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 March 31, 2003
[ ] 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer(as
defined by Rule 12b-2 of the Acts). Yes [X] No [ ]
As of May 1, 2003, there were 31,937,711 shares of the Registrant's Common
Stock, par value $0.01 per share, outstanding.
================================================================================
-1-
TABLE OF CONTENTS
<Table>
<Caption>
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 2003 and
December 31, 2002............................................................................3
Consolidated Statements of Operations for the three months ended
March 31, 2003 and 2002......................................................................4
Consolidated Statements of Cash Flows for the three months ended
March 31, 2003 and 2002......................................................................5
Notes to Consolidated Financial Statements .......................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................................12
Item 3. Quantitative and Qualitative Disclosures about Market Risk......................................16
Item 4. Controls and Procedures.........................................................................17
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................................18
</Table>
-2-
ITEM 1. FINANCIAL STATEMENTS
ENERGY PARTNERS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<Table>
<Caption>
March 31, December 31,
2003 2002
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,883 $ 116
Trade accounts receivable -- net of allowance for
doubtful accounts of $1,351 in 2003 and 2002 46,532 25,824
Deferred tax asset 1,015 1,221
Prepaid expenses 1,165 1,868
------------ ------------
Total current assets 51,595 29,029
Property and equipment, at cost under the successful efforts
method of accounting for oil and gas properties 522,778 471,840
Less accumulated depreciation, depletion and amortization (146,061) (121,034)
------------ ------------
Net property and equipment 376,717 350,806
Other assets 4,061 3,463
Deferred financing costs -- net of accumulated amortization
of $2,451 in 2003 and $2,365 in 2002 836 922
------------ ------------
$ 433,209 $ 384,220
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 20,906 $ 8,869
Accrued expenses 28,445 43,533
Fair value of commodity derivative instruments 2,820 3,392
Current maturities of long-term debt 94 92
------------ ------------
Total current liabilities 52,265 55,886
Long-term debt 118,663 103,687
Deferred income taxes 17,001 9,033
Other 38,553 23,692
------------ ------------
226,482 192,298
Stockholders' equity:
Preferred stock, $1 par value, authorized
1,700,000 shares; 373,591 issued
and outstanding; aggregate liquidation
value $37,359,082 34,703 35,359
Common stock, par value $0.01 per share. Authorized
50,000,000 shares; issued and outstanding:
2003 - 27,710,910 shares; 2002 - 27,550,466
shares 277 276
Additional paid-in capital 189,088 187,965
Accumulated other comprehensive loss (1,805) (2,171)
Accumulated deficit (15,536) (29,507)
------------ ------------
Total stockholders' equity 206,727 191,922
Commitments and contingencies
------------ ------------
$ 433,209 $ 384,220
============ ============
</Table>
See accompanying notes to consolidated financial statements.
-3-
ENERGY PARTNERS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
(In thousands, except per share data)
<Table>
<Caption>
2003 2002
------------ ------------
Revenue:
Oil and natural gas $ 56,954 $ 29,541
Other 283 (416)
------------ ------------
57,237 29,125
------------ ------------
Costs and expenses:
Lease operating 8,017 8,800
Taxes, other than on earnings 2,371 1,550
Exploration expenditures and dry hole costs 1,307 2,322
Depreciation, depletion and amortization 17,572 16,383
General and administrative:
Stock-based compensation 126 127
Severance costs -- 1,211
Other general and administrative 7,439 6,253
------------ ------------
Total costs and expenses 36,832 36,646
------------ ------------
Income (loss) from operations 20,405 (7,521)
------------ ------------
Other income (expense):
Interest income 21 22
Interest expense (1,821) (1,601)
------------ ------------
(1,800) (1,579)
------------ ------------
Income (loss) before income taxes and cumulative
effect of change in accounting principle 18,605 (9,100)
Income taxes (6,691) 3,286
------------ ------------
Income (loss) before cumulative effect of change
in accounting principle 11,914 (5,814)
Cumulative effect of change in accounting principle,
net of income taxes of $1,276 2,268 --
------------ ------------
Net income (loss) 14,182 (5,814)
Less dividends earned on preferred stock and accretion of
discount and issuance costs (855) (724)
------------ ------------
Net income (loss) available to common
stockholders $ 13,327 $ (6,538)
============ ============
Earnings per share:
Basic:
Before cumulative effect of change in accounting principle $ 0.40 $ (0.24)
Cumulative effect of change in accounting principle $ 0.08 $ --
------------ ------------
Basic earnings (loss) per share $ 0.48 $ (0.24)
============ ============
Diluted:
Before cumulative effect of change in accounting principle $ 0.37 $ (0.24)
Cumulative effect of change in accounting principle $ 0.07 $ --
------------ ------------
Diluted earnings (loss) per share $ 0.44 $ (0.24)
============ ============
Weighted average common shares used in
Computing income (loss) per share:
Basic 27,651 27,371
Incremental common shares 4,850 --
------------ ------------
Diluted 32,501 27,371
============ ============
</Table>
See accompanying notes to consolidated financial statements.
-4-
ENERGY PARTNERS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
(In thousands)
<Table>
<Caption>
2003 2002
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 14,182 $ (5,814)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of change in accounting principle, net of tax (2,268) --
Depreciation, depletion and amortization 17,572 16,383
Gain on sale of oil and natural gas assets (207) --
Amortization of deferred revenue -- (868)
Stock-based compensation 126 127
Deferred income taxes 6,691 (3,286)
Exploration expenditures 311 1,828
Non-cash effect of derivative instruments -- 514
Amortization of deferred financing costs 86 59
Other 50 --
------------ ------------
36,543 8,943
Changes in operating assets and liabilities, net of acquisition in
2002:
Trade accounts receivable (20,708) (2,419)
Prepaid expenses 703 662
Other assets (598) (511)
Accounts payable and accrued expenses 8,996 (13,943)
Other liabilities (144) 31
------------ ------------
Net cash provided by (used in) operating activities 24,792 (7,237)
------------ ------------
Cash flows used in investing activities:
Acquisition of business, net of cash acquired (850) (10,661)
Property acquisitions (883) (265)
Exploration and development expenditures (35,493) (7,875)
Other property and equipment additions (95) (77)
Proceeds from sale of oil and natural gas assets 238 --
------------ ------------
Net cash used in investing activities (37,083) (18,878)
------------ ------------
Cash flows provided by financing activities:
Bank overdraft -- (808)
Repayments of long-term debt (22) (7,022)
Proceeds from long-term debt 15,000 35,000
Exercise of stock options and warrants 80 --
------------ ------------
Net cash provided by financing activities 15,058 27,170
------------ ------------
Net increase in cash and cash equivalents 2,767 1,055
Cash and cash equivalents at beginning of period 116 --
------------ ------------
Cash and cash equivalents at end of period $ 2,883 $ 1,055
============ ============
</Table>
See accompanying notes to consolidated financial statements.
-5-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(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 Energy Partners, Ltd.'s (the
Company) Annual Report on Form 10-K for the year ended December 31, 2002 and
Management's Discussion and Analysis of Financial Condition and Results of
Operations. The Company maintains a website at www.eplweb.com which contains
information about the Company including links to the Company's Annual Report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all
related amendments. The Company's web site and the information contained in it
and connected to it shall not be deemed incorporated by reference into this
Report on Form 10-Q.
The financial information as of March 31, 2003 and for the three months
ended March 31, 2003 and 2002 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 three months
of the year are not necessarily indicative of the results of operations, which
might be expected for the entire year.
(2) STOCK-BASED COMPENSATION
The Company has two stock award plans, the Amended and Restated 2000
Long Term Stock Incentive Plan and the 2000 Stock Option Plan for Non-Employee
Directors (the Plans). The Company accounts for its stock-based compensation in
accordance with Accounting Principles Board's Opinion No. 25, "Accounting For
Stock Issued to Employees" (Opinion No. 25). However, Statement of Financial
Accounting Standards No. 123 (Statement 123), "Accounting For Stock-Based
Compensation" and Statement of Financial Accounting Standards No. 148,
"Accounting For Stock-Based Compensation - Transition and Disclosure,"
(Statement 148) permits the continued use of the intrinsic value-based method
prescribed by Opinion No. 25, but requires additional disclosures, including
pro-forma calculations of earnings and net earnings per share as if the fair
value method of accounting prescribed by Statement 123 had been applied. There
were no options granted in the first quarter 2003. Accordingly, the pro forma
stock option expense was calculated using the assumptions as described in our
Form 10-K for the year ended December 31, 2002. If compensation expense for the
Plans had been determined using the fair-value method in Statement 123, the
Company's net income (loss) and earnings (loss) per share would have been as
follows (in thousands, except per share amounts):
-6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
<Table>
<Caption>
Three Months Ended
March 31,
--------------------------------
2003 2002
------------ ------------
Net income (loss) available to common stockholders:
As reported ............................................................ $ 13,327 $ (6,538)
Pro forma .............................................................. $ 13,046 $ (7,142)
Basic earnings (loss) per share:
As reported ............................................................ $ 0.48 $ (0.24)
Pro forma .............................................................. $ 0.47 $ (0.26)
Diluted earnings (loss) per share:
As reported ............................................................ $ 0.44 $ (0.24)
Pro forma .............................................................. $ 0.43 $ (0.26)
Stock-option based employee compensation cost,
net of tax, included in net income (loss) as reported ................... $ 28 $ 125
</Table>
(3) BUSINESS COMBINATION
On January 15, 2002, the Company closed the acquisition of Hall-Houston Oil
Company (HHOC). The results of HHOC's operations have been included in the
Company's consolidated financial statements since that date. HHOC was an oil and
gas exploration and production company with operations focused in the shallow
waters of the Gulf of Mexico. As a result of the acquisition, the Company has a
strengthened management team, expanded exploration opportunities as well as a
reserve portfolio and production that are more balanced between oil and natural
gas.
The acquisition was completed for $38.4 million liquidation preference of
newly authorized and issued Series D Exchangeable Convertible Preferred Stock
(the Series D Preferred Stock), with a fair value of $34.7 million discounted to
give effect to the increasing dividend rate, $38.4 million of 11% Senior
Subordinated Notes (the Notes) due 2009 (immediately callable at par), 574,931
shares of common stock with a fair value of approximately $3.0 million
determined based on the average market price of the Company's common stock over
the period of two days before and after the terms of the acquisition were agreed
to and announced. We also paid $9.0 million of cash including $3.9 million of
accrued interest and prepayment fees paid to former debt holders, and warrants
to purchase four million shares of the Company's common stock. Of the warrants,
one million have a strike price of $9.00 and three million have a strike price
of $11.00 per share. The warrants had a fair value of approximately $3.0 million
based on a third party valuation. In addition, the Company incurred
approximately $3.6 million of expenses in connection with the acquisition and
assumed HHOC's working capital deficit.
In addition, former preferred stockholders of HHOC have the right to
receive contingent consideration based upon a percentage of the amount by which
the before tax net present value of proved reserves related, in general, to
exploratory prospect acreage held by HHOC as of the closing date of the
acquisition (the Ring-Fenced Properties) exceeds the net present value
discounted at 30%. The potential consideration is determined annually beginning
March 3, 2003 and ending March 1, 2007. The cumulative percentage remitted to
the participants is 20% for March 3, 2003, 30% for March 1, 2004, 35% for March
1, 2005, 40% for March 1, 2006 and 50% for March 1, 2007. The contingent
consideration, if any, may be paid in the Company's common stock or cash at the
Company's option (with a minimum of 20% in cash) and in no event will exceed a
value of $50 million. On March 17, 2003, the Company capitalized, as
-7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
additional purchase price, and paid additional consideration of $0.9 million
related to the March 3, 2003 contingent consideration payment date. Due to the
uncertainty inherent in estimating the value of future contingent consideration
which includes annual revaluations based upon, among other things, drilling
results from the date of the prior revaluation, and development, operating and
abandonment costs and production revenues (actual historical and future
projected, as contractually defined, as of each revaluation date) for the
Ring-Fenced Properties, total final consideration will not be determined until
March 1, 2007. All additional contingent consideration will be capitalized as
additional purchase price.
Following the completion of the acquisition, management of the Company
assessed the technical and administrative needs of the combined organization. As
a result, 14 redundant positions were eliminated including finance,
administrative, geophysical and engineering positions in New Orleans and
Houston. All terminated employees were informed of their termination date and
severance benefits prior to March 31, 2002. Total severance costs under the plan
was $1.2 million.
(4) 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. Diluted earnings per share reflects the potential dilution that
could occur if the Company's convertible preferred stock, options and warrants
were converted to common stock.
The following table reconciles the net earnings and common shares
outstanding used in the calculations of basic and diluted earnings per share for
the three months ended March 31, 2003. The diluted loss per share calculation
for the three months ended March 31, 2002 produces results that are
anti-dilutive, therefore, the diluted loss per share amount as reported for that
period in the accompanying consolidated statements of operations is the same as
the basic loss per share amount.
<Table>
<Caption>
Weighted
Net Income Average
Available Common
to Common Shares Earnings
Stockholders Outstanding Per Share
-------------- -------------- --------------
(In thousands, except per share amounts)
Three months ended March 31, 2003:
Basic ............................... $ 13,327 27,651 $ 0.48
Effect of dilutive securities:
Preferred stock ............... 855 4,375
Stock options ................. -- 321
Warrants ...................... -- 154
-------------- -------------- --------------
Diluted ............................. $ 14,182 32,501 $ 0.44
</Table>
(5) HEDGING ACTIVITIES
The Company enters into hedging transactions with major financial
institutions to reduce exposure to fluctuations in the price of oil and natural
gas. Crude oil hedges are settled based on the average of the reported
settlement prices for West Texas Intermediate crude on the New York Mercantile
Exchange ("NYMEX") for each month. Natural gas hedges are settled based on the
average of the last three days of trading of the NYMEX Henry Hub natural gas
contract for each month. The Company also uses financially-settled crude oil and
natural gas swaps, zero-cost collars and options that provide floor prices with
varying upside price participation.
-8-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
With a financially-settled swap, the counterparty is required to make a
payment to the Company if the settlement price for any settlement period is
below the hedged price for the transaction, and the Company is required to make
a payment to the counterparty if the settlement price for any settlement period
is above the hedged price for the transaction. With a zero-cost collar, the
counterparty is required to make a payment to the Company if the settlement
price for any settlement period is below the floor price of the collar, and the
Company is required to make a payment to the counterparty if the settlement
price for any settlement period is above the cap price for the collar. In some
hedges, we have modified our collar to provide full upside participation after a
limited non-participation range.
The Company had the following hedging contracts as of March 31, 2003:
<Table>
<Caption>
Natural Gas Positions
- ---------------------------------------------------------------------------------------------
Volume (Mmbtu)
------------------
Remaining Contract Term Contract Type Strike Price ($/Mmbtu) Daily Total
- ------------------------ ------------------- ---------------------- ------ ---------
04/03 - 06/03............. Swap $5.04 10,000 910,000
04/03 - 06/03............. Combination options $4.67/$6.06/$6.16 15,000 1,365,000
04/03 - 01/04............. Collar $3.50/$5.25 10,000 3,060,000
04/03 - 01/04............. Collar $3.50/$5.40 10,000 3,060,000
02/04 - 12/04............. Collar $3.50/$8.00 10,000 3,350,000
</Table>
<Table>
<Caption>
Crude Oil Positions
- ---------------------------------------------------------------------------------------------
Volume (Bbls)
------------------
Remaining Contract Term Contract Type Strike Price ($/Bbl) Daily Total
- ------------------------ ------------------- ---------------------- ------ ---------
04/03 - 06/03............. Swap $29.90 1,000 91,000
04/03 - 12/03............. Swap $26.36 2,000 550,000
04/03 - 12/03............. Swap $26.12 1,000 275,000
</Table>
For the three months ended March 31, 2003 and 2002, hedging activities
reduced oil and natural gas revenues by $7.4 million and increased natural gas
revenues by $1.3 million, respectively.
For the three months ended March 31, 2003, losses of $4.7 million, net of
tax, were transferred from accumulated other comprehensive loss, and the fair
value of outstanding derivative instruments decreased by $6.8 million ($4.4
million net of tax) to a liability of $2.8 million ($1.8 million net of tax)
resulting in an ending liability of $1.8 million related to hedging activities
in accumulated other comprehensive loss at March 31, 2003. For the three months
ended March 31, 2002, gains of $0.9 million, net of tax, were transferred from
accumulated other comprehensive loss, and the fair value of outstanding
derivative instruments decreased by $6.1 million ($3.9 million net of tax) to a
liability of $5.9 million ($3.8 million net of tax) resulting in an ending
balance of $3.8 million related to hedging activities in accumulated other
comprehensive loss at March 31, 2002. Based upon current prices, the Company
expects to transfer approximately $3.2 million of net deferred losses in
accumulated other comprehensive loss as of March 31, 2003 to earnings during the
next twelve months when the forecasted transactions actually occur.
(6) CONTINGENCIES
In the ordinary course of business, the Company is a defendant in various
legal proceedings. The Company does not expect its exposure in these
proceedings, individually or in the aggregate, to have a material adverse effect
on the financial position, results of operations or liquidity of the Company.
-9-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
(7) ASSET RETIREMENT OBLIGATION
In 2001, the Financial Accounting Standards Board (FASB) issued Statement
143, Accounting for Asset Retirement Obligations (Statement 143). 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, a corresponding
increase in the carrying amount of the related long-lived asset and is effective
for fiscal years beginning after June 15, 2002. The Company adopted Statement
143 effective January 1, 2003, using the cumulative effect approach to recognize
transition amounts for asset retirement obligations, asset retirement costs and
accumulated depreciation. The Company previously recorded estimated costs of
dismantlement, removal, site restoration and similar activities as part of its
depreciation, depletion and amortization for oil and natural gas properties and
recorded a separate liability for such amounts in other liabilities. The effect
of adopting Statement 143 on the Company's results of operations and financial
condition included a net increase in long-term liabilities of $14.2 million; an
increase in net property, plant and equipment of $17.8 million; a cumulative
effect of adoption income of $2.3 million, net of deferred income taxes of $1.3
million.
The following pro forma data summarizes the Company's net loss and net
loss per share as if the Company had adopted the provisions of Statement 143 on
January 1, 2002, including an associated pro forma asset retirement obligation
on that date of $ 33.3 million (in thousands, except per share amounts):
<Table>
<Caption>
March 31,
2002
------------
Net loss available to common stockholders, as reported .............................. $ (6,538)
Pro forma adjustments to reflect retroactive adoption of Statement 143 .............. 149
------------
Pro forma net loss .................................................................. $ (6,389)
============
Net loss per share:
Basic - as reported ............................................................... $ (0.24)
============
Basic - pro forma ................................................................. $ (0.23)
============
Diluted - as reported ............................................................. $ (0.24)
============
Diluted - pro forma ............................................................... $ (0.23)
============
</Table>
The following table reconciles the beginning and ending aggregate recorded
amount of the asset retirement obligation for the three months ended March 31,
2003 (in thousands):
-10-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
<Table>
<Caption>
Asset
Retirement
Obligation
------------
December 31, 2002 ........................... $ 22,669
Net impact of initial adoption ........... 14,211
Accretion expense ........................ 535
Liabilities incurred ..................... 259
Liabilities settled ...................... (173)
------------
March 31, 2003 .............................. $ 37,501
============
</Table>
(8) ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued Statement 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure (Statement 148). Statement 148
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, Statement 148 amends the disclosure requirements of Statement 123,
Accounting for Stock-Based Compensation, to require more prominent and
frequent disclosures in financial statements about the effects of stock-based
compensation. The transition guidance and annual disclosure provisions of
Statement 148 are effective for fiscal years ending after December 15, 2002,
while the interim disclosure provisions are effective for periods beginning
after December 15, 2002. The Company is currently assessing the impact of the
transition options presented in Statement 148 and adoption of the disclosure
provisions required by Statement 148 are included in note 2.
(9) SUBSEQUENT EVENT
On April 16, 2003, the Company completed the public offering of 6.8 million
shares of its common stock, which was priced at $9.50 per share. The offering
included 4.2 million shares offered by the Company, 1.7 million shares offered
by Evercore Capital Partners L.P. and certain of its affiliates, and 0.9 million
shares offered by Energy Income Fund, L.P. In addition, the underwriters have
exercised their option to purchase 1.0 million additional shares to cover
over-allotments, the proceeds from which go to selling shareholders and not to
the Company. After payment of underwriting discounts and commissions, the
offering generated net proceeds to the Company of approximately $38.0 million.
After expenses of approximately $0.4 million, the proceeds are being used to
repay a portion of its existing borrowings under the Company's $100 million
bank credit facility.
(10) RECLASSIFICATIONS
Certain reclassifications have been made to the prior period financial
statements in order to conform to the classification adopted for reporting in
fiscal 2003.
-11-
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, incorporated in January 1998, with operations concentrated in the
shallow to moderate depth waters of the Gulf of Mexico Shelf.
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. Our
annual report on Form 10-K includes a discussion of our critical accounting
policies, which have not significantly changed.
On January 15, 2002, we closed the acquisition of Hall-Houston Oil Company
(HHOC) and certain affiliated interests. At closing, we issued $38.4 million
liquidation preference of newly authorized Series D Exchangeable Convertible
Preferred Stock, with a fair value of $34.7 million, discounted to effect the
increasing dividend rate, $38.4 million of 11% Senior Subordinated Notes (the
Notes) due 2009 (immediately callable at par) and 574,931 shares of common
stock. We also paid $9.0 million of cash including $3.9 million of accrued
interest and prepayment fees paid to former debt holders, assumed HHOC's working
capital deficit and issued warrants, with a fair market value of approximately
$3.0 million, to purchase four million shares of common stock. Former preferred
stockholders of HHOC also received the right to receive contingent consideration
related to future proved reserve additions generally to come from certain
exploratory prospect acreage held by HHOC as of the closing date. We have
included the results of operations from the HHOC acquisition with ours from the
closing date of January 15, 2002.
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.
-12-
RESULTS OF OPERATIONS
The following table presents information about our oil and natural gas
operations.
<Table>
<Caption>
Three Months Ended
March 31,
-------------------------------
2003 2002
------------ ------------
NET PRODUCTION (per day):
Oil (Bbls) 8,012 8,876
Natural gas (Mcf) 70,007 53,345
Total barrels of oil equivalent (Boe) 19,680 17,767
OIL & NATURAL GAS REVENUES (in thousands):
Oil $ 21,803 $ 16,238
Natural gas 35,151 13,303
Total oil & natural gas revenues 56,954 29,541
AVERAGE SALES PRICES (1):
Oil (per Bbl) $ 30.24 $ 20.33
Natural gas (per Mcf) 5.58 2.77
Average sales price (per Boe) 32.16 18.47
AVERAGE COSTS (per Boe):
Lease operating expense $ 4.53 $ 5.50
Taxes, other than on earnings 1.34 0.97
Depreciation, depletion, and amortization 9.92 10.25
</Table>
(1) Net of the effect of hedging transactions
PRODUCTION
CRUDE OIL AND CONDENSATE. Our net oil production for the first quarter of
2003 decreased to 8,012 barrels (Bbls) per day from 8,876 Bbls per day in the
first quarter of 2002. The decrease was the result of fewer
workovers/recompletions on oil wells in the first quarter of 2003 combined with
natural reservoir declines.
NATURAL GAS. Our net natural gas production for the first quarter of 2003
increased to 70,007 thousand cubic feet of natural gas (Mcf) per day from 53,345
Mcf per day in the first quarter of 2002. The increase was the result of new
production from natural gas wells completed subsequent to the first quarter
2002, partially offset by natural reservoir declines.
REALIZED PRICES
CRUDE OIL AND CONDENSATE. Our average realized oil price in the first
quarter of 2003 was $30.24 per Bbl, an increase of 49% from an average realized
price of $20.33 per Bbl in the first quarter of 2002. Hedging activities in 2003
reduced oil price realizations by $2.45 per Bbl or 7% from the $32.69 per Bbl
that would have otherwise been received. We did not have any oil hedging
contracts in place in the first quarter of 2002.
NATURAL GAS. Our average realized natural gas price in the first quarter of
2003 was $5.58 per Mcf, an increase of 101% from an average realized price of
$2.77 per Mcf in the first quarter of 2002. Hedging activities in 2003 decreased
natural gas price realizations by $0.90 per Mcf, or 14% from the $6.48 per Mcf
that would have otherwise been received. In 2002, hedging activities increased
natural gas price realizations by $0.28 per Mcf from the $2.49 per Mcf that
would have otherwise been received.
-13-
NET INCOME AND REVENUES
Our oil and natural gas revenues increased 93% to $57.0 million in the
first quarter of 2003 from $29.5 million in the first quarter of 2002.
Production volumes increased 11%, and combined with the sharp increase in
prices, resulted in significantly higher revenues.
We recognized net income of $14.2 million in the first quarter of 2003
compared to a net loss of $5.8 million in the first quarter of 2002. The
increase in net income was primarily due to the increase in oil and natural gas
revenues previously discussed. In addition, the following items had a
significant impact on our net income or loss in these periods and affect the
comparability of the results of operations for the periods:
o In January 2003, we adopted the Financial Accounting Standards Boards'
Statement 143, Accounting for Asset Retirement Obligations (Statement
143), using the cumulative effect approach to recognize transition
amounts for asset retirement obligations, asset retirement costs and
accumulated depreciation. We previously recorded estimated costs of
dismantlement, removal, site restoration and similar activities as
part of its depreciation, depletion and amortization for oil and
natural gas properties and recorded a separate liability for such
amounts in other liabilities. The effect of adopting Statement 143 on
the results of operations included a cumulative effect of adoption
income of $2.3 million net of deferred income taxes.
o In March 2002, in connection with management's plan to reduce costs
and effectively combine the operations of HHOC with ours, we executed
a severance plan and recorded an expense of $1.2 million.
OPERATING EXPENSES
Operating expenses during the three-month period ended March 31, 2003 were
impacted by the following:
o Lease operating expense decreased to $8.0 million in the first quarter
of 2003 from $8.8 million in the first quarter of 2002. The decrease
was primarily attributable to the concerted effort to reduce operating
costs at our East Bay field and a reduced level of workover expenses.
o Taxes, other than on earnings, increased to $2.4 million in the first
quarter of 2003 from $1.6 million in the first quarter of 2002. The
$0.8 million increase was due to an increase in the production volumes
and prices received for our oil and natural gas production on state
leases, primarily at East Bay, subject to Louisiana severance taxes.
o Depreciation, depletion and amortization increased to $17.6 million in
the first quarter of 2003 from $16.4 million in the first quarter of
2002. The increase was due to the increased depreciable asset base and
increased production volumes.
o Other general and administrative expenses increased to $7.4 million in
the first quarter of 2003 from $6.3 million in the first quarter of
2002. The increase was primarily due to increased compensation expense
($2.2 million) partially offset by decreased consultant fees ($0.4
million), decreased insurance costs ($0.3 million) and decreased other
costs ($0.4 million).
o As previously discussed, $1.2 million of severance costs were incurred
in the first quarter of 2002. Management assessed the personnel needs
of the combined companies and implemented a plan to terminate 14
employees.
o Non-cash stock-based compensation expense of $0.1 million was
recognized in the first quarter of each of 2003 and 2002 related to
restricted stock grants made to employees.
-14-
OTHER INCOME AND EXPENSE
INTEREST. Interest expense increased to $1.8 million in the first quarter
of 2003 from $1.6 million in the first quarter of 2002 as a result of increased
borrowings under our bank facility and the issuance of the Notes on January 15,
2002.
LIQUIDITY AND CAPITAL RESOURCES
We intend to use cash flows from operations before changes in working
capital to fund our future capital expenditure program. Our future cash flows
from operations before changes in working capital will depend on our ability to
maintain and increase production through our development and exploratory
drilling program, as well as the prices we receive for oil and natural gas. We
may, from time to time, use the availability of our bank credit facility for
working capital needs.
Our bank credit facility, as amended on January 15, 2002, consists of a
revolving line of credit with a group of banks available through March 30, 2005
(the bank facility). The bank facility currently has a borrowing base of $100
million that is subject to redetermination based on the proved reserves of the
oil and natural gas properties that serve as collateral for the bank facility as
set out in the reserve report delivered to the banks each April 1 and October 1.
The bank facility permits both prime rate based borrowings and LIBOR based
borrowings plus a floating spread. The spread will float up or down based on our
utilization of the bank facility. The spread can range from 1.50% to 2.25% above
LIBOR and 0% to 0.75% above prime. The borrowing base under the bank facility is
secured by substantially all of our oil and natural gas assets. The bank
facility contains customary events of default and requires that we satisfy
various financial covenants. After using proceeds from the public offering to
pay a portion of our debt, as of May 8, 2003, we had $45 million outstanding and
$55 million of credit capacity available under the bank facility. Also included
in long-term debt in the consolidated balance sheet is $38.4 million of the
Notes, which are due in January 2009.
Net cash of $37.1 million used in investing activities in the first three
months of 2003 consisted primarily of oil and natural gas property capital and
exploration expenditures. Dry hole costs resulting from exploration expenditures
are excluded from operating cash flows and included in investing activities.
During the first three months of 2003, we completed two drilling projects and
nine recompletion/workover projects, eight of which were successful. During the
first three months of 2002, we completed one drilling projects and six
recompletion/workover projects, five of which were successful. Cash and cash
equivalents at March 31, 2003 were $2.9 million.
Our 2003 capital expenditure budget is focused on exploration, exploitation
and development activities on our proved properties combined with moderate risk
and higher risk exploratory activities on undeveloped leases. We currently
intend to allocate approximately 65% of our budget on an annual basis on low
risk development and exploitation activities, approximately 25% to moderate risk
exploration opportunities and approximately 10% to higher risk, higher potential
exploration opportunities. Our capital expenditure budget for 2003 is currently
approximately $90 million. The level of our capital expenditure budget is based
on many factors, including results of our drilling program, oil and natural gas
prices, industry conditions, participation by other working interest owners and
the costs of drilling rigs and other oilfield goods and services. Should actual
conditions differ materially from expectations, some projects may be accelerated
or deferred and, consequently, may increase or decrease total 2003 capital
expenditures.
We have experienced and expect to continue to experience substantial
working capital requirements, primarily due to our active capital expenditure
program. We believe that cash flows from operations before changes in working
capital will be sufficient to meet our capital requirements for at least the
next twelve months and reduce borrowings under our bank facility to levels in
effect at year end 2002. Availability under the bank facility will be used to
balance short-term fluctuations in working capital requirements. However,
additional financing may be required in the future to fund our growth.
-15-
Our annual report on Form 10-K for the year ended December 31, 2002 included
a discussion of our contractual obligations; as a result, the only change to
that disclosure is the increase in borrowings under our bank facility discussed
herein.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued Statement 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure (Statement 148). Statement 148
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, Statement 148 amends the disclosure requirements of Statement 123,
Accounting for Stock-Based Compensation, to require more prominent and
frequent disclosures in financial statements about the effects of stock-based
compensation. The transition guidance and annual disclosure provisions of
Statement 148 are effective for fiscal years ending after December 15, 2002,
while the interim disclosure provisions are effective for periods beginning
after December 15, 2002. The Company is currently assessing the impact of the
transition options presented in Statement 148 and adoption of the disclosure
provisions required by Statement 148 are included in note 2 of the financial
statements.
FORWARD LOOKING INFORMATION
All statements other than statements of historical fact contained in this
Report and other periodic reports filed by us under the Securities Exchange Act
of 1934 and other written or oral statements made by us or on our behalf, are
forward-looking statements. When used herein, the words "anticipates",
"expects", "believes", "goals", "intends", "plans", or "projects" and similar
expressions are intended to identify forward-looking statements. It is important
to note that forward-looking statements are based on a number of assumptions
about future events and are subject to various risks, uncertainties and other
factors that may cause our actual results to differ materially from the views,
beliefs and estimates expressed or implied in such forward-looking statements.
We refer you specifically to the section "Additional Factors Affecting Business"
in Items 1 and 2 of our Annual Report on Form 10-K for the year ended December
31, 2002. Although we believe that the assumptions on which any forward-looking
statements in this Report and other periodic reports filed by us are reasonable,
no assurance can be given that such assumptions will prove correct. All
forward-looking statements in this document are expressly qualified in their
entirety by the cautionary statements in this paragraph.
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 bank facility. Under our current policies, we
do not use interest rate derivative instruments to manage exposure to interest
rate changes. At March 31, 2003, $80 million of our long-term debt had variable
interest rates, while the remaining long-term debt had fixed interest rates. If
market interest rates average 1% higher or lower in the first quarter of 2004
than in 2003, interest expense for the quarter on variable rate debt would
increase (decrease), and net income before income taxes would increase
(decrease) by approximately $0.2 million based on the total variable rate debt
outstanding at March 31, 2003.
COMMODITY PRICE RISK
Our revenues, profitability and future growth depend substantially on
prevailing prices for oil and natural gas. Prices also affect the amount of cash
flow available for capital expenditures and our ability to borrow and raise
additional capital. The amount we can borrow under the bank facility is subject
to periodic redetermination based in part on changing expectations of future
prices. Lower prices may also reduce the amount of oil and natural gas that we
can economically produce. We currently sell all of our oil and natural gas
production under price sensitive or market price contracts.
We use derivative commodity instruments to manage commodity price risks
associated with future oil and natural gas production. As of March 31, 2003, we
had the following contracts in place:
-16-
<Table>
<Caption>
Natural Gas Positions
- ---------------------------------------------------------------------------------------------
Volume (Mmbtu)
------------------
Remaining Contract Term Contract Type Strike Price ($/Mmbtu) Daily Total
- ------------------------ ------------------- ---------------------- ------ ---------
04/03 - 06/03............. Swap $5.04 10,000 910,000
04/03 - 06/03............. Combination options $4.67/$6.06/$6.16 15,000 1,365,000
04/03 - 01/04............. Collar $3.50/$5.25 10,000 3,060,000
04/03 - 01/04............. Collar $3.50/$5.40 10,000 3,060,000
02/04 - 12/04............. Collar $3.50/$8.00 10,000 3,350,000
</Table>
<Table>
<Caption>
Crude Oil Positions
- ---------------------------------------------------------------------------------------------
Volume (Bbls)
------------------
Remaining Contract Term Contract Type Strike Price ($/Bbl) Daily Total
- ------------------------ ------------------- ---------------------- ------ ---------
04/03 - 06/03............. Swap $29.90 1,000 91,000
04/03 - 12/03............. Swap $26.36 2,000 550,000
04/03 - 12/03............. Swap $26.12 1,000 275,000
</Table>
Our hedged volume as of March 31, 2003 approximated 22% of our estimated
production from proved reserves for the balance of the terms of the contracts.
We use a sensitivity analysis technique to evaluate the hypothetical
effect that changes in the market value of crude oil and natural gas may have on
the fair value of our derivative instruments. At March 31, 2003, the potential
change in the fair value of commodity derivative instruments assuming a 10%
adverse movement in the underlying commodity price was a $5.1 million increase
in the combined estimated loss.
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.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this Report, under the supervision
and with the participation of certain members of the Company's management,
including the Chief Executive Officer and Chief Financial Officer, the Company
completed an evaluation of the effectiveness of its disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) to the Securities
Exchange Act of 1934, as amended). Based on this evaluation, the Company's Chief
Executive Officer and Chief Financial Officer believe that the disclosure
controls and procedures are effective with respect to timely communication to
them and other members of management responsible for preparing periodic reports
and all material information required to be disclosed in this Report as it
relates to the Company and its consolidated subsidiaries. There were no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to the date of the most
recently completed evaluation, including any corrective actions with regards to
significant deficiencies and material weaknesses.
-17-
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
99.1 Certification Accompanying Form 10-Q Report of Energy Partners, Ltd.
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chapter 63,
Title 18 U.S.C. Section 1350(a) and (b)).
(b) Reports on Form 8-K:
On March 17, 2003 the Company filed a current report on Form 8-K,
reporting, under Items 5 and 7, the filing of a registration statement
with the Securities and Exchange Commission relating to a proposed
public offering of up to $80.5 million of common stock.
-18-
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: May 12, 2003 By: /s/ SUZANNE V. BAER
-----------------------------------
Suzanne V. Baer
Executive Vice President and
Chief Financial Officer
(Authorized Officer and Principal
Financial Officer)
-19-
CERTIFICATIONS OF THE EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER AND
CHAIRMAN, PRESIDENT, AND CHIEF EXECUTIVE OFFICER OF ENERGY PARTNERS, LTD.
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Suzanne V. Baer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Energy Partners, Ltd.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ SUZANNE V. BAER
- ------------------------------------
Suzanne V. Baer
Executive Vice President and Chief
Financial Officer
Dated: May 12, 2003
-20-
I, Richard A. Bachmann, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Energy Partners, Ltd.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ RICHARD A. BACHMANN
- --------------------------------------
Richard A. Bachmann
Chairman, President and Chief
Executive Officer
Dated: May 12, 2003
-21-
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
99.1 Certification Accompanying Form 10-Q Report of Energy
Partners, Ltd. Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (Chapter 63, Title 18 U.S.C. Section 1350(a) and
(b)).
</Table>
-22-