1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 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 No.
ENCORE ACQUISITION COMPANY
(Exact name of Registrant as specified in its charter)
Delaware 75-2759650
- ------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
777 Main Street, Suite 1400, Ft. Worth, Texas 76102
- --------------------------------------------- --------
(Address of principal executive offices) (Zip code)
Registrant's Telephone Number, including area code: (817) 877-9955
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
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]
Number of shares of Common Stock outstanding as of
March 31, 2001.......................................................30,029,961
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ENCORE ACQUISITION COMPANY
INDEX
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2001 and
December 31, 2000............................................ 3
Consolidated Statements of Operations for the three months
ended March 31, 2001 and 2000................................ 4
Consolidated Statements of Stockholders' Equity for the three
months ended March 31, 2001.................................. 5
Consolidated Statements of Cash Flows for the three
months ended March 31, 2001 and 2000......................... 6
Notes to Consolidated Financial Statements...................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 11
Item 3. Quantitative and Qualitative Disclosure about Market
Risk............................................................ 14
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds................. 15
Item 6. Exhibits and Reports on Form 8-K.......................... 15
Signatures........................................................ 16
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENCORE ACQUISITION COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands except per share data)
MARCH 31, DECEMBER 31,
2001 2000
-------------- --------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents ................................. $ 225 $ 876
Accounts receivable ....................................... 23,815 21,210
Other current assets ...................................... 11,723 4,171
-------------- --------------
Total Current Assets ............................... 35,763 26,257
-------------- --------------
Properties and Equipment, at cost -- successful efforts
method:
Producing properties ...................................... 348,326 333,892
Undeveloped properties .................................... 696 624
Accumulated depletion, depreciation and amortization ...... (34,321) (26,868)
-------------- --------------
314,701 307,648
-------------- --------------
Other property and equipment .............................. 2,010 1,910
Accumulated depletion, depreciation and amortization ...... (750) (621)
-------------- --------------
1,260 1,289
-------------- --------------
Other Assets ................................................ 4,012 8,562
-------------- --------------
Total Assets ....................................... $ 355,736 $ 343,756
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable .......................................... $ 5,171 $ 8,840
Current portion of note payable ........................... 12,860 16,438
Other current liabilities ................................. 35,296 16,254
-------------- --------------
Total Current Liabilities .......................... 53,327 41,532
-------------- --------------
Long-term debt .............................................. 52,083 144,500
Note payable ................................................ -- 1,107
Other liabilities ........................................... 16,071 8,806
-------------- --------------
Total Liabilities .................................. 121,481 195,945
-------------- --------------
Commitments and Contingencies ............................... -- --
Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized,
none issued and outstanding ............................. -- --
Class A common stock, $.01 par value, 75,000 shares
authorized 0 and 73,725 issued and outstanding .......... -- 1
Class B common stock, $.01 par value, 300,000 shares
authorized 0 and 294,901 issued and outstanding ......... -- 3
Common stock, $.01 par value, 50,000,000 authorized,
30,029,961 and 0 issued and outstanding ................. 300 --
Additional paid-in capital ................................ 248,729 147,968
Notes receivable-- officers and employees ................. (21) (21)
Retained earnings (deficit) ............................... (1,817) (140)
Accumulated other comprehensive income .................... (12,936) --
-------------- --------------
Total Stockholders' Equity ......................... 234,255 147,811
-------------- --------------
Total Liabilities and Stockholders' Equity ......... $ 355,736 $ 343,756
============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
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ENCORE ACQUISITION COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
THREE MONTHS ENDED
MARCH 31,
--------------------
2001 2000
-------- --------
(unaudited)
Revenues:
Oil ................................................... $ 27,377 $ 16,740
Natural gas ........................................... 8,844 487
-------- --------
Total revenues .......................................... 36,221 17,227
Expenses:
Production--
Direct lifting costs ............................... 6,355 3,682
Production, ad valorem and severance taxes ......... 4,270 3,318
General and administrative (excluding non-cash
stock based compensation) .......................... 1,263 964
Non-cash stock based compensation ..................... 9,587 2,552
Depreciation, depletion and amortization .............. 7,563 2,386
Derivative fair value loss ............................ 102 --
-------- --------
Total expenses .......................................... 29,140 12,902
-------- --------
Operating income ........................................ 7,081 4,325
-------- --------
Other income (expenses):
Interest .............................................. (2,537) (1,932)
Other ................................................. 52 165
-------- --------
Total other income (expenses) ........................... (2,485) (1,767)
-------- --------
Income before income taxes .............................. 4,596 2,558
Provision for income taxes .............................. (5,389) (2,044)
-------- --------
Income (loss) before accounting change .................. (793) 514
Cumulative effect of accounting change (net of
income taxes of $541 and $0, respectively) ............ (884) --
-------- --------
Net income (loss) ....................................... $ (1,677) $ 514
======== ========
Income (loss) per common share before accounting change:
Basic and diluted ..................................... $ (0.03) $ 0.02
Income (loss) per common share after accounting change:
Basic and diluted ..................................... $ (0.07) $ 0.02
Weighted average common shares outstanding .............. 24,707 22,739
The accompanying notes are an integral part of these
consolidated financial statements.
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ENCORE ACQUISITION COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
MARCH 31, 2001
(in thousands)
(unaudited)
NOTES ACCUMULATED
RETAINED CLASS A CLASS B RECEIVABLE OTHER
EARNINGS COMMON COMMON COMMON PAID-IN OFFICERS/ COMPREHENSIVE STOCKHOLDERS'
(DEFICIT) STOCK STOCK STOCK CAPITAL EMPLOYEES INCOME EQUITY
--------- --------- --------- --------- --------- --------- ------------- -------------
BALANCE AT DECEMBER 31,
2000 ............................... $ (140) $ 1 $ 3 $ -- $ 147,968 $ (21) $ -- $ 147,811
Proceeds from initial public
offering (net of offering
costs of $1,625).................. -- -- -- 71 91,399 -- -- 91,470
Non-cash stock based
compensation ..................... -- -- -- -- 9,587 -- -- 9,587
Recapitalization ..................... -- (1) (3) 229 (225) -- -- --
Components of comprehensive income:
Net loss .......................... (1,677) -- -- -- -- -- -- (1,677)
Change in deferred hedge loss
(net of income taxes
of $808)....................... -- -- -- -- -- -- 1,945 1,945
Cumulative effect of accounting
change (net of income
taxes of $9,121)................ -- -- -- -- -- -- (14,881) (14,881)
---------
Total comprehensive income... (14,613)
--------- --------- --------- --------- --------- --------- --------- ---------
BALANCE AT MARCH 31,
2001 ............................... $ (1,817) $ -- $ -- $ 300 $ 248,729 $ (21) $ (12,936) $ 234,255
========= ========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
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ENCORE ACQUISITION COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands except per share data)
THREE MONTHS ENDED
MARCH 31,
----------------------------
2001 2000
------------ ------------
(unaudited)
Operating Activities
Net income (loss) .................................. $ (1,677) $ 514
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, depletion and amortization ......... 7,563 2,386
Deferred taxes ................................... 3,505 2,044
Non-cash stock based compensation ................ 9,587 2,552
Non-cash cumulative accounting change ............ 884 --
Non-cash derivative fair value loss .............. 102 --
Other non-cash charges ........................... 480 148
Changes in operating assets and liabilities:
Accounts receivable .............................. (2,605) (1,812)
Other current assets ............................. (951) 196
Other assets ..................................... 1,068 (2,175)
Accounts payable and other current liabilities ... 1,631 1,759
------------ ------------
Cash Provided by Operating Activities ............. 19,587 5,612
Investing Activities
Purchases of other property and equipment ........ (101) (164)
Acquisition of oil and gas properties ............ (262) (43,327)
Development of oil and gas properties ............ (14,243) (3,745)
------------ ------------
Cash Used by Investing Activities .................. (14,606) (47,236)
Financing Activities
Proceeds from capital calls ...................... -- 21,495
Payable to shareholders .......................... -- 17,340
Proceeds from initial public offering ............ 93,095 --
Offering costs paid .............................. (1,625) --
Proceeds from long-term debt ..................... 33,000 41,000
Payments on long-term debt ....................... (125,417) (18,050)
Payments on note payable ......................... (4,685) --
------------ ------------
Cash Provided by (Used by) Financing Activities .... (5,632) 61,785
Increase (Decrease) in Cash and Cash Equivalents ... (651) 20,161
Cash and Cash Equivalents, Beginning of Period ..... 876 6,497
------------ ------------
Cash and Cash Equivalents, End of Period ........... $ 225 $ 26,658
============ ============
Supplemental disclosure of non-cash investing and
financing activities:
Note payable issued for purchase of oil and gas
properties .................................... $ -- $ 35,200
Notes received from officers and employees in
connection with capital calls ................. $ -- $ 23
The accompanying notes are an integral part of these
consolidated financial statements.
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ENCORE ACQUISITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. FORMATION OF ENCORE
Encore Acquisition Company ("Encore"), a Delaware Corporation, is an
independent (non-integrated) oil and natural gas company in the United States.
We were organized in April 1998 and are engaged in the acquisition, development,
exploitation and production of North American oil and natural gas reserves. Our
oil and natural gas reserves are concentrated in fields located in the Williston
Basin of Montana and North Dakota, the Permian Basin of Texas and New Mexico,
the Anadarko Basin of Oklahoma and the Powder River Basin of Montana.
2. BASIS OF PRESENTATION
In the opinion of management, the unaudited consolidated financial
statements of Encore include all adjustments necessary to present fairly our
financial position as of March 31, 2001 and results of operations and cash flows
for the three months ended March 31, 2001 and 2000. All adjustments are of a
recurring nature. These interim results are not necessarily indicative of
results for an entire year. Certain amounts of prior periods have been
reclassified in order to conform to the current period presentation.
Certain disclosures have been condensed or omitted from these consolidated
financial statements pursuant to the rules and regulations of the Securities and
Exchange Commission. Therefore, these financial statements should be read in
conjunction with Encore's 2000 consolidated financial statements and related
notes thereto included in Encore's registration statement filed on Form S-1
(Registration No. 333-47540, effective February 16, 2001).
Effective January 1, 2001, Encore adopted Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities". This standard requires us to recognize all of our
derivative and hedging instruments in our statements of financial position as
either assets or liabilities and measure them at fair value. If a derivative
does not qualify for hedge accounting, it must be adjusted to fair value through
earnings. However, if a derivative does qualify for hedge accounting, depending
on the nature of the hedge, changes in fair value can be offset against the
change in fair value of the hedged item through earnings or recognized in other
comprehensive income until such time as the hedged item is recognized in
earnings. In addition, all hedging relationships must be designated, documented
and reassessed periodically. The impact of adopting SFAS 133 on January 1, 2001
was to record the fair value of our derivatives as a reduction of assets of $1.1
million and as a liability in the amount of $24.3 million. Additionally, we
recorded a reduction in earnings as the cumulative effect of an accounting
change of $0.9 million (net of taxes of $0.5 million) and a decrease to
stockholders' equity for other comprehensive income in the amount of $14.9
million (net of taxes of $9.1 million).
Currently, all of Encore's derivative financial instruments qualify for
hedge accounting and are designated as cash flow hedges. These instruments hedge
the exposure of variability in expected future cash flows that is attributable
to a particular risk. The effective portion of the gain or loss on these
derivative instruments is recorded in other comprehensive income in
stockholders' equity and reclassed into earnings in the same period in which the
hedged transaction affects earnings. Any ineffective portion of the gain or loss
is recognized into earnings immediately.
3. IPO AND RECAPITALIZATION
On March 8, 2001, Encore priced its shares to be issued in its initial
public offering ("IPO") and began trading on the New York Stock Exchange the
following day under the ticker symbol "EAC". Immediately prior to the IPO, all
of the outstanding shares of Class A and Class B stock held by management and
institutional investors were converted into 2,630,203 and 20,249,758 shares,
respectively, of a single class of common stock. Through the IPO, Encore sold an
additional 7,150,000 shares of common stock to the public at the offering price
of $14.00 per share resulting in total outstanding shares of 30,029,961. Encore
received $91.5 million in net proceeds after deducting the underwriter's
discounts and commissions and related offering expenses. The proceeds received
from the IPO were used to pay down debt outstanding under our credit facility.
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4. INDEBTEDNESS
As a result of the application of proceeds from the IPO, scheduled note
repayments, and excess operating cash flows being applied to Encore's credit
facility, Encore has substantially reduced overall indebtedness since December
31, 2000. The following table summarizes the activity of Encore's debt balances
from December 31, 2000 through March 31, 2001 (in thousands):
Credit Facility:
December 31, 2000 .................... $ 144,500
Application of IPO proceeds ........ (91,470)
Net borrowings and payments ........ (947)
------------
March 31, 2001 ....................... $ 52,083
============
Note Payable:
December 31, 2000 .................... $ 17,545
Scheduled payments ................. (4,685)
------------
March 31, 2001 ....................... $ 12,860
============
5. NON-CASH STOCK BASED COMPENSATION EXPENSE ON CLASS A STOCK
Encore follows variable plan accounting for the Class A stock sold to
management. Accordingly, compensation expense is based on the excess of the
estimated fair value of the Class A stock over the amount paid by the
shareholders. Compensation expense is recorded over the service period of the
Class A stock, which is based on a vesting schedule. The Class A stock vests 25%
upon issuance and an additional 15% per year for the following five years. Prior
to Encore's IPO, compensation expense was adjusted in each reporting period
based on the most recent fair value estimates. Using available fair value
estimates, during the three months ended March 31, 2000, Encore recorded $2.6
million in non-cash compensation expense. On March 8, 2001, the date of the IPO,
the measurement date occurred, as after this date the Class A shareholders were
no longer required to make future capital contributions. Total compensation
expense on the Class A shares using the IPO price of $14.00 per share is $35.6
million. Encore recorded the final $9.6 million of compensation expense related
to the Class A shares in the first quarter of 2001.
6. EARNINGS (LOSS) PER SHARE (EPS)
The following table reflects earnings (loss) per share data for the three
months ended March 31 (in thousands, except per share data):
2001 EARNINGS SHARES PER SHARE
- -------------------------------------------- -------- -------- ---------
Basic
Net Loss ................................... $ (1,677)
--------
Loss Available To Common Stock-Basic ....... $ (1,677) 24,707 $ (0.07)
========
Diluted
Effect Of Dilutive Securities:
Stock Options .............................. -- --
-------- --------
Loss Available To Common Stock-Diluted ..... $ (1,677) 24,707 $ (0.07)
======== ======== =========
2000 EARNINGS SHARES PER SHARE
- -------------------------------------------- -------- -------- ---------
Basic
Net Income ................................. $ 514
--------
Income Available To Common Stock-Basic ..... $ 514 22,739 $ 0.02
========
Diluted
Effect Of Dilutive Securities:
Stock Options .............................. -- --
-------- --------
Income Available To Common Stock-Diluted ... $ 514 22,739 $ 0.02
======== ======== =========
First quarter 2000 earnings per share and weighted average shares
outstanding have been restated to reflect the conversion of the outstanding
Class A and Class B shares into one class of common stock in conjunction with
the IPO (see note 3). For the quarter ended March 31, 2000, Encore had no common
stock equivalents outstanding. For the quarter ended March 31, 2001, the common
stock equivalents outstanding were not included in the calculation of diluted
earnings per share because their effect would have been antidilutive.
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7. DERIVATIVE FINANCIAL INSTRUMENTS
Encore hedges commodity price risk with swap contracts, put contracts, and
collar contracts and interest rate risk with a swap contract. Swap contracts
provide a fixed price for a notional amount of sales volume in the case of
commodity hedges or a fixed interest rate for notional amount of principal in
the case of interest rate hedges. Put contracts provide a fixed floor price on a
notional amount of sales volume while allowing full price participation if the
relevant index price closes above the floor price. Collar contracts provide a
floor price for Encore for a notional amount of sales volume while allowing some
additional price participation if the relevant index price closes above the
floor price. From time to time, Encore also enters into swaption contracts,
although there were none outstanding at March 31, 2001. A swaption is an option
to enter into a swap in the future.
All of Encore's derivative financial instruments qualify for hedge
accounting in accordance with SFAS 133 and have been designated cash flow
hedges. As a result, to the extent the hedges are effective, all unrealized
gains or losses due to marking the derivatives to market have been recorded in
other comprehensive income as a component of stockholders' equity. These amounts
will be reclassified to earnings when the hedged transaction is recognized into
earnings. However, to the extent the hedges were ineffective, the ineffective
portion of the gain or loss has been recognized in earnings in the current
period. Excluding the $0.9 million net of tax loss recorded as a cumulative
effect of an accounting change, during the three months ended March 31, 2001,
Encore recognized a $0.1 million loss related to the ineffective portion of the
total deferred hedge loss. Additionally, the $24.4 million liability recorded on
January 1, 2001 as a cumulative change in accounting was reduced in the first
quarter to $21.1 million at March 31, 2001 ($14.3 million is included in other
current liabilities and $6.8 million in other liabilities on the balance sheet).
The value of our derivative assets was further reduced by $1.5 million in the
first quarter to $2.2 million at March 31, 2001 ($0.9 million is included in
other current assets and $1.3 million in other assets on the balance sheet).
These changes in the market value of our derivatives during the first quarter
were due primarily to a reduction in the market price of natural gas, as well as
the expiration of part of our 2001 contracts.
The following tables summarize our open commodity hedging positions as of
March 31, 2001:
OIL HEDGES AT MARCH 31, 2001
DAILY FLOOR DAILY CAP DAILY SWAP
FLOOR VOLUME PRICE CAP VOLUME PRICE SWAP VOLUME PRICE
PERIOD (BBL) (PER BBL) (BBL) (PER BBL) (BBL) (PER BBL)
--------- ------------ --------- ---------- --------- ----------- ---------
2001...... 4,500 $ 20.53 1,000 $ 22.05 3,000 $ 19.88
2002...... 2,000 $ 22.35 -- $ -- 2,000 $ 17.97
NATURAL GAS HEDGES AT MARCH 31, 2001
DAILY FLOOR DAILY CAP DAILY SWAP
FLOOR VOLUME PRICE CAP VOLUME PRICE SWAP VOLUME PRICE
PERIOD (MCF) (PER MCF) (MCF) (PER MCF) (MCF) (PER MCF)
--------- ------------- ---------- ---------- --------- ----------- ---------
2001.... 6,000 $ 3.21 -- $ -- 9,500 $ 3.09
2002.... 10,000 $ 3.09 2,500 $ 8.05 3,500 $ 3.31
2003.... -- $ -- -- $ -- 2,500 $ 3.11
INTEREST RATE HEDGES AT MARCH 31, 2001
FIXED
SWAP INTEREST SWAP
PERIOD RATE NOTIONAL
--------- ------------- -----------
2001.... 6.72% $30,000,000
2002.... 6.72% $30,000,000
2003.... 6.72% $30,000,000
2004.... 6.72% $30,000,000
2005.... 6.72% $30,000,000
The actual gains or losses we realize from our hedge transactions may vary
significantly from the fair market values disclosed above due to the fluctuation
of prices in the commodity markets and / or fluctuations in the floating LIBOR
interest rate.
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8. TAXES
INCOME TAXES
During the first quarter of 2001, Encore incurred $4.8 million in income tax
expense. Of this, $3.5 million is deferred income tax expense and relates
primarily to intangible drilling costs incurred during the quarter, which are
deductible for income tax purposes, but have been capitalized in Properties and
Equipment for book purposes. These amounts will be depleted and transferred to
earnings over the production life of the wells. The related deferred tax
liability is included in other liabilities on the balance sheet.
Income tax expense recorded during the first quarter of 2001 and 2000 is
substantially greater than if calculated using income before income taxes at the
statutory rate. This results from the non-cash stock based compensation expense
recorded by Encore during the first quarter of 2001 and 2000 of $9.6 million and
$2.6 million, respectively, not being deductible for tax purposes. Thus, these
amounts must be added back to income before income taxes to arrive at taxable
income.
Primarily as a result of the net deferred hedge loss recorded in other
comprehensive income during the first quarter of 2001, Encore has a deferred tax
asset in the amount of $8.8 million at March 31, 2001; $5.7 million of which is
current and has been included in other current assets on the balance sheet. The
remaining $3.1 million has been netted with our deferred tax liability and
included in other liabilities on the balance sheet.
9. OTHER COMPREHENSIVE INCOME
With the adoption of SFAS 133 on January 1, 2001, Encore began recording
deferred hedge gains and losses as other comprehensive income. For the quarter
ended March 31, 2001, comprehensive income totaled ($14.6) million, while net
loss totaled ($1.7) million. The difference between net loss and comprehensive
income is the result of recording a ($14.9) million deferred hedge loss as a
cumulative change in accounting, offset by an increase in the mark to market
value of Encore's derivatives of $1.9 million during the quarter. The increase
in the mark to market value of $1.9 million resulted from the expiration of a
portion of the term of some derivative contracts, as well as a reduction in the
market price of natural gas during the quarter. At March 31, 2001, Encore had
$12.9 million in deferred hedge losses in accumulated other comprehensive
income, shown as a component of equity on the balance sheet.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This document contains forward-looking statements that involve risks and
uncertainties that are made pursuant to the Safe Harbor Provisions of the
Private Securities Litigation Reform Act of 1995. See "Information Regarding
Forward-Looking Statements" in Encore's registration statement filed on Form S-1
(Registration No. 333-47540, effective February 16, 2001). Actual results may
differ materially from those anticipated in our forward-looking statements due
to many factors, including, but not limited to, those set forth under "Risk
Factors" in the registration statement. The following discussion should be read
in conjunction with the consolidated financial statements and notes thereto
included in this document and Encore's registration statement filed on Form S-1
(Registration No. 333-47540, effective February 16, 2001).
OVERVIEW
Because of our rapid growth through acquisitions since formation, our
historical results of operations and period-to-period comparisons of such
results and certain financial data may not be meaningful or indicative of future
results. Our acquisition history through March 31, 2001 is as follows:
ASSET DATE ACQUIRED
-------------------------- ----------------
Cedar Creek Anticline (CCA).. June 1, 1999
Crockett County.............. March 30, 2000
Lodgepole.................... March 31, 2000
Indian Basin/Verden.......... August 24, 2000
Bell Creek................... November 29, 2000
We use the successful efforts method of accounting for our oil and natural
gas properties. Under this method, all development costs and acquisition costs
of proved properties are capitalized and amortized on a unit-of-production basis
over the remaining life of proved developed reserves or proved reserves, as
applicable. Exploration expenses, including geological and geophysical expenses
and lease rentals, are charged to expense as incurred.
RESULTS OF OPERATIONS
The following table sets forth operating information of Encore for the
periods presented.
THREE MONTHS ENDED
MARCH 31,
----------------------- INCREASE
2001 2000 (DECREASE)
---------- ---------- ----------
Operating Results (in thousands):
Oil and natural gas revenues ..................... $ 36,221 $ 17,227 $ 18,994
Direct lifting costs ............................. 6,355 3,682 2,673
Production, ad valorem and severance taxes ....... 4,270 3,318 952
Daily production:
Oil volumes (Bbls) ............................. 13,236 9,809 3,427
Natural gas volumes (Mcf) ...................... 21,179 2,205 18,974
Combined volumes (BOE) ......................... 16,766 10,176 6,590
Average prices:
Oil (per Bbl) .................................. $ 22.98 $ 18.75 $ 4.23
Natural gas (per Mcf) .......................... 4.64 2.43 2.21
Combined volumes (per BOE) ..................... 24.00 18.60 5.40
Average costs (per BOE):
Direct lifting costs ........................... $ 4.21 $ 3.98 $ 0.23
Production, ad valorem and severance taxes ..... 2.83 3.58 (0.75)
G&A (excluding non-cash stock based
compensation) ................................ 0.84 1.04 (0.20)
DD&A ........................................... 5.01 2.58 2.43
Average prices shown in the table are net of net profits interests and the
effects of hedging transactions. As a result of hedging transactions, oil and
natural gas revenues were reduced by $6.8 million for the three months ended
March 31, 2001 and $3.6 million for the three months ended March 31, 2000. As a
result of our net profits interest payments, oil and natural gas revenues were
reduced by $1.4 million in the first quarter of 2001 and $3.2 million in the
first quarter of 2000.
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COMPARISON OF QUARTER ENDED MARCH 31, 2001 TO QUARTER ENDED MARCH 31, 2000
Set forth below is our comparison of operations during the first quarter of
2001 with the first quarter of 2000.
REVENUES. Oil and natural gas revenues of Encore for the first quarter of
2001 increased as compared to 2000 by $19.0 million, from $17.2 million to $36.2
million. The increase resulted primarily from our acquisition program for 2000
which resulted in our Crockett County, Lodgepole, Indian Basin/Verden and Bell
Creek acquisitions. Oil and natural gas prices of Encore for the first quarter
of 2001 increased as compared to 2000 which further increased our revenues. Our
realized net oil price for the first quarter of 2001 compared to 2000 increased
by $4.23 per Bbl, from $18.75 to $22.98 per Bbl. Our realized net natural gas
price for the first quarter of 2001 compared to 2000 increased by $2.21 per Mcf,
from $2.43 to $4.64 per Mcf. Encore's development and exploitation program
further increased revenues as the result of increases in production for the
first quarter 2001 compared to 2000. Hedging transactions had the effect of
reducing oil and natural gas revenues by $6.8 million, or $4.52 per BOE, during
the first quarter of 2001 and decreasing oil and natural gas revenues by $3.6
million, or $3.93 per BOE, during the first quarter of 2000. Net profits
interest payments had the effect of reducing oil and natural gas revenues by
$1.1 million, or $0.75 per BOE, during the first quarter of 2001 and decreasing
oil and natural gas revenues by $3.2 million or $3.46 per BOE, during the first
quarter of 2000. The reduction in net profits interest payments resulted from
increased capital expenditures in CCA.
DIRECT LIFTING COSTS. Direct lifting costs of Encore for the first quarter
of 2001 increased as compared to the first quarter of 2000 by $2.7 million, from
$3.7 million to $6.4 million. The increase in direct lifting costs resulted from
the Crockett County, Lodgepole, Indian Basin/Verden and Bell Creek acquisitions
completed after the end of the first quarter of 2000. On a per BOE basis, direct
lifting costs increased from $3.98 to $4.21, primarily as a result of higher
workover and contract labor costs in CCA related to the relatively harsh winter.
PRODUCTION, AD VALOREM AND SEVERANCE TAXES. Production, ad valorem and
severance taxes for the first quarter of 2001 increased as compared to the first
quarter of 2000 by approximately $1.0 million, from $3.3 million to $4.3
million. The increase in production, ad valorem and severance taxes resulted
from the Crockett County, Lodgepole, Indian Basin/Verden and Bell Creek
acquisitions completed after the end of the first quarter of 2000. As a percent
of oil and natural gas revenues (excluding the effects of hedges), production,
ad valorem and severance taxes decreased from 15.9% to 9.9%. The decrease in
production, ad valorem and severance taxes as a percent of revenue was a result
of the higher production, ad valorem and severance tax rates in Montana
associated with our Cedar Creek Anticline asset versus the tax rates in Texas,
North Dakota, New Mexico and Oklahoma associated with our Crockett County,
Lodgepole, and Indian Basin/Verden assets, respectively.
DEPLETION, DEPRECIATION AND AMORTIZATION (DD&A) EXPENSE. DD&A expense for
the first quarter of 2001 increased by approximately $5.2 million, from $2.4
million to $7.6 million as compared to the first quarter of 2000. The increase
in DD&A resulted from the Crockett County, Lodgepole, Indian Basin/Verden and
Bell Creek acquisitions completed after the first quarter of 2000. The average
DD&A rate of $5.01 per BOE of production during the first quarter of 2001
represents an increase of $2.43 per BOE from the $2.58 per BOE recorded in the
first quarter of 2000. The increase was attributable to higher per BOE
acquisition costs and relatively faster depletion associated with the Lodgepole,
Crockett County, Indian Basin/Verden and Bell Creek acquisitions completed after
the first quarter of 2000.
GENERAL AND ADMINISTRATIVE (G&A) EXPENSE. G&A expense increased $0.3 million
for the first quarter of 2001 as compared to the first quarter of 2000, from
$1.0 million to $1.3 million (excluding non-cash stock based compensation of
$9.6 million in the first quarter of 2001 and $2.6 million in the first quarter
of 2000). The increase in G&A resulted from the additional staff and lease space
necessary for the Crockett County, Lodgepole, Indian Basin/Verden and Bell Creek
acquisitions completed after the first quarter of 2000. On a BOE basis, G&A
expense fell to $0.84 for the first quarter of 2001 from $1.04 for the first
quarter of 2000.
NON-CASH STOCK BASED COMPENSATION EXPENSE. Non-cash stock based compensation
expense increased $7.0 million from the first quarter of 2000, $2.6 million, to
the first quarter of 2001, $9.6 million. This stock based compensation is
associated with the purchase by our management stockholders of Class A common
stock under our management stock plan adopted in August 1998. This amount
represents the vested portion of the shares purchased and is recorded as
compensation, calculated in accordance with variable plan accounting under APB
25. The amount recorded in the first quarter of 2001 represents the final amount
of expense to be recorded related to the Class A stock.
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INTEREST EXPENSE. Interest expense for the quarter ended March 31, 2001 was
$2.5 million compared to $1.9 million for the quarter ended March 31, 2000. The
increase in interest expense is directly attributable to additional debt
incurred as a result of Encore's acquisition program for 2000 which resulted in
the Crockett County, Lodgepole, Indian Basin/Verden and Bell Creek acquisitions.
The weighted average interest rate, net of hedges, for the first quarter of 2001
was 7.1% compared to 7.6% for the first quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
Principal uses of capital have been for the acquisition and development of
oil and natural gas properties.
During the quarter ended March 31, 2001, net cash provided by operations was
$19.6 million, an increase of $14.0 million compared to the quarter ended March
31, 2000. This increase is a result of cash flows provided by the Crockett
County, Lodgepole, Indian Basin/Verden and Bell Creek acquisitions, which all
occurred subsequent to March 31, 2000.
We anticipate that our capital expenditures will total approximately $15.0
million for the second quarter of 2001. 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. We plan to finance our ongoing
development and acquisition expenditures using internally generated cash flow,
available cash and our existing credit agreement.
At March 31, 2000 Encore has a $17.3 million payable to shareholders
outstanding, which is shown as cash provided by financing activities for the
first quarter of 2000. During the quarter ended March 31, 2000, Encore
originally intended to fund the Lodgepole acquisition with one half debt under
the company's credit facility and one half from capital calls to shareholders.
As a result, capital calls in the amount of $17.3 million were collected from
shareholders. However, by quarter end, management instead decided to issue a
seller-financed note for 100% of the cost of the acquisition. Thus, the amount
collected was paid back to shareholders in the second quarter of 2000 and,
therefore, was reported as a liability at March 31, 2000.
At March 31, 2001, Encore had total assets of $355.7 million. Total
capitalization was $299.2 million, of which 78.3% was represented by
stockholders' equity and 21.7% by senior debt.
Encore's operating subsidiary currently maintains a credit agreement with a
group of banks that matures in May 2004. Encore has guaranteed the subsidiary's
obligations under the credit agreement and has pledged the stock and other
equity interests of its subsidiaries to secure the guaranty. Borrowings under
the credit agreement totaled $52.1 million as of March 31, 2001. The borrowing
base, as established in the credit agreement, was $180.0 million as of March 31,
2001. During the first quarter of 2001, the weighted average interest rate under
the facility, net of hedges, was 7.4%. The remaining borrowing base available
under the credit agreement at March 31, 2001, was $127.9 million. Encore pays
certain fees based on the unused portion of the borrowing base. The credit
agreement contains a number of negative and financial covenants. Encore was in
compliance with all of them as of March 31, 2001.
Encore issued a $35.2 million note payable associated with the Lodgepole
acquisition. The note requires monthly principal payments over a 22-month period
ending January 31, 2002. The note bears monthly compounded interest at the rate
of 4.0% per year on the outstanding principal plus accrued interest. Principal
payments remaining as of March 31, 2001 total $11.8 million for 2001 and $1.1
million for 2002. All of the remaining principal and interest outstanding, less
a demand premium, is callable at any time with 45 days notice. In the event the
note is called, our credit agreement allows additional borrowings to meet the
demand payment.
INFLATION AND CHANGES IN PRICES
While the general level of inflation affects certain of our costs, factors
unique to the petroleum industry result in independent price fluctuations.
Historically, significant fluctuations have occurred in oil and natural gas
prices. In addition, changing prices often cause costs of equipment and supplies
to vary as industry activity levels increase and decrease to reflect perceptions
of future price levels. Although it is difficult to estimate future prices of
oil and natural gas, price fluctuations have had, and will continue to have, a
material effect on us.
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The following table indicates the average oil and natural gas prices
received for the quarter ended March 31, 2001 and 2000. Average equivalent
prices for 2001 and 2000 were decreased by $4.52 and $3.93 per BOE,
respectively, as a result of our hedging activities. Average prices per
equivalent barrel indicate the composite impact of changes in oil and natural
gas prices. Natural gas production is converted to oil equivalents at the
conversion rate of six Mcf per Bbl. Average prices shown in the following table
are net of net profits interests.
OIL NATURAL GAS EQUIV. OIL
(PER BBL) (PER MCF) (PER BOE)
---------- ---------- ----------
NET PRICE REALIZATION WITH HEDGES
Quarter ended March 31, 2001 ......... $ 22.98 $ 4.64 $ 24.00
Quarter ended March 31, 2000 ......... 18.75 2.43 18.60
AVERAGE WELLHEAD PRICE
Quarter ended March 31, 2001 ......... $ 25.75 $ 6.49 $ 28.52
Quarter ended March 31, 2000 ......... 22.83 2.43 22.53
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information included in "Quantitative and Qualitative Disclosures About
Market Risk" in Encore's 2000 registration statement on Form S-1 (Registration
No. 333-47540, effective February 16, 2001) is incorporated herein by reference.
Such information includes a description of Encore's potential exposure to market
risks, including commodity price risk and interest rate risk. Encore's open
commodity positions as of March 31, 2001 are presented in Note 7 to the
accompanying financial statements. The fair value of our open commodity and
interest rate hedges is ($18.9) million as of March 31, 2001.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Encore completed its IPO of 7,150,000 shares of its common stock pursuant to
a Registration Statement on Form S-1 (Registration No. 333-47540, effective
February 16, 2001) on March 8, 2001, which began trading on the New York Stock
Exchange the following day under the ticker symbol "EAC". The managing
underwriters in the offering were Goldman, Sachs & Co., Credit Suisse First
Boston, Dain Rauscher Wessels and Petrie Parkman & Co. The underwriters did not
exercise their over-allotment option to purchase additional shares of stock.
Encore sold all 7,150,000 shares offered, at the offering price of $14.00 per
share. Total proceeds from the offering were approximately $91.5 million, net of
underwriting discounts and commissions of approximately $7.0 million and other
fees and expenses of approximately $1.6 million. All of the offering proceeds
were used to pay off long-term debt outstanding under Encore's credit facility.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
None.
Reports on Form 8-K
None.
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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.
ENCORE ACQUISITION COMPANY
Date: May 11, 2001 By: Morris B. Smith
---------------------------------------
Morris B. Smith
Chief Financial Officer, Treasurer,
Executive Vice President and
Principal Financial Officer
Date: May 11, 2001 By: Robert C. Reeves
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Robert C. Reeves
Vice President, Controller and
Principal Accounting Officer
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