registration statement under the
Securities Act at our expense. "Piggyback" rights provide for notice to the
relevant holders of our stock if we propose to register any of our securities
under the Securities Act, and grant such holders the right to include their
shares in the registration statement. In connection with our initial public
offering, all holders with registration rights have agreed not to exercise their
rights until April 17, 2001 without the consent of Credit Suisse First Boston
Corporation.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Our disclosure and analysis in this report contain some forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. These statements may
include words such as "anticipate," "estimate," "expect," "project," "intend,"
"plan," "believe" and other words and terms of similar meaning in connection
with any discussion of future operating or financial performance. In particular,
these include, among other things, statements relating to:
o amount, nature and timing of capital expenditures;
o drilling of wells;
o timing and amount of future production of oil and natural gas;
o operating costs and other expenses;
o cash flow and anticipated liquidity;
o prospect exploitation and property acquisitions; and
o marketing of oil and natural gas.
17
20
Any or all of our forward-looking statements in this report may turn
out to be wrong. They can be affected by inaccurate assumptions we might make or
by known or unknown risks and uncertainties. Many factors mentioned in our
discussion in this report will be important in determining future results.
Actual future results may vary materially. Factors that could cause our results
to differ materially from the results discussed in the forward-looking
statements include the risks described above under "Risk Factors," including:
o the risks associated with exploration;
o our ability to find, acquire, market, develop and produce new
properties;
o oil and natural gas price volatility;
o uncertainties in the estimation of proved reserves and in the
projection of future rates of production and timing of exploitation
expenditures;
o operating hazards attendant to the oil and natural gas business;
o drilling and completion risks that are generally not recoverable
from third parties or insurance;
o potential mechanical failure or underperformance of significant
wells;
o climatic conditions;
o availability and cost of material and equipment;
o actions or inactions of third-party operators of our properties;
o our ability to find and retain skilled personnel;
o availability of capital;
o the strength and financial resources of our competitors;
o regulatory developments;
o environmental risks; and
o general economic conditions.
When you consider these forward-looking statements, you should keep in
mind these risk factors and the other cautionary statements in this report. Our
forward-looking statements speak only as of the date made.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We currently sell most of our oil and natural gas production under
price sensitive or market price contracts. To reduce our exposure to
fluctuations in oil and natural gas prices, we occasionally enter into hedging
arrangements. However, these contracts may also limit the benefits we would
realize if prices increase.
As of October 1, 2000, we had entered into the following hedging
arrangements covering the period beginning October 1, 2000 through December 31,
2000. One Mmbtu approximates one Mcf of natural gas.
Natural Gas Swaps Oil Collars
--------------------------- ---------------------------
Average
Average Average Average NYMEX
Daily Volume NYMEX Average Daily NYMEX Floor Ceiling
Time Period (Mmbtu) Price/Mmbtu Volume (bbl) Price/bbl Price/bbl
- ----------- ------------ ----------- ------------- ----------- ---------
10/1/00-12/31/00................... 16,000 $ 2.52 2,000 $18.25 $20.62
10/1/00-12/31/00................... -- -- 2,000 18.25 21.30
10/1/00-12/31/00................... -- -- 1,000 20.50 24.30
While it is not our intention to terminate any of the arrangements, we
estimate we would have had to pay approximately $8.8 million to terminate the
existing arrangements on September 30, 2000.
18
21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) During the quarter ended September 30, 2000, we sold the securities
set forth below, which were not registered under the Securities Act of 1933:
o In August 2000, each of Randy Stein and Peter R. Hearl were issued
535 shares of our common stock in connection with his service as a
director.
o In September 2000, Thomas A. Petrie purchased 13,018 shares of our
common stock upon exercise of stock options granted to Mr. Petrie in
connection with his service as a director.
The sales of securities in the transactions described above were deemed
to be exempt from registration under the Securities Act of 1933 in reliance upon
Section 4(2) of the Securities Act of 1933 for the following reasons:
o The transactions involved a limited group of recipients and did not
involve any public offering of securities;
o We engaged in no general solicitations or advertising in connection
with the transactions;
o The recipients of the securities in each such transaction
represented their intentions to acquire the securities for
investment only and not with a view to or in connection with any
distribution thereof;
o Appropriate legends were affixed to the securities issued in such
transactions; and
o All recipients were accredited investors within the definition of
Regulation D, were financially sophisticated and had adequate access
to the type of information about us that would be included in a
registration statement.
(b) On October 19, 2000 (subsequent to the reporting period), we
commenced our initial public offering, which consisted of 9,150,000 shares of
our common stock, par value $0.01 per share (including 2,650,000 shares offered
by the selling stockholders) at $15.00 per share pursuant to the registration
statement (No. 333-40422) declared effective by the SEC on October 19, 2000. The
managing underwriters were Credit Suisse First Boston Corporation, Donaldson,
Lufkin & Jenrette Securities Corporation, Lehman Brothers, Inc., Petrie Parkman
& Co., Inc. and Banc of America Securities LLC. Aggregate proceeds from the
offering were $137,250,000 (including $39,750,000 payable to the selling
stockholders). The underwriters have an option to purchase a maximum of
1,350,000 additional shares from us to cover over-allotments of shares. The
option is exercisable until November 19, 2000.
Our registration statement was declared effective October 19, 2000, and
the offering was completed on October 25, 2000. Accordingly, we did not receive
any proceeds from the offering during the reporting period. In connection with
the offering, we incurred total expenses of approximately $10.4 million,
including underwriting discounts and commissions of approximately $9.3 and
approximately $1.2 million in other expenses. Subsequent to the reporting
period, after deducting expenses of the offering, we received net offering
proceeds of $89.8 million. We used the net offering proceeds to repay a portion
of the debt under our credit agreement. No payments constituted direct or
indirect payments to any of our directors, officers or general partners or their
associates, to persons owning 10% or more of any class of our equity securities,
or to any of our affiliates.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
19
22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the quarter ended September 30, 2000, we solicited a written
consent effective August 22, 2000 from our stockholders regarding the approval
of our Second Amended and Restated Certificate of Incorporation and approval of
our Second Amended and Restated Bylaws. Both matters were approved unanimously
by our stockholders.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibits are filed as part of this Form
10-Q:
2 Agreement and Plan of Merger, dated as of March 9, 2000, by
and among Westport Oil and Gas Company, Inc., Westport
Energy Corporation, Equitable Production Company, Equitable
Production (Gulf) Company and EPGC Merger Sub Corporation
(Incorporated by reference to Exhibit 2.1 of the Company's
Registration Statement on Form S-1, Registration No.
333-40422).
3.1* Second Amended and Restated Certificate of Incorporation of
the Company.
3.2 Second Amended and Restated Bylaws of the Company
(Incorporated by reference to Exhibit 3.4 of the Company's
Registration Statement on Form S-1, Registration No.
333-40422).
4 Specimen Certificate for shares of Common Stock of the
Company (Incorporated by reference to Exhibit 4 of the
Company's Registration Statement on Form S-1, Registration
No. 333-40422).
10* Westport Resources Corporation 2000 Stock Incentive Plan.
27* Financial Data Schedule.
- ----------
*Filed herewith.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
quarter ended September 30, 2000.
20
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Date: November 16, 2000 WESTPORT RESOURCES CORPORATION
By: /s/ Donald D. Wolf
-------------------------------------------
Name: Donald D. Wolf
Title: Chairman and Chief Executive Officer
Date: November 16, 2000 By: /s/ James H. Shonsey
-------------------------------------------
Name: James H. Shonsey
Title: Chief Financial Officer
21
24
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2 Agreement and Plan of Merger, dated as of March 9, 2000, by and
among Westport Oil and Gas Company, Inc., Westport Energy
Corporation, Equitable Production Company, Equitable Production
(Gulf) Company and EPGC Merger Sub Corporation (Incorporated by
reference to Exhibit 2.1 of the Company's Registration Statement on
Form S-1, Registration No. 333-40422).
3.1* Second Amended and Restated Certificate of Incorporation of the
Company.
3.2 Second Amended and Restated Bylaws of the Company (Incorporated by
reference to Exhibit 3.4 of the Company's Registration Statement on
Form S-1, Registration No. 333-40422).
4 Specimen Certificate for shares of Common Stock of the Company
(Incorporated by reference to Exhibit 4 of the Company's
Registration Statement on Form S-1, Registration No. 333-40422).
10* Westport Resources Corporation 2000 Stock Incentive Plan.
27* Financial Data Schedule.
- ----------
*Filed herewith.