1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Quarterly Period Ended June 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 001-16179
--------------------------------
ENERGY PARTNERS, LTD.
(Exact name of registrant as specified in its charter)
Delaware 72-1409562
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification number)
201 St. Charles Avenue, Suite 3400
New Orleans, Louisiana 70170
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (504) 569-1875
----------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of August 3, 2001, there were 26,849,007 shares of the Registrant's
Common Stock, par value $0.01 per share, outstanding.
================================================================================
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TABLE OF CONTENTS
<Table>
<Caption>
Page
------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 2001 and
December 31, 2000..........................................................................3
Consolidated Statements of Operations for the three and six months ended
June 30, 2001 and 2000.....................................................................4
Consolidated Statements of Cash Flows for the six months ended
June 30, 2001 and 2000.....................................................................5
Notes to Consolidated Financial Statements ..................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk......................................16
PART II OTHER INFORMATION
Item 4. Submission Of Matters To The Vote Of Security Holders...........................................17
Item 6. Exhibits and Reports on Form 8-K................................................................17
</Table>
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ITEM 1. FINANCIAL STATEMENTS
ENERGY PARTNERS, LTD.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
June 30, December 31,
2001 2000
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,284 $ 3,349
Trade accounts receivable 23,809 28,930
Fair value of commodity derivative instruments 582 --
Prepaid expenses 2,115 1,465
------------ ------------
Total current assets 30,790 33,744
Property and equipment, at cost under the successful efforts
method of accounting for oil and gas properties 260,558 195,714
Less accumulated depreciation, depletion and amortization (43,074) (24,927)
------------ ------------
Net property and equipment 217,484 170,787
Other assets 2 1,357
Deferred financing costs - net of accumulated amortization
of $1,480 in 2001 and $1,027 in 2000 1,808 2,261
------------ ------------
$ 250,084 $ 208,149
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,565 $ 17,322
Accrued expenses 31,978 24,639
Current maturities of long-term debt 82 --
------------ ------------
Total current liabilities 40,625 41,961
Long-term debt 10,452 100
Deferred income taxes 19,292 9,207
Other 10,531 6,290
------------ ------------
80,900 57,558
------------ ------------
Stockholders' equity:
Preferred Stock, $1 par value, authorized 1,700,000 shares;
none issued -- --
Common stock, par value $0.01 per share. Authorized
50,000,000 shares; issued and outstanding:
2001 - 26,870,757 shares; 2000 - 26,400,147 shares 269 264
Additional paid-in capital 180,399 179,679
Accumulated other comprehensive income 407 --
Accumulated deficit (11,891) (29,352)
------------ ------------
Total stockholders' equity 169,184 150,591
------------ ------------
$ 250,084 $ 208,149
============ ============
</Table>
See accompanying notes to consolidated financial statements.
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ENERGY PARTNERS, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Revenues:
Oil and gas $ 37,287 $ 26,047 $ 83,458 $ 30,009
Other (68) 66 3,691 347
---------- ---------- ---------- ----------
37,219 26,113 87,149 30,356
---------- ---------- ---------- ----------
Costs and expenses:
Lease operating 9,824 5,813 18,816 6,449
Taxes, other than on earnings 2,000 1,543 3,808 1,543
Exploration expenditures 3,055 778 4,423 824
Depreciation, depletion and amortization 11,551 6,591 22,297 8,286
General and administrative:
Stock-based compensation 294 1,247 1,065 1,247
Other general and administrative 4,893 2,698 8,826 4,330
---------- ---------- ---------- ----------
Total costs and expenses 31,617 18,670 59,235 22,679
---------- ---------- ---------- ----------
Income from operations 5,602 7,443 27,914 7,677
Other income (expense):
Interest income 98 97 226 328
Interest expense (435) (2,671) (864) (3,057)
Gain on sale of oil and gas assets -- 7,781 41 7,781
---------- ---------- ---------- ----------
(337) 5,207 (597) 5,052
---------- ---------- ---------- ----------
Income before income taxes 5,265 12,650 27,317 12,729
Income taxes (1,841) (4,455) (9,856) (4,474)
---------- ---------- ---------- ----------
Net income $ 3,424 $ 8,195 $ 17,461 $ 8,255
---------- ---------- ---------- ----------
Less dividends earned on preferred stock
and accretion of issuance costs -- (2,586) -- (4,232)
---------- ---------- ---------- ----------
Net income available to
common stockholders $ 3,424 $ 5,609 $ 17,461 $ 4,023
========== ========== ========== ==========
Basic income per share $ 0.13 $ 0.66 $ 0.65 $ 0.47
========== ========== ========== ==========
Diluted income per share $ 0.13 $ 0.46 $ 0.65 $ 0.46
========== ========== ========== ==========
Weighted average common shares used
in computing income per share:
Basic 26,867 8,537 26,859 8,494
Incremental common shares 93 9,330 103 9,330
---------- ---------- ---------- ----------
Diluted 26,960 17,867 26,962 17,824
========== ========== ========== ==========
</Table>
See accompanying notes to consolidated financial statements.
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ENERGY PARTNERS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<Table>
<Caption>
Six Months Ended
June 30,
-----------------------------
2001 2000
----------- -----------
Cash flows from operating activities:
Net income $ 17,461 $ 8,255
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 22,297 8,286
Gain on sale of oil and gas assets (41) (7,781)
Stock-based compensation 1,065 1,247
Deferred income taxes 9,856 4,246
Exploration expenditures 3,592 824
Amortization of deferred financing costs 453 255
----------- -----------
54,683 15,332
Changes in operating assets and liabilities:
Trade accounts receivable 5,121 (13,033)
Prepaid expenses (650) (1,095)
Other assets 1,355 (500)
Accounts payable and accrued expenses (7,043) 6,292
Other liabilities 90 147
----------- -----------
Net cash provided by operating activities 53,556 7,113
----------- -----------
Cash flows used in investing activities:
Property acquisitions (1,370) (117,390)
Exploration and development expenditures (60,937) (4,064)
Other property and equipment additions (501) --
Proceeds from sale of oil and gas assets 93 36,610
----------- -----------
Net cash used in investing activities (62,715) (84,844)
----------- -----------
Cash flows from financing activities:
Deferred financing costs -- (2,737)
Proceeds from long-term debt 15,565 108,000
Repayment of long-term debt (5,132) (43,150)
Other (339) --
----------- -----------
Net cash provided by financing activities 10,094 62,113
----------- -----------
Net increase (decrease) in cash and cash
equivalents 935 (15,618)
Cash and cash equivalents at beginning of period 3,349 22,282
----------- -----------
Cash and cash equivalents at end of period $ 4,284 $ 6,664
=========== ===========
</Table>
See accompanying notes to consolidated financial statements.
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ENERGY PARTNERS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2000
(UNAUDITED)
(1) BASIS OF PRESENTATION
Certain information and footnote disclosures normally in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to rules and regulations of the
Securities and Exchange Commission; however, management believes the disclosures
which are made are adequate to make the information presented not misleading.
These financial statements and footnotes should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2000 and Management's Discussion
and Analysis of Financial Condition and Results of Operations.
The financial information as of June 30, 2001 and for the three and six
month periods ended June 30, 2001 and 2000 has not been audited. However, in the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the results of operations for the
periods presented have been included therein. The results of operations for the
first six months of the year are not necessarily indicative of the results of
operations, which might be expected for the entire year.
(2) COMPREHENSIVE INCOME
The following table presents comprehensive income for the six months ended
June 30, 2001 (in thousands).
<Table>
Accumulated other comprehensive income as of December 31, 2000 $ --
Net income $ 17,461
Other comprehensive income - net of tax
Hedging activities
Cumulative effect of change in accounting principle as of January 1, 2001 (2,412)
Current period changes in fair value of settled contracts (1,093)
Reclassification adjustments for settled contracts 3,430
Changes in fair value of outstanding hedging positions 482
--------
Total other comprehensive income 407 407
-------- --------
Comprehensive income $ 17,868
========
Accumulated other comprehensive income as of June 30, 2001 $ 407
========
</Table>
The Company did not have any items of comprehensive income for the six
months ended June 30, 2000.
(3) EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the period. On November 17, 1999 management and director stockholders placed in
escrow 3,304,830 shares of common stock. These shares could not be voted by the
management and director stockholders and all or a portion would only be released
from escrow upon the attainment of specified reserve replacement targets or upon
the completion of an initial public offering. Also, on the same date, a
stockholder returned 3,291,720 shares
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ENERGY PARTNERS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
of common stock, which were cancelled. All of these shares have been excluded
from the calculation of weighted average common shares for the quarter and six
months ended June 30, 2000. The effect of preferred stock dividends and
accretion of issuance costs on arriving at income available to common
stockholders was none for the three and six month periods ended June 30, 2001
and $2.6 million and $4.2 million for the three and six month periods ended June
30, 2000, respectively.
Diluted earnings per share is computed in the same manner as basic earnings
per share except that the denominator is increased to include the number of
additional common shares that could have been outstanding assuming the exercise
of stock options and convertible preferred stock shares that would have a
dilutive effect on earnings per share. The number of dilutive convertible
preferred stock shares and stock awards used in computing diluted earnings per
share were 9,329,839 for the three and six month periods ended June 30, 2000 and
the number of stock awards used were 92,657 and 102,750 for the three and six
month periods ended June 30, 2001, respectively.
Energy Income Fund, L.P., a stockholder of the Company, exercised its
option for a cashless conversion of a warrant in January 2001, receiving 466,245
shares of common stock.
(4) ACQUISITIONS AND DISPOSITION
On March 31, 2000, the Company purchased an 80% working interest in South
Timbalier 26 from Unocal for approximately $44.9 million, which included $1.25
million for pipeline assets. Additionally, on March 31, 2000, the Company
purchased an average 96.1% working interest in East Bay Field (East Bay) from
Ocean Energy, Inc. for approximately $72.3 million. The entire purchase price
for both acquisitions was allocated to property and equipment. The terms of the
acquisitions did not contain any contingent consideration, options or future
commitments.
On April 20, 2000, the Company sold a 50% working interest in South
Timbalier 26 for approximately $36.6 million, resulting in a gain of
approximately $7.8 million.
The unaudited pro forma results of operations, assuming that such
acquisitions and disposition occurred on January 1, 2000 are as follows (in
thousands, except per share amounts):
<Table>
<Caption>
Six Months Ended
June 30, 2000
----------------
(Unaudited)
Pro forma:
Revenue......................................... $56,401
Income from operations.......................... 21,233
Net income...................................... 15,822
Basic earnings per common share................. $ 1.36
Diluted earnings per common share............... $ 0.89
</Table>
The pro forma financial information does not purport to be indicative of
the results of operations that would have occurred had the acquisitions and
disposition taken place at the beginning of the period presented or future
results of operations.
(5) HEDGING ACTIVITIES
The Company has entered into derivative commodity instruments to manage
commodity price risks associated with future crude oil and natural gas
production but does not use them for speculative purposes. The Company's
commodity price hedging program utilizes financially-settled zero-cost collar
contracts to establish floor and ceiling prices on anticipated future crude oil
and natural gas production and oil forward sales contracts to fix the price of
anticipated future crude oil production. On
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ENERGY PARTNERS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
January 1, 2001, the Company adopted Statement of Financial Accounting Standards
No. 133 (Statement 133), as amended, Accounting for Derivative Instruments and
Hedging Activities. Statement 133 establishes accounting and reporting standards
requiring that derivative instruments, including certain derivative instruments
embedded in other contracts, be recorded at fair market value and included as
either assets or liabilities in the balance sheet and measured at fair value.
The accounting for changes in fair value depends on the intended use of the
derivative and the resulting designation, which is established at the inception
of the derivative. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the hedged item in
the statement of operations. For derivative instruments designated as cash-flow
hedges, changes in fair value, to the extent the hedge is effective, will be
recognized in other comprehensive income (a component of stockholders' equity)
until settled, when the resulting gains and losses will be recorded in earnings.
Hedge ineffectiveness is measured at least quarterly based on the relative
changes in fair value between the derivative contract and the hedged item over
time. Any change in fair value resulting from ineffectiveness, as defined by
Statement 133, will be charged currently to earnings. The Company's current
derivative instruments qualify as cash-flow hedges.
As of June 30, 2001, the Company had financially-settled crude oil collar
positions for the period July 2001 through December 2001 related to the sale of
552,000 barrels of oil with a floor of $24.00 per barrel and an average cap of
$32.17 per barrel. The Company also has financially-settled natural gas collar
positions maturing monthly through December 2001 related to the net sale of
1,840,000 mmbtu of natural gas with a floor of $3.00 per mmbtu and a cap of
$9.00 per mmbtu.
Hedging activities reduced natural gas and crude oil revenues by $3.1
million and $5.2 million in the three and six month periods ended June 30, 2001,
respectively. The Company's hedging activities reduced oil revenues by $1.8
million for the six months ended June 30, 2000. There were no hedging contracts
in place prior to March 31, 2000. In addition, in the three and six month
periods ended June 30, 2001, the Company recognized a non-cash loss of $0.2
million and a gain of $0.1 million, respectively, in other revenues associated
with hedge ineffectiveness resulting from certain option valuation changes
inherent in the zero-cost collars on natural gas.
In accordance with the transition provisions of Statement 133, on January
1, 2001, the Company recorded a net-of-tax cumulative-effect-type loss
adjustment of $2.4 million in accumulated other comprehensive income to
recognize at fair value all derivatives that are designated as cash-flow hedging
instruments. During the first half of 2001, losses of $3.4 million were
transferred from accumulated other comprehensive income and the fair value of
outstanding derivative assets increased $0.5 million resulting in an ending
balance of $0.4 million related to hedging activities in accumulated other
comprehensive income at June 30, 2001.
(6) CONTINGENCIES
The Company has been named as a defendant in certain lawsuits arising in
the ordinary course of business. While the outcome of these lawsuits cannot be
predicted with certainty, management does not expect these matters to have a
material adverse effect on the financial position, cash flows or results of
operations of the Company.
Management believes that the Company is in substantial compliance with
current federal, state and local environmental laws, regulations and orders
applicable to it and that continued compliance with existing requirements will
not have a material adverse effect on the Company's financial position, cash
flows or results of operations. There can be no assurance, however, that current
regulatory requirements will not change, currently unforeseen environmental
incidents will not occur or non-compliance with environmental laws or
regulations will not be discovered.
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ENERGY PARTNERS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
(7) ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued new
pronouncements: Statement 141, Business Combinations, Statement 142, Goodwill
and Other Intangible Assets, and Statement 143, Accounting for Asset Retirement
Obligations. Statement 141, which requires the purchase method of accounting for
all business combinations, applies to all business combinations initiated after
June 30, 2001 and to all business combinations accounted for by the purchase
method that are completed after June 30, 2001. Statement 142 requires that
goodwill as well as other intangible assets be tested annually for impairment
and is effective for fiscal years beginning after December 15, 2001. Statement
143 requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred and a corresponding
increase in the carrying amount of the related long-lived asset. Statement 143
is effective for fiscal years beginning after June 15, 2002. Statements 141 and
142 will not apply to the Company unless it enters into a future business
combination. The Company is currently assessing the impact of Statement 143 on
its financial condition and results of operations.
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ENERGY PARTNERS, LTD.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are an independent oil and natural gas exploration and production
company concentrated in the shallow to moderate depth waters of the central
region of the Gulf of Mexico Shelf. We were incorporated in January 1998.
We use the successful efforts method of accounting for our investment in
oil and natural gas properties. Under this method, we capitalize lease
acquisition costs, costs to drill and complete exploration wells in which proven
reserves are discovered and costs to drill and complete development wells.
Seismic, geological and geophysical, and delay rental expenditures are expensed
as incurred. We conduct many of our exploration and development activities
jointly with others and, accordingly, recorded amounts for our oil and natural
gas properties reflect only our proportionate interest in such activities.
In March 2000, we acquired Unocal Corporation's 80% interest in South
Timbalier 26. In April 2000, we sold to Vastar Resources, Inc. 50% of our
working interest in South Timbalier 26. On March 31, 2000, we closed the
purchase of an average 96.1% working interest in the East Bay field from Ocean
Energy, Inc. Additionally, in September 2000, we closed the acquisition of
Texaco, Inc.'s 14.6% working interest in South Timbalier 22, 23 and 27.
We have included the results of operations from the East Bay and South
Timbalier 26 acquisitions from the closing date of March 31, 2000 and the South
Timbalier 22, 23 and 27 from the closing date of September 7, 2000. We have
experienced substantial revenue and production growth as a result of these
acquisitions.
For the foregoing reasons, the East Bay, South Timbalier 26 and South
Timbalier 22, 23 and 27 acquisitions will affect the comparability of our
historical results of operations with results of operations in the current year.
Our revenue, profitability and future growth rate depend substantially on
factors beyond our control, such as economic, political and regulatory
developments and competition from other sources of energy. Oil and natural gas
prices historically have been volatile and may fluctuate widely in the future.
Sustained periods of low prices for oil and natural gas could materially and
adversely affect our financial position, our results of operations, the
quantities of oil and natural gas reserves that we can economically produce and
our access to capital.
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ENERGY PARTNERS, LTD.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
RESULTS OF OPERATIONS
The following table presents information about our oil and natural gas
operations.
<Table>
<Caption>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
NET PRODUCTION (per day):
Oil (Bbls) 10,444 9,286 10,579 5,303
Natural gas (Mcf) 34,718 13,205 34,098 8,127
Total (Boe) 16,230 11,487 16,262 6,658
OIL & GAS REVENUES (in thousands)
Oil $ 22,492 $ 21,488 $ 45,918 $ 24,803
Natural Gas 14,795 4,559 37,540 5,206
Total 37,287 26,047 83,458 30,009
AVERAGE SALES PRICES (1):
Oil (per Bbl) $ 23.67 $ 25.43 $ 23.98 $ 25.70
Natural gas (per Mcf) 4.68 3.79 6.08 3.52
Total (per Boe) 25.25 24.92 28.35 24.76
AVERAGE COSTS (per Boe):
Lease operating expense $ 6.65 $ 5.56 $ 6.39 $ 5.32
Taxes, other than on earnings 1.35 1.48 1.29 1.27
Depreciation, depletion, and amortization 7.82 6.30 7.58 6.84
General and administrative expense
(exclusive of stock-based compensation) 3.31 2.58 3.00 3.57
</Table>
(1) Net of the effect of hedging transactions
PRODUCTION
CRUDE OIL AND CONDENSATE. Our net oil production for the second quarter of
2001 increased to 10,444 Bbls per day from 9,286 Bbls per day in the second
quarter of 2000. Our net oil production for the first six months of 2001
increased to 10,579 Bbls per day from 5,303 Bbls per day in the same period
2000. The increase for the quarter and six months was primarily due to 75
successful well operations, which commenced production after the second quarter
of 2000, and were partially offset by natural declines from other producing
wells.
NATURAL GAS. Our net natural gas production for the second quarter of 2001
increased to 34,718 Mcf per day from 13,205 Mcf per day in the second quarter of
2000. Our net natural gas production for the first six months of 2001 increased
to 34,098 Mcf per day from 8,127 Mcf per day in the same period of 2000. The
increase for the quarter and six months was the result of 44 successful well
operations, which commenced production after the second quarter of 2000, and
were partially offset by natural declines from other producing wells.
The overall increase in oil and natural gas production for the six month
period in 2001 is also attributed to the 2000 acquisitions.
As strong as these results were, we did not achieve the full growth in
volumes we anticipated for the period. Drilling rig delays,
longer-than-anticipated flowline hook up processes, together with weather
related delays associated with Tropical Storm Allison all contributed to an
unexpected but temporary slowdown in our drilling program and in our well
completion schedule in the second quarter of 2001.
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ENERGY PARTNERS, LTD.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
REALIZED PRICES
CRUDE OIL AND CONDENSATE. Our average realized oil price in the second
quarter of 2001 was $23.67 per Bbl, a decrease of 7% from an average realized
price of $25.43 per Bbl in the second quarter of 2000. Hedging activities
reduced oil price realizations by $2.15 per Bbl or 8% from the $25.82 per Bbl
that would have otherwise been received in the second quarter of 2001. In the
second quarter of 2000, hedging activities reduced oil price realizations by
$2.12 per Bbl or 8% from the $27.55 per Bbl that would have otherwise been
received.
Our average realized oil price in the first half of 2001 was $23.98 per
Bbl, a decrease of 7% from an average realized price of $25.70 per Bbl in the
first half of 2000. Hedging activities reduced oil price realizations by $2.67
per Bbl or 10% from the $26.65 per Bbl that would have otherwise been received
in the first half of 2001. In the first half of 2000, hedging activities reduced
oil price realizations by $1.85 per Bbl or 7% from the $27.55 per Bbl that would
have otherwise been received.
NATURAL GAS. Our average realized natural gas price in the second quarter
of 2001 was $4.68 per Mcf, an increase of 24% over an average realized price of
$3.79 per Mcf in the second quarter of 2000. As a result of our natural gas
collar positions, hedging activities did not impact realized prices in the
second quarter of 2001. We had no hedging positions for natural gas related to
production in the second quarter of 2000.
Our average realized natural gas price in the first half of 2001 was $6.08
per Mcf, an increase of 73% over an average realized price of $3.52 per Mcf in
the first half of 2000. In the first half of 2001, hedging activities reduced
natural gas price realizations by $0.01 per Mcf from the $6.09 per Mcf that
would have otherwise been received. We had no hedging positions for natural gas
related to production in the first half of 2000.
NET INCOME AND REVENUES
We recognized net income of $3.4 million in the second quarter of 2001
compared to net income of $8.2 million in the second quarter of 2000. Exclusive
of the gain on sale of assets in the second quarter of 2000, our net income
would have been $3.2 million. Our oil and natural gas revenues increased to
$37.3 million in the second quarter of 2001, an increase of $11.3 million from
$26 million in the second quarter of 2000.
We recognized net income of $17.5 million in the first half of 2001
compared to net income of $8.3 million in the first half of 2000. Our oil and
natural gas revenues increased to $83.5 million in the first half of 2001, an
increase of $53.5 million from $30.0 million in the first half of 2000.
The increases in net income and revenues in the three and six month periods
of 2001 were primarily due to sharp increases in natural gas prices coupled with
higher production volumes from acquisitions and drilling activities. In
addition, we recorded business interruption income of $3.5 million in the first
quarter of 2001 as a result of the rupture of a high-pressure natural gas
transfer line at the East Bay field. The rupture occurred in November 2000 and
was restored to service in February 2001. The impact of these increases on net
income was partially offset by higher costs associated with increased production
volumes.
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ENERGY PARTNERS, LTD.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
OPERATING EXPENSES
Operating expenses during the three and six month periods ended June 30, 2001
and 2000 were impacted by the following:
o Lease operating expense increased to $9.8 million in the second quarter of
2001 from $5.8 million in the second quarter of 2000. The increase was
attributable to additional production from 119 successful well operations,
which commenced production after the second quarter of 2000, $0.7 million
incurred on 8 workovers in May 2001 and repairs attributed to Tropical
Storm Allison.
Lease operating expense increased to $18.8 million in the first half of
2001 from $6.4 million in the first half of 2000. The increase was
primarily attributable to the acquisitions combined with additional
production from successful well operations and costs incurred for workovers
and repairs.
o Taxes, other than on earnings increased to $2.0 million in the second
quarter of 2001 from $1.5 million in the second quarter of 2000. The
increase was primarily attributable to the increase in production.
Taxes, other than on earnings increased to $3.8 million in the first half
of 2001 from $1.5 million in the first half of 2000. The increase was
primarily attributable to the acquisition of the East Bay field on March
31, 2000, where a portion of the production is subject to Louisiana
severance taxes and property taxes. Prior to that time, we did not hold an
interest in properties subject to these taxes.
o Depreciation, depletion and amortization increased to $11.6 million in the
second quarter of 2001 from $6.6 million in the second quarter of 2000.
Depreciation, depletion and amortization increased to $22.3 million in the
first half of 2001 from $8.3 million in the first half of 2000. The
increases were primarily due to increased production volumes and an
increased depreciable asset base resulting from the acquisitions and
drilling activities.
o Other general and administrative expenses increased to $4.9 million in the
second quarter of 2001 from $2.7 million in the second quarter of 2000. The
increase was primarily due to increased consultant fees ($0.6 million), the
hiring of additional personnel ($0.8 million) and increased insurance costs
($0.4 million) as a result of our increased operations.
Other general and administrative expenses increased to $8.8 million in the
first half of 2001 from $4.3 million in the first half of 2000. The
increase was primarily due to increased consultant fees ($1.0 million), the
hiring of additional personnel ($2.1 million), increased insurance costs
($0.7 million) and other costs associated with our acquisitions and growth.
o Non-cash stock-based compensation expense of $0.3 million was recognized in
the second quarter of 2001, a decrease from $1.2 million recognized in the
second quarter of 2000. Non-cash stock-based compensation expense of $1.1
million was recognized in the first half of 2001, a decrease from $1.2
million recognized in the first half of 2000. The expense relates to
restricted stock and stock option grants made in April and October 2000 and
will decrease as the grants vest.
OTHER INCOME AND EXPENSE
INTEREST. Interest expense decreased to $0.4 million in the second quarter
of 2001 from $2.7 million in the second quarter of 2000. Interest expense also
decreased for the year to date period to $0.9 million in 2001 from $3.1 million
in 2000. The decrease is a result of the repayment of borrowings under our bank
facility which had been drawn for the acquisitions completed on March 31, 2000.
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14
ENERGY PARTNERS, LTD.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
GAIN ON SALE OF OIL AND GAS ASSETS. On April 20, 2000, we sold a 50%
working interest in the South Timbalier 26 field, resulting in a gain of
approximately $7.8 million ($5.0 million after tax). Sales in 2001 are comprised
of equipment used for our oil and gas operations.
LIQUIDITY AND CAPITAL RESOURCES
We intend to use cash flows from operations and our revolving line of
credit to fund our future development, exploration and acquisition activities.
Our acquisitions in 2000 of the East Bay field, the South Timbalier 22, 23 and
27 interests and the additional interest in South Timbalier 26 field
significantly impacted our cash flows from operations. Our future cash flow from
operations will depend on our ability to maintain and increase production
through our development and exploration drilling program, as well as the prices
of oil and natural gas.
Our credit facility consists of a $65 million revolving line of credit
with a group of banks available through March 31, 2003 (the bank facility). The
bank facility bears interest at LIBOR plus 1.25% to 2.25% based on the level of
and utilization of the line of credit.
At August 3, 2001, we had $15 million outstanding and $50 million of credit
capacity available under the bank facility. The bank facility is secured by
substantially all of our assets.
Net cash of $62.7 million used in investing activities in the first six
months of 2001 consisted primarily of oil and gas property capital and
exploration expenditures. Exploration expenditures incurred are excluded from
operating cash flows and included in investing activities. During the first half
of 2001, we completed 15 drilling projects and 31 recompletion/workover
projects, 38 of which were successful. During the first half of 2000, we
completed 13 drilling projects and nine recompletion/workover projects, 19 of
which were successful. Cash and cash equivalents at June 30, 2001 were $4.3
million.
Our 2001 capital expenditure budget is focused on exploitation activities
on prospects with multiple reservoirs, which we expect to increase our
probability of success and to lead to accelerated payback of our investment.
These exploitation activities also provide exploratory potential in deeper
geologic formations. We have capital expenditure plans for the remaining six
months of 2001 totaling approximately $45 million. Actual levels of capital
expenditures may vary significantly due to many factors, including drilling
results, oil and natural gas prices, industry conditions, participation by other
working interest owners and the prices of drilling rigs and other oilfield goods
and services.
We have experienced and expect to continue to experience substantial
working capital requirements, primarily due to our active capital expenditure
program. We believe that working capital, cash flows from operations and
borrowings under our credit facility will be sufficient to meet our capital
requirements through the end of 2001. However, additional financing may be
required in the future to fund our growth and capital expenditures.
In July 2001, the Financial Accounting Standards Board issued new
pronouncements: Statement 141, Business Combinations, Statement 142, Goodwill
and Other Intangible Assets, and Statement 143, Accounting for Asset Retirement
Obligations. Statement 141, which requires the purchase method of accounting for
all business combinations, applies to all business combinations initiated after
June 30, 2001 and to all business combinations accounted for by the purchase
method that are completed after June 30, 2001. Statement 142 requires that
goodwill as well as other intangible assets be tested annually for impairment
and is effective for fiscal years beginning after December 15, 2001. Statement
143 requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred and a corresponding
increase in the carrying amount of the related long-lived asset. Statement 143
is effective for fiscal years beginning after June 15, 2002. Statements 141 and
142 will not apply to us unless we enter into a future business combination. We
are currently assessing the impact of Statement 143 on our financial condition
and results of operations.
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15
ENERGY PARTNERS, LTD.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
FORWARD LOOKING INFORMATION
Any statements made in this document, other than those of historical fact,
about an action, event or development, which we hope, believe or anticipate may
or will occur in the future, are "forward-looking statements" under U. S.
securities laws. Such statements are subject to various assumptions, risks and
uncertainties, which are specifically described in our Annual Report on Form
10-K for the year ended December 31, 2000. Forward-looking statements are not
guarantees of future performance or an assurance that the our current
assumptions and projections are valid. Actual results may differ materially from
those projected.
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ENERGY PARTNERS, LTD.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
We are exposed to changes in interest rates. Changes in interest rates
affect the interest earned on our cash and cash equivalents and the interest
rate paid on borrowings under the credit agreements. Under our current policies,
we do not use interest rate derivative instruments to manage exposure to
interest rate changes. At June 30, 2001, $10 million of our long-term debt had
variable interest rates.
COMMODITY PRICE RISK
Our revenues, profitability and future growth depend substantially on
prevailing prices for oil and natural gas. Prices also affect the amount of cash
flow available for capital expenditures and our ability to borrow and raise
additional capital. The amount we can borrow under the credit agreement is
subject to periodic redetermination based in part on changing expectations of
future prices. Lower prices may also reduce the amount of oil and natural gas
that we can economically produce. We currently sell all of our oil and natural
gas production under price sensitive or market price contracts.
We use derivative commodity instruments to manage commodity price risks
associated with future oil and natural gas production. Our crude oil commodity
price hedging program used only financially-settled crude oil forward sales
contracts through the second quarter of 2001. In April 2001, we expanded our
commodity price hedging program to include financially-settled crude oil collar
positions for the period July 2001 to December 2001 related to the sale of
552,000 barrels of oil with a floor of $24.00 per barrel and an average cap of
$32.17 per barrel.
We also have natural gas hedging positions, which utilize zero-cost collar
contracts. As of June 30, 2001, we had contracts maturing monthly through
December 2001 related to the net sale of 1,840,000 mmbtu of natural gas with a
floor of $3.00 per mmbtu and a cap of $9.00 per mmbtu.
We may in the future enter into these and other types of hedging
arrangements to reduce our exposure to fluctuations in the market prices of oil
and natural gas. Hedging transactions expose us to risk of financial loss in
some circumstances, including if production is less than expected, the other
party to the contract defaults on its obligations, or there is a change in the
expected differential between the underlying price in the hedging agreement and
actual prices received. Hedging transactions may limit the benefit we would have
otherwise received from increases in the prices for oil and natural gas.
Furthermore, if we do not engage in hedging transactions, we may be more
adversely affected by declines in oil and natural gas prices than our
competitors who engage in hedging transactions.
Our hedged volume as of June 30, 2001, approximated 29% of our estimated
production from proved reserves for the balance of 2001.
We use a sensitivity analysis technique to evaluate the hypothetical
effect that changes in the market value of crude oil may have on fair value of
our derivative instruments. At June 30, 2001, the potential change in the fair
value of commodity derivative instruments assuming a 10% adverse movement in the
underlying commodity price is a $0.6 million to $0.8 million increase in the
deferred asset.
For purposes of calculating the hypothetical change in fair value, the
relevant variables are the type of commodity (crude oil or natural gas), the
commodities futures prices and volatility of commodity prices. The hypothetical
fair value is calculated by multiplying the difference between the hypothetical
price and the contractual price by the contractual volumes.
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17
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO THE VOTE OF SECURITY HOLDERS
a) The annual meeting of the stockholders of the Company was held on May 2,
2001 (the "Annual Meeting").
b) At the Annual Meeting, the stockholders of the Company elected Richard A.
Bachmann, Austin M. Beutner, John C. Bumgarner, Jr., Harold D. Carter,
Robert D. Gershen, William O. Hiltz, Dr. Eamon M. Kelly and John G.
Phillips to serve as directors until the next annual meeting of
stockholders.
(c) The voting tabulation for the election of the eight directors is as
follows:
<Table>
<Caption>
DIRECTOR FOR WITHHELD
---------------------------------------------------------
Richard A. Bachmann 21,758,289 1,359,226
Austin M. Beutner 23,113,765 3,750
John C. Bumgarner, Jr. 21,615,189 1,502,326
Harold D. Carter 23,113,965 3,550
Robert D. Gershen 23,115,465 2,050
Willian O. Hiltz 23,113,965 3,550
Dr. Eamon M, Kelley 23,115,565 1,950
John G. Phillips 23,115,465 2,050
</Table>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K:
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENERGY PARTNERS, LTD.
Date: August 9, 2001 By: /s/ SUZANNE V. BAER
-------------------------------------------
Suzanne V. Baer
Executive Vice President and Chief Financial
Officer
(Authorized Officer and Principal
Financial Officer)
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18
INDEX TO EXHIBIT
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
None
</Table>
-18-