SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 2001 COMMISSION FILE NUMBER 001-14039
CALLON PETROLEUM COMPANY
------------------------
(Exact name of Registrant as specified in its charter)
<Table>
<Caption>
DELAWARE 64-0844345
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</Table>
200 NORTH CANAL STREET
NATCHEZ, MISSISSIPPI 39120
--------------------------
(Address of principal executive offices)(Zip code)
(601) 442-1601
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(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 X No
---. ---.
As of November 5, 2001, there were 13,397,706 shares of the Registrant's Common
Stock, par value $0.01 per share, outstanding.
CALLON PETROLEUM COMPANY
TABLE OF CONTENTS
<Table>
PAGE NO.
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<Caption>
PART I. FINANCIAL INFORMATION
---------------------
Consolidated Balance Sheets as of September 30, 2001
and December 31, 2000 3
Consolidated Statements of Operations for Each of the
Three and Nine Months in the Periods Ended September 30, 2001
and September 30, 2000 4
Consolidated Statements of Cash Flows for Each of the
Nine Months in the Periods Ended September 30, 2001 and
September 30, 2000 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Quantitative and Qualitative Disclosures about Market Risk 15
PART II. OTHER INFORMATION 16
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</Table>
2
CALLON PETROLEUM COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
ASSETS (UNAUDITED)
------
Current assets:
Cash and cash equivalents $ 6,883 $ 11,876
Accounts receivable 6,723 9,244
Advance to operators -- 1,131
Derivative asset-current portion 8,458 --
Other current assets 172 207
------------ ------------
Total current assets 22,236 22,458
------------ ------------
Oil and gas properties, full cost accounting method:
Evaluated properties 672,554 589,549
Less accumulated depreciation, depletion and amortization (393,115) (378,589)
------------ ------------
279,439 210,960
Unevaluated properties excluded from amortization 44,579 47,653
------------ ------------
Total oil and gas properties 324,018 258,613
------------ ------------
Pipeline and other facilities 5,448 5,537
Other property and equipment, net 2,509 1,790
Deferred tax asset -- 8,573
Long-term gas balancing receivable 567 643
Other assets, net 5,372 3,955
------------ ------------
Total assets $ 360,150 $ 301,569
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued liabilities $ 17,603 $ 17,842
Undistributed oil and gas revenues 1,343 1,411
Accrued net profits payable 1,798 2,146
Senior subordinated notes due 2002 36,000 --
------------ ------------
Total current liabilities 56,744 21,399
------------ ------------
Accounts payable and accrued liabilities to be refinanced 6,155 --
Long-term debt 137,702 134,000
Deferred revenue on sale of production payment interest 3,623 7,236
Deferred tax liability 325 --
Accrued retirement benefits 140 1,886
Long-term gas balancing payable 1,042 720
------------ ------------
Total liabilities 205,731 165,241
------------ ------------
Stockholders' equity:
Preferred stock, $0.01 par value, 2,500,000 shares authorized; 600,861 shares of 6 6
Convertible Exchangeable Preferred Stock, Series A, issued and outstanding with
a liquidation preference of $15,021,525
Common stock, $0.01 par value, 20,000,000 shares authorized; 13,387,067 and
13,327,675 outstanding at September 30, 2001 and at December 31, 2000,
respectively 134 133
Treasury stock (99,078 shares at cost) (1,183) (1,183)
Capital in excess of par value 153,747 151,223
Other comprehensive income 6,634 --
Retained earnings (deficit) (4,919) (13,851)
------------ ------------
Total stockholders' equity 154,419 136,328
------------ ------------
Total liabilities and stockholders' equity $ 360,150 $ 301,569
============ ============
</Table>
The accompanying notes are an integral part of these financial statements.
3
CALLON PETROLEUM COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Revenues:
Oil and gas sales $ 12,404 $ 15,960 $ 49,647 $ 39,720
Interest and other 311 462 1,592 1,536
---------- ---------- ---------- ----------
Total revenues 12,715 16,422 51,239 41,256
---------- ---------- ---------- ----------
Costs and expenses:
Lease operating expenses 3,238 2,295 8,963 6,449
Depreciation, depletion and amortization 4,722 4,568 14,773 12,885
General and administrative 843 992 3,545 2,964
Interest 3,508 2,103 8,742 5,949
---------- ---------- ---------- ----------
Total costs and expenses 12,311 9,958 36,023 28,247
---------- ---------- ---------- ----------
Income from operations 404 6,464 15,216 13,009
Income tax expense 142 2,197 5,326 4,423
---------- ---------- ---------- ----------
Net income 262 4,267 9,890 8,586
Preferred stock dividends 320 553 958 1,658
---------- ---------- ---------- ----------
Net income (loss) available to common shares $ (58) $ 3,714 $ 8,932 $ 6,928
========== ========== ========== ==========
Net income (loss) per common share:
Basic $ 0.00 $ 0.30 $ 0.67 $ 0.57
========== ========== ========== ==========
Diluted $ 0.00 $ 0.29 $ 0.67 $ 0.56
========== ========== ========== ==========
Shares used in computing net income (loss) per common share:
Basic 13,284 12,228 13,265 12,185
========== ========== ========== ==========
Diluted 13,407 14,968 13,412 12,476
========== ========== ========== ==========
</Table>
The accompanying notes are an integral part of these financial statements.
4
CALLON PETROLEUM COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2001 2000
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Cash flows from operating activities:
Net income $ 9,890 $ 8,586
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation, depletion and amortization 15,232 13,207
Amortization of deferred costs 1,610 704
Amortization of deferred production payment revenue (3,613) (3,626)
Deferred income tax expense 5,326 4,423
Noncash charge related to compensation plans 714 907
Changes in current assets and liabilities:
Accounts receivable 2,521 (2,985)
Advance to operators 1,131 --
Other current assets 35 (368)
Current liabilities (655) (1,527)
Change in gas balancing receivable 76 (161)
Change in gas balancing payable 322 6
Change in other long-term liabilities (1,746) (166)
Change in other assets, net (957) (271)
---------- ----------
Cash provided (used) by operating activities 29,886 18,729
---------- ----------
Cash flows from investing activities:
Capital expenditures (85,254) (68,531)
Cash proceeds from sale of mineral interests 1,195 821
---------- ----------
Cash provided (used) by investing activities (84,059) (67,710)
---------- ----------
Cash flows from financing activities:
Increase in accounts payable and accrued liabilities to be refinanced 6,155 --
Payment on debt (39,000) --
Increase in debt 85,000 26,000
Debt issuance cost (2,375) --
Equity issued related to employee stock plans 358 236
Cash dividends on preferred stock (958) (1,658)
---------- ----------
Cash provided (used) by financing activities 49,180 24,578
---------- ----------
Net increase (decrease) in cash and cash equivalents (4,993) (24,403)
Cash and cash equivalents:
Balance, beginning of period 11,876 34,671
---------- ----------
Balance, end of period $ 6,883 $ 10,268
========== ==========
</Table>
The accompanying notes are an integral part of these financial statements.
5
CALLON PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
1. BASIS OF PRESENTATION
The financial information presented as of any date other than December
31, has been prepared from the books of Callon Petroleum Company (The
"Company") and records without audit. Financial information as of
December 31, has been derived from the audited financial statements of
the Company, but does not include all disclosures required by generally
accepted accounting principles. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary
for the fair presentation of the financial information for the period
indicated, have been included. For further information regarding the
Company's accounting policies, refer to the Consolidated Financial
Statements and related notes for the year ended December 31, 2000
included in the Company's Annual Report on Form 10-K dated March 30,
2001.
Effective January 1, 2001, the Company adopted Statement of Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended ("SFAS 133"). SFAS 133 establishes accounting
and reporting standards requiring that derivative instruments,
including certain derivative instruments embedded in other contracts,
be recorded in the balance sheet as either an asset or a liability
measured at its fair value. Changes in the value of derivatives that
qualify as cash flow hedges, to the extent effective, are reported in
other comprehensive income, a component of stockholders' equity, until
realized. See Note 3.
In July 2001, the Financial Accounting Standards Board approved
Statement of Accounting Standards No. 143, Asset Retirement Obligations
("SFAS 143"). SFAS 143 will require that the fair value of abandonment
obligations be reflected as a liability, resulting in a corresponding
increase to the historical cost of the related assets and potentially
an adjustment for the cumulative effect of a change in accounting
principle. This standard is required to be adopted by the Company
beginning no later than January 1, 2003. The Company has not yet
determined timing or the impact of the adoption of SFAS 143.
2. PER SHARE AMOUNTS
Basic earnings per common share were computed by dividing net income by
the weighted average number of shares of common stock outstanding
during the quarter. Diluted earnings or loss per common share were
determined on a weighted average basis using common shares issued and
outstanding adjusted for the effect of stock options and warrants
considered common stock equivalents computed using the treasury stock
method and the effect of the convertible preferred stock (if dilutive).
The earnings per share computation for the quarter ended September 30,
2000 includes the conversion of preferred stock in the computation of
diluted income per share because the preferred stock was dilutive. The
conversion of the preferred stock was not included in the calculation
for the nine months ended September 30, 2000 and for the three and the
nine months ended September 30, 2001 due to the preferred stock's
antidilutive effect on diluted income or loss per share.
6
A reconciliation of the basic and diluted earnings per share computation is as
follows (in thousands, except per share amounts):
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(a) Net income available
for common stock $ (58) $ 3,714 $ 8,932 $ 6,928
Preferred dividends assuming
conversion of preferred stock
(if dilutive) $ -- $ 553 $ -- $ --
(b) Income available for common stock
assuming conversion of preferred
stock (if dilutive) $ (58) $ 4,267 $ 8,932 $ 6,928
(c) Weighted average shares outstanding 13,284 12,228 13,265 12,185
Dilutive impact of stock options -- 414 106 291
Dilutive impact of warrants 123 -- 41 --
Convertible preferred stock
(if dilutive) -- 2,326 -- --
(d) Total diluted shares 13,407 14,968 13,412 12,476
Stock options excluded due to
antidilutive impact 2,303 40 713 40
Basic income per share (a/c) $ 0.00 $ 0.30 $ 0.67 $ 0.57
Diluted income per share (b/d) $ 0.00 $ 0.29 $ 0.67 $ 0.56
</Table>
3. DERIVATIVES
The Company uses derivative financial instruments to manage oil and gas
price risks. Settlements of gains and losses on commodity price swap
contracts are generally based upon the difference between the contract
price or prices specified in the derivative instrument and a NYMEX
price and are reported as a component of oil and gas revenues.
Approximately $351,000 related to these financial instruments was
recognized as additional oil and gas revenue in the first nine months
of 2001 and $2.8 million was recognized as a reduction of oil and gas
revenue in the first nine months of 2000.
These 2001 contracts, in effect at September 30, 2001, are for gas
volumes of 400,000 Mcf for the month of October 2001 at a ceiling price
of $5.50 and floor price of $4.44. The Company had no open crude oil
contracts at September 30, 2001.
The Company also has natural gas collar contracts, in effect, for
January 2002 through December 2002. These agreements are for average
gas volumes of approximately 600,000 Mcf per month with a weighted
average ceiling price of $6.09 and floor price of $4.11.
As discussed in Note 1, the Company adopted SFAS 133 effective January
1, 2001. The cumulative effect of the accounting change, net of tax,
recorded as other comprehensive loss was
7
$3.8 million. In the first nine months of 2001, this amount was offset
by an increase in the fair value of derivatives recorded as other
comprehensive income, net of tax, of $10.4 million. Recorded in the
balance sheet is a $10.2 million derivative asset representing the fair
market value of the derivative financial instruments at September 30,
2001, of which approximately $8.5 million is classified as a current
asset.
4. LONG-TERM DEBT
In July 2001, the Company entered into a $95 million multiple advance
term loan with a private lender. The Company issued $45 million of 12%
senior notes upon closing of the loan and will issue the remaining $50
million of senior notes prior to June 30, 2002. Under the terms of the
agreement Callon also issued warrants to purchase, at a nominal
exercise price, 265,210 shares of its common stock and conveyed an
overriding royalty interest equal to 2% of the Company's net interest
in four existing deepwater discoveries. The warrants and the overriding
royalty interest will be earned by the lender based on the ratio of the
amount of the loan proceeds advanced to the total loan facility amount.
The senior notes will mature March 31, 2005 and contain restrictions on
certain types of future indebtedness.
The 10.125% Senior Subordinated Notes due September 15, 2002 have been
classified as a current liability.
5. COMPREHENSIVE INCOME
The first nine months of 2000 did not include any items of other
comprehensive income. A recap of the Company's 2001 comprehensive
income is shown below (in thousands):
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
------------------ ------------------
Net Income (loss) $ 262 $ 9,890
Other comprehensive income (loss):
Cumulative effect of change in
accounting principle $ -- $ (3,764)
Change in unrealized derivatives'
fair value 2,048 10,398
---------- ----------
2,048 6,634
---------- ---------
Total Comprehensive Income $ 2,310 $ 16,524
========== ---------
</Table>
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. All statements other than statements of historical facts included in
this report, including statements regarding the Company's financial position,
adequacy of resources, estimated reserve quantities, business strategies, plans,
objectives and expectations for future operations and covenant compliance, are
forward-looking statements. The Company can give no assurances that the
assumptions upon which such forward-looking statements are based will prove to
have been correct. Important factors that could cause actual results to differ
materially from the Company's expectations ("Cautionary Statements") are
disclosed below, in the section "Risk Factors" included in the Company's Form
10-K, elsewhere in this report and from time to time in other filings made by
the Company with the Securities and Exchange Commission. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified by the Cautionary Statements.
GENERAL
The Company's revenues, profitability, future growth and the carrying value of
its oil and gas properties are substantially dependent on prevailing prices of
oil and gas and its ability to find, develop and acquire additional oil and gas
reserves that are economically recoverable. The Company's ability to maintain or
increase its borrowing capacity and to obtain additional capital on attractive
terms is also influenced by oil and gas prices. Prices for oil and gas are
subject to large fluctuations in response to relatively minor changes in the
supply of and demand for oil and gas, market uncertainty and a variety of
additional factors beyond the control of the Company. These factors include
weather conditions in the United States, the condition of the United States
economy, the actions of the Organization of Petroleum Exporting Countries,
governmental regulations, political stability in the Middle East and elsewhere,
the foreign supply of oil and gas, the price of foreign imports and the
availability of alternate fuel sources. Any substantial and extended decline in
the price of oil or gas would have an adverse effect on the Company's carrying
value of its proved reserves, borrowing capacity, revenues, profitability and
cash flows from operations. The Company uses derivative financial instruments
for price protection purposes on a limited amount of its future production but,
does not use derivative financial instruments for trading purposes.
The following discussion is intended to assist in an understanding of the
Company's historical financial positions and results of operations. The
Company's historical financial statements and notes thereto included elsewhere
in this quarterly report contains detailed information that should be referred
to in conjunction with the following discussion.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital are its cash flows from operations,
borrowings from financial institutions and the sale of debt and equity
securities. Net cash and cash equivalents during the nine months ended September
30, 2001 decreased by $5.0 million and net cash flows from operations before
working capital changes totaled $32.8 million. Net capital expenditures from the
cash flow statement for the period
9
totaled $84.1 million. These funds were primarily expended in exploration,
drilling and completion of oil and gas properties.
At September 30, 2001, the Company had working capital of $1.5 million,
excluding current maturities of long-term debt.
In May 2001, the Company initiated a combination of offerings of equity and
senior notes to investors with proceeds to be used to call certain of the
Company's subordinated debt, repay borrowings under its senior secured credit
facility and to finance capital expenditures. Subsequently, the Company withdrew
its offer to sell the senior notes and the equity sale was terminated.
Approximately $358,000 of costs associated with the withdrawn offering were
expensed during the second quarter.
In early July of 2001, the Company closed a $95 million multiple advance term
loan with a private lender. The Company drew $45 million on July 3, 2001 and
paid down its revolving Credit Facility. The Company plans to draw the remaining
$50 million as capital expenditures (primarily on the deepwater Medusa
construction and completion project) are incurred. Under the terms of the
agreement, Callon also issued warrants for the purchase, at a nominal exercise
price, of 265,210 shares of its common stock to the lender and conveyed an
overriding royalty interest equal to 2% of the company's net interest in four of
its deepwater discoveries. The warrants and the overriding royalty interest will
be earned by the lender based on the ratio of the amount of the loan proceeds
advanced to the total loan facility amount. All amounts under the loan must be
drawn before June 30, 2002. This senior debt will mature March 31, 2005 and
contains restrictions on certain types of future indebtedness and dividends on
common stock.
The proceeds from this financing, when combined with cash flow and current
availability under the senior secured credit facility, is anticipated to fund
our capital budgets for the balance of this year, and into next year. This would
include completion of the Medusa deepwater discovery, currently scheduled to
begin production in the fourth quarter of 2002. It also includes ongoing
delineation and development drilling programs at three additional deepwater
discoveries, and an ongoing exploration program in both the shelf and deepwater
regions of the Gulf of Mexico. However, additional capital requirements may
result from greater than anticipated success rates from the Company's ongoing
shelf and deepwater exploration programs and the refinancing of our senior
subordinated notes due 2002. The Company is currently evaluating options on
refinancing the senior subordinated notes due 2002.
CAPITAL EXPENDITURES
Capital expenditures for exploration and development costs related to oil and
gas properties totaled approximately $84 million in the first nine months of
2001. The Company incurred approximately $55 million in the Gulf of Mexico Shelf
area. The Gulf of Mexico Deepwater area expenditures and other capitalized costs
accounted for the remainder of the total capital expended. The Company had one
unsuccessful deepwater exploration project in the first nine months of 2001 and
incurred $13.2 million for additional development costs for production
facilities at the Company's Medusa discovery. Interest and general and
administrative costs allocable directly to exploration and development projects
were approximately $9.4 million for the first nine months of 2001.
For the remainder of the year, the Company will continue evaluating property
acquisitions and drilling opportunities. The Company has budgeted up to $31
million in capital expenditures for the remainder of
10
2001. The major portion of the capital expenditure budget will be used to drill
development and exploratory wells to increase total proved reserves and increase
production for the Company. The capital budget includes $13 million of
additional development costs for production facilities at the Company's Medusa
discovery.
RESULTS OF OPERATIONS
The following table sets forth certain unaudited operating information with
respect to the Company's oil and gas operations for the periods indicated.
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Production volumes: (b)
Oil (MBbls) 76 56 196 186
Gas (MMcf) 3,258 3,950 10,238 10,956
Total production (MMcfe) 3,713 4,285 11,414 12,072
Average daily production (MMcfe) 40.4 46.6 41.8 44.1
Average sales price: (a)(b)
Oil (Bbls) $ 24.28 $ 29.37 $ 25.04 $ 27.42
Gas (Mcf) 3.38 3.63 4.41 3.16
Total (Mcfe) 3.46 3.72 4.39 3.29
Average costs (per Mcfe):
Lease operating (excluding severance taxes) $ 0.74 $ 0.49 $ 0.66 $ 0.48
Severance taxes 0.13 0.05 0.12 0.06
Depletion 1.25 1.05 1.27 1.05
General and administrative (net of management fees) 0.23 0.23 0.31 0.25
</Table>
(a) Includes hedging gains and losses.
(b) Includes volumes of 587 MMcf for both three month periods ended
September 30, 2001 and 2000 and 1,740 MMcf and 1,747 MMcf for the nine
month periods ended September 30, 2001 and 2000, respectively, at an
average price of $2.08 per Mcf associated with a volumetric production
payment.
11
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2001 AND THE THREE MONTHS ENDED SEPTEMBER 30, 2000.
Oil and Gas Production and Revenues
Total oil and gas revenues decreased 23% from $16.0 million in the third quarter
of 2000 to $12.4 million in the third quarter of 2001. Both oil and gas prices
declined when compared to the same period in 2000. Total production for the
third quarter of 2001 decreased by 13% versus the third quarter of 2000.
Gas production during the third quarter of 2001 totaled 3.3 billion cubic feet
and generated $11.0 million in revenues compared to 4.0 billion cubic feet and
$14.3 million in revenues during the same period in 2000. The average sales
price for the third quarter of 2001 averaged $3.38 per thousand cubic feet
compared to $3.63 per thousand cubic feet at this time last year. The Company's
third quarter gas production decreased when compared to the same quarter last
year as a result of production declines at East Cameron 275 and South Marsh
Island 261, offset by increases in production at Mobile Block 864 and Chandeleur
Block 40. The production declines at East Cameron 275 and South Marsh Island 261
were normal and expected as the 2000 rates were indicative of higher initial
production. Mobile Block 864 Area increased production due to a well stimulation
program as well as additions to production through exploratory and developmental
drilling on the property.
Oil production during the third quarter of 2001 totaled 76,000 barrels and
generated $1.8 million in revenues compared to 56,000 barrels and $1.6 million
in revenues for the same period in 2000. Average oil prices received in the
third quarter of 2001 were $24.28 compared to $29.37 in 2000. The increase in
production was primarily due to an increase in oil production at Main Pass 36
and the addition of oil production at South Marsh Island 261.
Lease Operating Expenses
Lease operating expenses, including severance taxes, for the three-month period
ending September 30, 2001 were $3.2 million compared to $2.3 million for the
same period in 2000. The increase was attributable to higher operating costs at
South Marsh Island 261 and at Mobile Block 864. Also, production declines
related to older properties that have relatively fixed operating costs
contributed to the higher per Mcf costs with lower production levels for those
properties in the three months ended September 30, 2001.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization for the three months ending September
30, 2001 and 2000 were $4.7 million and $4.6 million, respectively. This
increase is primarily due to a higher average rate in the third quarter of 2001
reflecting an increase in capitalized cost.
12
General and Administrative
General and administrative expense decreased $149,000 for the three months ended
September 30, 2001 as compared to the three months ended September 30, 2000.
This decrease was due primarily to an increase in direct costs capitalized
associated with development of the Company's deepwater discoveries.
Interest Expense
Interest expense increased from $2.1 million during the three months ended
September 30, 2000 to $3.5 million during the three months ended September 30,
2001. This is a result of an increase in the Company's long-term debt as well as
higher interest rates associated with additional debt incurred in 2001.
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
AND THE NINE MONTHS ENDED SEPTEMBER 30, 2000.
Oil and Gas Production and Revenues
Total oil and gas revenues increased 25% from $39.7 million in the first nine
months of 2000 to $49.6 million in the first nine months of 2001. Gas prices
were higher while oil prices declined when compared to the same period in 2000.
Total production for the first nine months of 2001 decreased by 5% versus the
first nine months of 2000.
Gas production during the first nine months of 2001 totaled 10.2 billion cubic
feet and generated $45.1 million in revenues compared to 11.0 billion cubic feet
and $34.8 million in revenues during the same period in 2000. The average sales
price for the first nine months of 2001 averaged $4.41 per thousand cubic feet
compared to $3.16 per thousand cubic feet at this time last year. The Company's
gas production decreased when compared to the same period last year as a result
of expected and normal declines in maturing properties along with increased
production in the Mobile Block 864 Area due to a well stimulation program as
well as additions to production through exploratory and developmental drilling
on the property.
Oil production during the first nine months of 2001 totaled 196,000 barrels and
generated $4.9 million in revenues compared to 186,000 barrels and $5.1 million
in revenues for the same period in 2000. Average oil prices received in the
first nine months of 2001 were $25.04 compared to $27.42 in 2000. The increase
in production was primarily due to an increase in oil production at Main Pass 36
and the addition of oil production at South Marsh Island 261.
Lease Operating Expenses
Lease operating expenses, including severance taxes, for the nine month period
ending September 30, 2001 were $9.0 million compared to $6.4 million for the
same period in 2000. The increase was due primarily to South Marsh Island 261
initial production beginning in May 2000, whereas 2001 incurred a full nine
months of lease operating expenses and higher operating expenses associated with
increased production at Mobile Block 864. Also, production declines related to
older properties that have relatively fixed operating costs contributed to the
higher per Mcf costs with lower production levels for those properties in the
nine months ended September 30, 2001.
13
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization for the nine months ending September
30, 2001 and 2000 were $14.8 million and $12.9 million, respectively. This
increase is primarily due to a higher average rate in the first nine months of
2001 reflecting an increase in capitalized costs.
General and Administrative
General and administrative expense increased to $3.5 million for the nine months
ended September 30, 2001 as compared to $3.0 million for the nine months ended
September 30, 2000. This increase was due primarily to expenses incurred in the
second quarter of 2001 related to the Company's withdrawn debt and equity
offering.
Interest Expense
Interest expense increased from $5.9 million during the nine months ended
September 30, 2000 to $8.7 million during the nine months ended September 30,
2001. This is a result of an increase in the Company's long-term debt and higher
interest rate associated with additional debt incurred in 2001.
14
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's revenues are derived from the sale of its crude oil and natural
gas production. In recent months, the prices for oil and gas have decreased;
however, they remain extremely volatile and sometimes experience large
fluctuations as a result of relatively small changes in supplies, weather
conditions, economic conditions and government actions. The Company enters into
derivative financial instruments to hedge oil and gas price risks for the
production volumes to which the hedge relates. The derivatives reduce the
Company's exposure on the hedged volumes to decreases in commodity prices and
limit the benefit the Company might otherwise have received from any increases
in commodity prices on the hedged volumes.
The Company also enters into price "collars" to reduce the risk of changes in
oil and gas prices. Under these arrangements, no payments are due by either
party so long as the market price is above the floor price set in the collar and
below the ceiling. If the price falls below the floor, the counter-party to the
collar pays the difference to the Company and if the price is above the ceiling,
the counter-party receives the difference from the Company. The Company enters
into these various agreements to reduce the effects of volatile oil and gas
prices and does not enter into hedge transactions for speculative purposes. See
Note 3 to the Consolidated Financial Statements for a description of the
Company's hedged position at September 30, 2001. There have been no significant
changes in market risks faced by the Company since the end of 2000.
15
CALLON PETROLEUM COMPANY
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a.) Exhibits
2. Plan of acquisition, reorganization, arrangement,
liquidation or succession*
3. Articles of Incorporation and By-Laws
3.1 Certificate of Incorporation of the Company,
as amended (incorporated by reference from
Exhibit 3.1 of the Company's Registration
Statement on Form S-4, filed August 4, 1994,
Reg. No. 33-82408)
3.2 Certificate of Merger of Callon Consolidated
Partners, L. P. with and into the Company
dated September 16, 1994 (incorporated by
reference from Exhibit 3.2 of the Company's
Annual Report on Form 10-K for the period
ended December 31, 1994, File No. 000-25192)
3.3 Bylaws of the Company (incorporated by
reference from Exhibit 3.2 of the Company's
Registration Statement on Form S-4, filed
August 4, 1994, Reg. No. 33-82408)
4. Instruments defining the rights of security holders,
including indentures
4.1 Specimen stock certificate (incorporated by
reference from Exhibit 4.1 of the Company's
Registration Statement on Form S-4, filed
August 4, 1994, Reg. No. 33-82408)
4.2 Specimen Preferred Stock Certificate
(incorporated by reference from Exhibit 4.2
of the Company's Registration Statement on
Form S-1, Reg. No. 33-96700)
4.3 Designation for Convertible Exchangeable
Preferred Stock, Series A (incorporated by
reference from Exhibit 4.3 of the Company's
Registration Statement on Form S-1/A, filed
November 13, 1995, Reg. No. 33-96700)
16
4.4 Indenture for Convertible Debentures
(incorporated by reference from Exhibit 4.4
of the Company's Registration Statement on
Form S-1, filed November 13, 1995, Reg. No.
33-96700)
4.5 Certificate of Correction on Designation of
Series A Preferred Stock (incorporated by
reference from Exhibit 4.4 of the Company's
Registration Statement on Form S-1, filed
November 22, 1996, Reg. No. 333-15501)
4.6 Indenture for the Company's 10.125% Senior
Subordinated Notes due 2002 dated as of July
31, 1997 (incorporated by reference from
Exhibit 4.1 of the Company's Registration
Statement on Form S-4, filed September 25,
1997, Reg. No. 333-36395)
4.7 Form of Note Indenture for the Company's
10.25% Senior Subordinated Notes due 2004
(incorporated by reference from Exhibit 4.10
of the Company's Registration Statement on
Form S-2, filed June 14, 1999, Reg. No.
333-80579)
4.8 Rights Agreement between Callon Petroleum
Company and American Stock Transfer & Trust
Company, Rights Agent, dated March 30, 2000
(incorporated by reference from Exhibit 99.1
of the Company's Registration Statement on
Form 8-A, filed April 6, 2000, File No. 001-
14039)
4.9 Subordinated Indenture for the Company dated
October 26, 2000 (incorporated by reference
from Exhibit 4.1 of the Company's Current
Report on Form 8-K dated October 24, 2000,
File No. 001-14039)
4.10 Supplemental Indenture for the Company's 11%
Senior Subordinated Notes due 2005
(incorporated by reference from Exhibit 4.2
of the Company's Current Report on Form 8-K
dated October 24, 2000, File No. 001-14039)
4.11 Warrant dated as of June 29, 2001 entitling
Duke Capital Partners, LLC to purchase
common stock from the Company. (Incorporated
by reference to Exhibit 4.11 of the
Company's Quarterly Report on Form 10-Q for
the period ended June 30, 2001, File No.
001-14039)
10. Material contracts
10.1 Credit Agreement dated as of June 29, 2001
between the Company and Duke Capital
Partners, LLC, as Administrative Agent
(Incorporated by reference to Exhibit 10.01
of the Company's Quarterly Report on Form
10-Q for the period ended June 30, 2001,
File No. 001-14039)
17
10.2 Second Amendment to Credit Agreement by and
among the Company and First Union National
Bank, as Administrative Agent, effective as
of June 29, 2001 (Incorporated by reference
to Exhibit 10.01 of the Company's Quarterly
Report on Form 10-Q for the period ended
June 30, 2001, File No. 001-14039)
10.3 Conveyance of Overriding Royalty Interest
from the Company to Duke Capital Partners,
LLC, dated June 29, 2001 (Incorporated by
reference to Exhibit 10.03 of the Company's
Quarterly Report on Form 10-Q for the period
ended June 30, 2001, File No. 001-14039)
11. Statement re computation of per share earnings*
15. Letter re unaudited interim financial information*
18. Letter re change in accounting principles*
19. Report furnished to security holders*
22. Published report regarding matters submitted to vote
of security holders*
23. Consents of experts and counsel*
24. Power of attorney*
99. Additional exhibits*
*Inapplicable to this filing
(b) Reports on Form 8-K
Current Report dated July 5, 2001, reporting Item 5. Other
Events
18
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.
CALLON PETROLEUM COMPANY
Date: November 9, 2001 By:/s/ John S. Weatherly
---------------- ----------------------
John S. Weatherly, Senior Vice President
and Chief Financial Officer
(on behalf of the registrant and as the
principal financial officer)
19
Exhibits Index
- --------------
2. Plan of acquisition, reorganization, arrangement, liquidation or
succession*
3. Articles of Incorporation and By-Laws
3.1 Certificate of Incorporation of the Company, as amended
(incorporated by reference from Exhibit 3.1 of the Company's
Registration Statement on Form S-4, filed August 4, 1994, Reg.
No. 33-82408)
3.2 Certificate of Merger of Callon Consolidated Partners, L. P
with and into the Company dated September 16, 1994
(incorporated by reference from Exhibit 3.2 of the Company's
Annual Report on Form 10-K for the period ended December 31,
1994, File No. 000-25192)
3.3 Bylaws of the Company (incorporated by reference from Exhibit
3.2 of the Company's Registration Statement on Form S-4, filed
August 4, 1994, Reg. No. 33-82408)
4. Instruments defining the rights of security holders, including
indentures
4.1 Specimen stock certificate (incorporated by reference from
Exhibit 4.1 of the Company's Registration Statement on Form
S-4, filed August 4, 1994, Reg. No. 33-82408)
4.2 Specimen Preferred Stock Certificate (incorporated by
reference from Exhibit 4.2 of the Company's Registration
Statement on Form S-1, Reg. No. 33-96700)
4.3 Designation for Convertible Exchangeable Preferred Stock,
Series A (incorporated by reference from Exhibit 4.3 of the
Company's Registration Statement on Form S-1/A, filed November
13, 1995, Reg. No. 33-96700)
4.4 Indenture for Convertible Debentures (incorporated by
reference from Exhibit 4.4 of the Company's Registration
Statement on Form S-1, filed November 13, 1995, Reg. No.
33-96700)
4.5 Certificate of Correction on Designation of Series A Preferred
Stock (incorporated by reference from Exhibit 4.4 of the
Company's Registration Statement on Form S-1, filed November
22, 1996, Reg. No. 333-15501)
4.6 Indenture for the Company's 10.125% Senior Subordinated Notes
due 2002 dated as of July 31, 1997 (incorporated by reference
from
1
Exhibit 4.1 of the Company's Registration Statement on
Form S-4, filed September 25, 1997, Reg. No. 333-36395)
4.7 Form of Note Indenture for the Company's 10.25% Senior
Subordinated Notes due 2004 (incorporated by reference from
Exhibit 4.10 of the Company's Registration Statement on Form
S-2, filed June 14, 1999, Reg. No. 333-80579)
4.8 Rights Agreement between Callon Petroleum Company and American
Stock Transfer & Trust Company, Rights Agent, dated March 30,
2000 (incorporated by reference from Exhibit 99.1 of the
Company's Registration Statement on Form 8-A, filed April 6,
2000, File No. 001-14039)
4.9 Subordinated Indenture for the Company dated October 26, 2000
(incorporated by reference from Exhibit 4.1 of the Company's
Current Report on Form 8-K dated October 24, 2000, File No.
001-14039)
4.10 Supplemental Indenture for the Company's 11% Senior
Subordinated Notes due 2005 (incorporated by reference from
Exhibit 4.2 of the Company's Current Report on Form 8-K dated
October 24, 2000, File No. 001-14039)
4.11 Warrant dated as of June 29, 2001 entitling Duke Capital
Partners, LLC to purchase common stock from the Company.
(Incorporated by reference to Exhibit 4.11 of the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
2001, File No. 001-14039)
10. Material contracts
10.1 Credit Agreement dated as of June 29, 2001 between the Company
and Duke Capital Partners, LLC, as Administrative Agent
(Incorporated by reference to Exhibit 10.01 of the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
2001, File No. 001-14039)
10.2 Second Amendment to Credit Agreement by and among the Company
and First Union National Bank, as Administrative Agent,
effective as of June 29, 2001 (Incorporated by reference to
Exhibit 10.01 of the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 2001, File No. 001-14039)
10.3 Conveyance of Overriding Royalty Interest from the Company to
Duke Capital Partners, LLC, dated June 29, 2001 (Incorporated
by reference to Exhibit 10.03 of the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 2001, File
No. 001-14039)
2
11. Statement re computation of per share earnings*
15. Letter re unaudited interim financial information*
18. Letter re change in accounting principles*
19. Report furnished to security holders*
22. Published report regarding matters submitted to vote of security
holders*
23. Consents of experts and counsel*
24. Power of attorney*
99. Additional exhibits*
*Inapplicable to this filing
3