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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 period ended June 30, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number: 0-20100
BELDEN & BLAKE CORPORATION
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(Exact name of registrant as specified in its charter)
Ohio 34-1686642
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5200 Stoneham Road
North Canton, Ohio 44720
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(Address of principal executive offices) (Zip Code)
(330) 499-1660
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
As of July 31, 2001, Belden & Blake Corporation had outstanding 10,353,159
shares of common stock, without par value, which is its only class of stock.
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BELDEN & BLAKE CORPORATION
INDEX
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PAGE
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PART I Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2001 and
December 31, 2000 ................................................................ 1
Consolidated Statements of Operations for the three and six
months ended June 30, 2001 and 2000 .............................................. 2
Consolidated Statements of Shareholders' Equity (Deficit)
for the six months ended June 30, 2001 and the years
ended December 31, 2000 and 1999 ................................................. 3
Consolidated Statements of Cash Flows for the six
months ended June 30, 2001 and 2000 .............................................. 4
Notes to Consolidated Financial Statements .......................................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................................. 8
PART II Other Information
Item 6. Exhibits and Reports on Form 8-K .................................................... 15
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BELDEN & BLAKE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2001 2000
--------- ---------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,235 $ 1,798
Accounts receivable, net 16,067 22,620
Inventories 2,234 2,222
Deferred income taxes 1,556 1,475
Other current assets 1,746 1,448
Fair value of derivatives 11,714 --
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TOTAL CURRENT ASSETS 35,552 29,563
PROPERTY AND EQUIPMENT, AT COST
Oil and gas properties (successful efforts method) 430,984 413,824
Gas gathering systems 13,185 13,445
Land, buildings, machinery and equipment 24,434 23,469
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468,603 450,738
Less accumulated depreciation, depletion and amortization 218,419 208,435
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PROPERTY AND EQUIPMENT, NET 250,184 242,303
FAIR VALUE OF DERIVATIVES 5,346 --
OTHER ASSETS 11,824 13,251
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$ 302,906 $ 285,117
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 6,119 $ 5,926
Accrued expenses 19,183 19,316
Current portion of long-term liabilities 100 141
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TOTAL CURRENT LIABILITIES 25,402 25,383
LONG-TERM LIABILITIES
Bank and other long-term debt 56,275 61,535
Senior subordinated notes 225,000 225,000
Other 231 323
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281,506 286,858
DEFERRED INCOME TAXES 27,743 21,189
SHAREHOLDERS' DEFICIT
Common stock without par value; $.10 stated value per share; authorized
58,000,000 shares; issued 10,410,103 and 10,357,255 shares
(which includes 70,518 and 53,972 treasury shares, respectively) 1,034 1,030
Paid in capital 108,009 107,921
Deficit (151,410) (157,264)
Accumulated other comprehensive income 10,622 --
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TOTAL SHAREHOLDERS' DEFICIT (31,745) (48,313)
--------- ---------
$ 302,906 $ 285,117
========= =========
See accompanying notes
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BELDEN & BLAKE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2001 2000 2001 2000
-------- -------- -------- --------
REVENUES
Oil and gas sales $ 23,562 $ 17,069 $ 49,341 $ 36,881
Gas gathering, marketing, and oilfield service 9,356 9,176 18,231 17,602
Other 411 1,020 898 1,853
-------- -------- -------- --------
33,329 27,265 68,470 56,336
EXPENSES
Production expense 5,708 4,636 11,166 10,066
Production taxes 748 520 1,436 1,282
Gas gathering, marketing, and oilfield service 7,707 8,520 16,095 15,631
Exploration expense 2,234 2,024 3,660 2,961
General and administrative expense 1,038 1,069 2,162 2,001
Franchise, property and other taxes 99 119 204 284
Depreciation, depletion and amortization 6,107 6,311 12,177 15,297
Other nonrecurring expense 55 -- 1,501 24
-------- -------- -------- --------
23,696 23,199 48,401 47,546
-------- -------- -------- --------
OPERATING INCOME 9,633 4,066 20,069 8,790
OTHER (INCOME) EXPENSE
(Gain) on sale of subsidiary and other income -- -- -- (14,426)
Interest expense 6,845 6,730 14,047 15,016
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 2,788 (2,664) 6,022 8,200
(Benefit) provision for income taxes (1,004) (966) 168 2,154
-------- -------- -------- --------
NET INCOME (LOSS) $ 3,792 $ (1,698) $ 5,854 $ 6,046
======== ======== ======== ========
See accompanying notes.
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BELDEN & BLAKE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
ACCUMULATED
OTHER
COMMON COMMON PAID IN COMPREHENSIVE TOTAL
SHARES STOCK CAPITAL DEFICIT INCOME DEFICIT
--------- ------- --------- --------- ------------- -------
JANUARY 1, 1999 10,111 $1,011 $107,897 $(141,922) $ -- $ (33,014)
Net loss (18,303) (18,303)
Stock options exercised 31 3 3
Stock-based compensation 118 12 (288) (276)
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DECEMBER 31, 1999 10,260 1,026 107,609 (160,225) -- (51,590)
Net income 2,961 2,961
Stock options exercised 97 10 (9) 1
Stock-based compensation 336 336
Treasury stock (54) (6) (15) (21)
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DECEMBER 31, 2000 10,303 1,030 107,921 (157,264) -- (48,313)
Comprehensive income:
Net income 5,854 5,854
Other comprehensive income, net of tax
Cumulative effect of accounting change (6,691) (6,691)
Change in derivative fair value 14,668 14,668
Reclassification adjustments - contract settlements 2,645 2,645
------------
Total comprehensive income 16,476
------------
Stock options exercised 54 5 1 6
Stock-based compensation 145 145
Treasury stock (17) (1) (58) (59)
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JUNE 30, 2001 (UNAUDITED) 10,340 $1,034 $108,009 $(151,410) $ 10,622 $ (31,745)
===================================================================================================================================
Total comprehensive income in the quarter ended June 30, 2001, was $16.1
million.
See accompanying notes.
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BELDEN & BLAKE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
SIX MONTHS ENDED JUNE 30,
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,854 $ 6,046
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 12,177 15,297
Gain on sale of subsidiary -- (13,155)
Loss on disposal of property and equipment 39 291
Exploration expense 3,660 2,961
Deferred income taxes 35 2,064
Stock-based compensation 145 33
Change in operating assets and liabilities, net of
effects of disposition of subsidiary:
Accounts receivable and other operating assets 6,266 (458)
Inventories (12) (230)
Accounts payable and accrued expenses 51 588
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 28,215 13,437
CASH FLOWS FROM INVESTING ACTIVITIES:
Disposition of businesses, net of cash 400 69,031
Proceeds from property and equipment disposals 387 157
Exploration expense (3,660) (2,961)
Additions to property and equipment (19,218) (8,415)
Increase in other assets (49) (602)
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NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (22,140) 57,210
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit 97,983 13,000
Repayment of long-term debt and other obligations (103,352) (82,973)
Debt issue costs (210) (668)
Purchase of treasury stock (59) --
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (5,638) (70,641)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 437 6
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,798 4,536
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,235 $ 4,542
========= =========
CASH PAID DURING THE PERIOD FOR:
Interest $ 14,244 $ 16,066
Income taxes, net of refunds 340 --
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of assets in exchange for long-term liabilities 74 239
See accompanying notes.
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BELDEN & BLAKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2001
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(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Belden
& Blake Corporation (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six month periods ended June 30, 2001 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2001. For further information, refer to the consolidated
financial statements and footnotes included in the Company's annual report on
Form 10-K for the year ended December 31, 2000. Certain reclassifications have
been made to conform to the current presentation.
(2) NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. (SFAS) 141, "Business Combinations," and
SFAS 142, "Goodwill and Other Intangible Assets." Adoption of these standards
should not have a material effect on the Company's financial position, results
of operations or cash flows. SFAS 141 eliminates the pooling-of-interests method
of accounting for business combinations except for qualifying business
combinations that were initiated prior to July 1, 2001. SFAS 141 further
clarifies the criteria to recognize intangible assets separately from goodwill.
The requirements of SFAS 141 are effective for any business combination
accounted for by the purchase method that is completed after June 30, 2001.
Under SFAS 142, goodwill and indefinite lived intangible assets are no
longer amortized but are reviewed for impairment annually or if certain
impairment indicators arise. Separable intangible assets that are not deemed to
have an indefinite life will continue to be amortized over their useful lives
(but with no maximum life). The amortization provisions of SFAS 142 apply to
goodwill and intangible assets acquired after June 30, 2001. With respect to
goodwill and intangible assets acquired prior to July 1, 2001, companies are
required to adopt SFAS 142 in their fiscal year beginning after December 15,
2001. Early adoption is not permitted for calendar year companies. Because of
the different transition dates for goodwill and intangible assets acquired on or
before June 30, 2001 and those acquired after that date, pre-existing goodwill
and intangibles will be amortized during this transition period until adoption
whereas new goodwill and indefinite lived intangible assets acquired after June
30, 2001 will not.
(3) CREDIT AGREEMENT
On June 29, 2001, the Company amended its $100 million revolving credit
facility ("the Revolver") from Ableco Finance LLC and Foothill Capital
Corporation. The amendment extended the Revolver's final maturity date to April
22, 2004, from August 23, 2002, increased the letter of credit sub-limit from
$20 million to $30 million and eliminated the effects of SFAS 133, "Accounting
for Derivative Instruments and Hedging Activities," from covenant calculations.
The Company paid approximately $200,000 in fees and expenses related to the
amendment.
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The amendment extended the financial covenant for the senior interest
coverage ratio of 3.2 to 1 for the quarters ending September 30, 2002, through
March 31, 2004; and the senior debt leverage ratio of 2.7 to 1 was extended for
the quarters ending September 30, 2002, through March 31, 2004. These ratios
will be calculated quarterly based on the financial results of the previous four
quarters.
The amendment added an early termination fee equal to .25% of the
facility if terminated between the effective date and May 31, 2002. If
termination is after May 31, 2002 but on or before May 31, 2003, the termination
fee is .125% of the facility. There is no termination fee after May 31, 2003.
The Company is required to hedge at least 20% but not more than 80% of its
estimated hydrocarbon production, on an Mcfe (Thousand cubic feet of natural gas
equivalent) basis, for the succeeding 12 months on a rolling 12 month basis.
Based on the Company's hedges currently in place and its expected production
levels the Company is in compliance with this hedging requirement through March
2003.
(4) OTHER NONRECURRING EXPENSE
Effective April 1, 2001, certain senior management members of the
Company accepted early retirements. These retirements will result in a cash
charge of approximately $760,000 and an additional non-cash charge of $100,000
related to the acceleration of certain stock options.
The Company recorded a total nonrecurring charge of $1.5 million in the
first six months of 2001 related to these retirement agreements and other
severance charges incurred which included a non-cash charge of approximately
$200,000 due to the acceleration of certain related stock options.
(5) DERIVATIVES AND HEDGING
As of January 1, 2001, the Company adopted SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended. As a result of the
adoption of SFAS 133, the Company recognizes all derivative financial
instruments as either assets or liabilities at fair value. Derivative
instruments that are not hedges must be adjusted to fair value through net
income (loss). Under the provisions of SFAS 133, changes in the fair value of
derivative instruments that are fair value hedges are offset against changes in
the fair value of the hedged assets, liabilities, or firm commitments, through
net income (loss). Changes in the fair value of derivative instruments that are
cash flow hedges are recognized in other comprehensive income (loss) until such
time as the hedged items are recognized in net income (loss). The hedging
relationship between the hedging instruments and hedged item must be highly
effective in achieving the offset of changes in fair values or cash flows
attributable to the hedged risk both at the inception of the contract and on an
ongoing basis. The Company measures effectiveness on a monthly basis.
Ineffective portions of a derivative instrument's change in fair value are
immediately recognized in net income (loss). If there is a discontinuance of a
cash flow hedge because it is probable that the original forecasted transaction
will not occur, deferred gains or losses are recognized in earnings immediately.
From time to time the Company may enter into a combination of futures
contracts, commodity derivatives and fixed-price physical contracts to manage
its exposure to natural gas price volatility. The Company employs a policy of
hedging gas production sold under New York Mercantile Exchange ("NYMEX") based
contracts by selling NYMEX based commodity derivative contracts which are placed
with major financial institutions that the Company believes are minimal credit
risks. The contracts may take the form of futures contracts, swaps, collars or
options. At June 30, 2001, the Company's derivative contracts consist of natural
gas swaps and natural gas costless collars. All of these NYMEX based derivative
contracts are designated as cash flow hedges.
Adoption of SFAS No. 133 resulted in recording a $10.5 million ($6.7
million net of tax) decline in fair value to accumulated other comprehensive
loss, consisting of $11.8 million to current fair value of
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derivative liabilities and $1.3 million to current fair value of derivative
assets. The fair value of derivatives assets represent the difference between
hedged prices and market prices on hedged volumes of natural gas as of June 30,
2001. During the first six months of 2001, losses on contract settlements of
$4.2 million ($2.6 million after tax) were reclassified from accumulated other
comprehensive income to earnings and the fair value of open hedges increased by
$23.4 million ($14.7 million after tax). At June 30, 2001, the estimated net
gains in accumulated other comprehensive income that are expected to be
reclassified into earnings within the next 12 months are approximately $11.7
million. The Company has partially hedged its exposure to the variability in
future cash flows through December 2003.
(6) INCOME TAX
During the second quarter the Company concluded an IRS income tax
examination of the years 1994 through 1997. A federal income tax benefit of $1.5
million was recorded during the quarter as a result of the examination. Also, in
the second quarter a federal income tax benefit was recorded for approximately
$700,000 along with a corresponding reduction in the valuation allowance as a
result of certain net operating loss carryforwards which the Company now
believes it can fully utilize.
(7) INDUSTRY SEGMENT FINANCIAL INFORMATION
The Company operates in one reportable segment, as an independent
energy company engaged in producing oil and natural gas; exploring for and
developing oil and gas reserves; acquiring and enhancing the economic
performance of producing oil and gas properties and gathering natural gas for
delivery to intrastate and interstate gas transmission pipelines. The Company's
operations are conducted entirely in the United States.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On March 17, 2000, the Company sold the stock of Peake Energy, Inc.
("Peake"), a wholly owned subsidiary, to an independent oil and gas company,
with an effective date of January 1, 2000. The sale included substantially all
of the Company's oil and gas properties in West Virginia and Kentucky. The sale
resulted in net proceeds of approximately $69 million. The Company recorded a
$13.2 million gain on the sale in the first quarter of 2000.
The following table presents certain information with respect to the
oil and gas operations of the Company. The last column in the table excludes
Peake:
EXCLUDING PEAKE
----------------------
THREE MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30,
---------------------- ----------------------- -----------------------
2001 2000 2001 2000 2001 2000
---------- ---------- ---------- ---------- ---------- ----------
PRODUCTION
Gas (Mmcf) 4,551 4,676 9,033 10,554 9,033 9,399
Oil (Mbbls) 162 143 317 307 317 290
Total production (Mmcfe) 5,520 5,536 10,936 12,394 10,936 11,141
AVERAGE PRICE
Gas (per Mcf) $ 4.29 $ 2.86 $ 4.57 $ 2.74 $ 4.57 $ 2.75
Oil (per Bbl) 24.94 25.82 25.39 25.91 25.39 25.96
Mcfe 4.27 3.08 4.51 2.98 4.51 3.00
AVERAGE COSTS (PER Mcfe)
Production expense 1.03 0.84 1.02 0.81 1.02 0.84
Production taxes 0.14 0.09 0.13 0.10 0.13 0.09
Depletion 0.76 0.76 0.76 0.87 0.76 0.89
GROSS MARGIN (PER Mcfe) 3.10 2.15 3.36 2.07 3.36 2.07
Mmcf - MILLION Mbbls - THOUSAND Mmcfe - MILLION CUBIC FEET OF
CUBIC FEET BARRELS NATURAL GAS EQUIVALENT
Mcf - THOUSAND Bbl - BARREL Mcfe - THOUSAND CUBIC FEET OF
CUBIC FEET NATURAL GAS EQUIVALENT
RESULTS OF OPERATIONS - SECOND QUARTERS OF 2001 AND 2000 COMPARED
Operating income increased $5.5 million from $4.1 million in the second
quarter of 2000 to $9.6 million in the second quarter of 2001. This increase was
primarily a result of a $6.2 million (49%) increase in operating margins
partially offset by a $609,000 decrease in other income. The increase in
operating margins was primarily due to a $5.2 million increase in the operating
margin from oil and gas sales primarily due to a $1.43 per Mcf increase in the
average price paid for the Company's natural gas partially offset by a decrease
in gas volumes from the natural production decline of the wells. The decrease in
other income was primarily due to proceeds received in the second quarter of
2000 from the settlement of a lawsuit. Net income increased $5.5 million from a
net loss of $1.7 million in the second quarter of 2000 to net income of $3.8
million in the second quarter of 2001. This increase was primarily a result of
the increase in operating income discussed above and favorable adjustments to
income tax expense in the second quarter of 2001 (see Note 6 to the Consolidated
Financial Statements).
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Earnings before interest, income taxes, depreciation, depletion,
amortization, exploration expense and other nonrecurring items ("EBITDAX")
increased $5.6 million (45%) from $12.4 million in the second quarter of 2000 to
$18.0 million in the second quarter of 2001 primarily due to the increased
operating margins discussed above.
Total revenues increased $6.1 million (22%) in the second quarter of
2001 compared to the second quarter of 2000 primarily due to a $1.43 per Mcf
increase in the average price paid for the Company's natural gas and an increase
in oilfield service revenue partially offset by a decrease in gas volumes from
the natural production decline of the wells and by the decrease in other income
discussed above.
Oil volumes increased 19,000 Bbls (13%) from 143,000 Bbls in the second
quarter of 2000 to 162,000 Bbls in the second quarter of 2001 resulting in an
increase in oil sales of approximately $470,000. Gas volumes decreased 125 Mmcf
(3%) from 4.7 Bcf (Billion cubic feet) in the second quarter of 2000 to 4.6 Bcf
in the second quarter of 2001 resulting in a decrease in gas sales of
approximately $360,000.
The average price paid for the Company's oil decreased from $25.82 per
Bbl in the second quarter of 2000 to $24.94 per Bbl in the second quarter of
2001 which decreased oil sales by approximately $140,000. The average price paid
for the Company's natural gas increased $1.43 per Mcf to $4.29 per Mcf in the
second quarter of 2001 compared to the second quarter of 2000 which increased
gas sales in the second quarter of 2001 by approximately $6.5 million. As a
result of the Company's hedging activities, gas sales revenue for the second
quarter of 2001 decreased by approximately $1.3 million or $.29 per Mcf compared
to a decrease of approximately $2.7 million or $.58 per Mcf for the second
quarter of 2000.
Production expense increased $1.1 million (23%) from $4.6 million in
the second quarter of 2000 to $5.7 million in the second quarter of 2001. The
average production cost increased from $.84 per Mcfe in the second quarter of
2000 to $1.03 per Mcfe in the second quarter of 2001 primarily due to additional
costs incurred in the second quarter of 2001 to minimize production declines in
order to take advantage of higher gas prices and general cost increases due to
current market conditions. Production taxes increased $228,000 (44%) from
$520,000 in the second quarter of 2000 to $748,000 in the second quarter of 2001
primarily due to higher natural gas prices in 2001.
Exploration expense increased by $210,000 (10%) from $2.0 million in
the second quarter of 2000 to $2.2 million in the second quarter of 2001
primarily due to increases in leasing activity and geophysical expense
associated with the Company's planned drilling activity in 2001 and 2002.
General and administrative expense in the second quarter of 2001 was
consistent with the second quarter of 2000.
Depreciation, depletion and amortization decreased by approximately
$204,000 (3%) from $6.3 million in the second quarter of 2000 to $6.1 million in
the second quarter of 2001. Depletion expense in the second quarter of 2001 was
consistent with the second quarter of 2000. Depletion per Mcfe was $.76 per Mcfe
in the second quarter of 2000 and 2001.
Interest expense increased $115,000 from $6.7 million in the second
quarter of 2000 to approximately $6.8 million in the second quarter of 2001.
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RESULTS OF OPERATIONS - SIX MONTHS OF 2001 AND 2000 COMPARED
Operating income increased $11.3 million from $8.8 million in the first
six months of 2000 to $20.1 million in the first six months of 2001. This
increase was primarily a result of a $11.4 million (41%) increase in operating
margins and a $3.1 million (20%) decrease in depreciation, depletion and
amortization expense partially offset by a $955,000 decrease in other income, a
$699,000 (24%) increase in exploration expense and the $1.5 million nonrecurring
expense recorded in the first six months of 2001.
The increase in operating margins was primarily due to a $11.2 million
increase in the operating margin from oil and gas sales primarily as a result of
a $1.83 per Mcf increase in the average price paid for the Company's natural
gas. The decrease in other income was primarily due to a reduction in income
from the monetization of nonconventional fuel source tax credits as a result of
the Peake sale and proceeds received in the second quarter of 2000 from the
settlement of a lawsuit.
Net income was $5.9 million in the first six months of 2001 compared to
$6.0 million in the first six months of 2000. Gain on sale of subsidiary and
other income in the first six months of 2000 was $14.4 million as discussed
below. Significant changes in the first six months of 2001 compared to the first
six months of 2000 were the $11.3 million increase in operating income discussed
above, a $1.0 million decrease in interest expense and favorable adjustments to
income tax expense in the second quarter of 2001 (see Note 6 to the Consolidated
Financial Statements).
EBITDAX increased $10.3 million (38%) from $27.1 million in the first
six months of 2000 to $37.4 million in the first six months of 2001. This
increase was primarily due to the $11.4 million increase in operating margins
offset by the decrease in other income discussed above.
Total revenues increased $12.1 million (22%) in the first six months of
2001 compared to the first six months of 2000 primarily due to a $1.83 per Mcf
increase in the average price paid for the Company's natural gas and an increase
in oilfield service revenue partially offset by decreases in the volume of
natural gas sold and the decrease in other income discussed above.
Oil volumes increased approximately 10,000 Bbls (3%) from 307,000 Bbls
in the first six months of 2000 to 317,000 Bbls in the first six months of 2001
resulting in an increase in oil sales of approximately $270,000. Gas volumes
decreased 1.6 Bcf (14%) from 10.6 Bcf in the first six months of 2000 to 9.0 Bcf
in the first six months of 2001 resulting in a decrease in gas sales of
approximately $4.2 million. These volume decreases were due to the sale of Peake
in the first quarter of 2000 and the natural production decline of the wells
partially offset by production from wells drilled in 2000 and 2001.
The average price paid for the Company's oil decreased from $25.91 per
Bbl in the first six months of 2000 to $25.39 per Bbl in the first six months of
2001 which decreased oil sales by approximately $165,000. The average price paid
for the Company's natural gas increased $1.83 per Mcf (67%) to $4.57 per Mcf in
the first six months of 2001 compared to the first six months of 2000 which
increased gas sales in the first six months of 2001 by approximately $16.5
million. As a result of the Company's hedging activities, gas sales revenue for
the first six months of 2001 decreased by approximately $4.2 million or $.46 per
Mcf compared to a decrease of approximately $2.8 million or $.27 per Mcf for the
first six months of 2000.
Production expense increased approximately $1.1 million (11%) from
$10.1 million in the first six months of 2000 to $11.2 million in the first six
months of 2001. The average production cost increased from $.81 per Mcfe in the
first six months of 2000 to $1.02 per Mcfe in the first six months of 2001. The
per unit increase was primarily due to the sale of Peake, increased compensation
related
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expenses, additional costs incurred in the first six months of 2001 to minimize
production declines in order to take advantage of higher gas prices and general
cost increases due to current market conditions. Production taxes increased
$154,000 (12%) from $1.3 million in the first six months of 2000 to $1.4 million
in the first six months of 2001 primarily due to higher natural gas prices in
2001 partially offset by decreased production taxes from lower oil and gas sales
due to the sale of Peake.
Exploration expense increased by $699,000 (24%) from $3.0 million in
the first six months of 2000 to $3.7 million in the first six months of 2001
primarily due to increases in leasing activity and geophysical expenses
associated with the Company's planned drilling activity in 2001 and 2002. The
Company currently expects to spend $29.2 million to drill 199 gross (170.2 net)
wells in 2001.
General and administrative expense increased by $161,000 (8%) from $2.0
million in the first six months of 2000 to $2.2 million in the first six months
of 2001 due to increases in employment and compensation related expenses.
Depreciation, depletion and amortization decreased by $3.1 million
(20%) from $15.3 million in the first six months of 2000 to $12.2 million in the
first six months of 2001. Depletion expense decreased $2.5 million (23%) from
$10.8 million in the first six months of 2000 to $8.3 million in the first six
months of 2001. Depletion per Mcfe decreased from $.87 per Mcfe in the first six
months of 2000 to $.76 per Mcfe in the first six months of 2001. These decreases
were primarily the result of decreased production volumes and a lower
amortization rate per Mcfe due to higher reserves resulting from higher oil and
gas prices.
The Company recorded a nonrecurring charge of $1.5 million in the first
six months of 2001 primarily related to the early retirement of certain senior
management members of the Company and other severance charges incurred which
included a non-cash charge of approximately $200,000 due to the acceleration of
certain related stock options. The Company expects to reduce its forecasted
future general and administrative expenses by over $500,000 annually as a result
of the retirements.
Gain on sale of subsidiary and other income in the first six months of
2000 was the result of the $13.2 million gain on the sale of Peake and the $1.3
million gain on terminated interest rate swaps.
Interest expense decreased approximately $1.0 million (6%) from $15.0
million in the first six months of 2000 to $14.0 million in the first six months
of 2001 due to a decrease in average outstanding borrowings partially offset by
higher blended interest rates.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity and capital resources are closely related to
and dependent on the current prices paid for its oil and natural gas.
The Company's current ratio at June 30, 2001 was 1.40 to 1. During the
first six months of 2001, working capital increased $6.0 million from $4.2
million at December 31, 2000 to $10.2 million at June 30, 2001. The increase was
primarily due to an increase in the fair market value of derivatives per SFAS
133 in the first six months of 2001 which increased working capital by $11.7
million. The increase in the fair market value of derivatives was offset by a
$6.6 million decrease in accounts receivable. The Company's operating activities
provided cash flows of $28.2 million during the first six months of 2001.
On June 29, 2001, the Company amended its $100 million credit facility
from Ableco Finance LLC and Foothill Capital Corporation. The amendment extended
the Revolver's final maturity date to April 22, 2004, from August 23, 2002,
increased the letter of credit sub-limit from $20 million to $30 million and
eliminated the effects of SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities," from covenant calculations. The Company paid approximately
$200,000 in fees and expenses related to the amendment.
The amendment extended the financial covenant for the senior interest
coverage ratio of 3.2 to 1 for the quarters ending September 30, 2002, through
March 31, 2004; and the senior debt leverage ratio of 2.7 to 1 was extended for
the quarters ending September 30, 2002, through March 31, 2004. These ratios
will be calculated quarterly based on the financial results of the previous four
quarters.
The amendment added an early termination fee equal to .25% of the
facility if terminated between the effective date and May 31, 2002. If
termination is after May 31, 2002 but on or before May 31, 2003, the termination
fee is .125% of the facility. There is no termination fee after May 31, 2003.
The Company is required to hedge at least 20% but not more than 80% of its
estimated hydrocarbon production, on an Mcfe basis, for the succeeding 12 months
on a rolling 12 month basis. Based on the Company's hedges currently in place
and its expected production levels the Company is in compliance with this
hedging requirement through March 2003.
The Revolver bears interest at the prime rate plus two percentage
points, payable monthly. At June 30, 2001 the interest rate was 8.75%. At June
30, 2001, the Company had $2.3 million of outstanding letters of credit. At June
30, 2001, the outstanding balance under the credit agreement was $56.1 million
with $41.6 million of borrowing capacity available for general corporate
purposes.
The Revolver is secured by security interests and mortgages against
substantially all of the Company's assets and is subject to periodic borrowing
base determinations. The borrowing base is the lesser of $100 million or the sum
of (i) 65% of the value of the Company's proved developed producing reserves
subject to a mortgage; (ii) 45% of the value of the Company's proved developed
non-producing reserves subject to a mortgage; and (iii) 40% of the value of the
Company's proved undeveloped reserves subject to a mortgage. The price forecast
used for calculation of the future net income from proved reserves is the
three-year NYMEX strip for oil and natural gas as of the date of the reserve
report. Prices beyond three years are held constant. Prices are adjusted for
basis differential, fixed price contracts and financial hedges in place. The
present value (using a 10% discount rate and a roll forward of the December 31,
2000 reserve run) of the Company's future net income at June 30, 2001, under
this formula was approximately $226 million for all proved reserves of the
Company and $178 million for properties secured by a mortgage.
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The Revolver is subject to certain financial covenants. These include a
senior debt interest coverage ratio ranging from 4.3 to 1 at June 30, 2001, to
3.2 to 1 at March 31, 2004; and a senior debt leverage ratio ranging from 2.5 to
1 and 3.2 to 1 for the periods from June 30, 2001, through March 31, 2004.
EBITDA, as defined in the Revolver, and consolidated interest expense on senior
debt in these ratios are calculated quarterly based on the financial results of
the trailing four quarters. In addition, the Company is required to maintain a
current ratio (including available borrowing capacity in current assets,
excluding current debt and accrued interest from current liabilities and
excluding any effects from the application of SFAS 133 to other current assets
or current liabilities) of at least 1.0 to 1 and maintain liquidity of at least
$5 million (cash and cash equivalents including available borrowing capacity).
As of June 30, 2001, the Company's current ratio including the above adjustments
was 2.73 to 1. The Company has satisfied all financial covenants as of June 30,
2001.
From time to time the Company may enter into interest rate swaps to
hedge the interest rate exposure associated with the credit facility, whereby a
portion of the Company's floating rate exposure is exchanged for a fixed
interest rate. At June 30, 2000, the Company had swap arrangements, which
expired in October 2000, covering $40 million of debt. The Company's interest
expense was reduced by $55,000 in the first six months of 2000 due to interest
rate swaps. There were no interest rate swaps open in the first six months of
2001.
The Company currently expects to spend approximately $39 million during
2001 on its drilling activities and other capital expenditures. The Company
intends to finance its planned capital expenditures through its available cash
flow, available borrowing capacity under the Revolver and the sale of non
strategic assets. At June 30, 2001, the Company had approximately $41.6 million
available under the Revolver. The level of the Company's future cash flow will
depend on a number of factors including the demand for and price levels of oil
and gas, the scope and success of its drilling activities and its ability to
acquire additional producing properties.
To manage its exposure to natural gas price volatility, the Company may
partially hedge its physical gas sales prices by selling futures contracts on
the NYMEX or by selling NYMEX based commodity derivative contracts which are
placed with major financial institutions that the Company believes are minimal
credit risks. The contracts may take the form of futures contracts, swaps,
collars or options. The Company had pretax losses on its hedging activities of
$4.2 million and $2.8 million in the first six months of 2001 and 2000,
respectively.
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The Company's financial results and cash flows can be significantly
impacted as commodity prices fluctuate widely in response to changing market
conditions. Accordingly, the Company may modify its fixed price contract and
financial hedging positions by entering into new transactions or terminating
existing contracts. The following table reflects the natural gas volumes and the
weighted average prices under financial hedges (including settled hedges), fixed
price contracts and costless collars at June 30, 2001:
NATURAL GAS SWAPS FIXED PRICE CONTRACTS
----------------------------------------- ------------------------
ESTIMATED ESTIMATED
NYMEX WELLHEAD WELLHEAD
PRICE PRICE ESTIMATED PRICE
QUARTER ENDING Bbtu PER Mmbtu PER Mcf Mmcf PER Mcf
------------------------ ------------ ----------- ---------- ---------- ----------
September 30, 2001 1,950 $ 4.50 $ 4.65 1,250 $ 3.85
December 31, 2001 2,400 4.77 4.99 900 4.40
------------ ---------- --------- ---------- ---------
4,350 $ 4.65 $ 4.84 2,150 $ 4.08
============ ========== ========= ========== =========
March 31, 2002 2,550 $ 4.95 $ 5.20 970 $ 4.65
June 30, 2002 2,550 4.61 4.76 700 4.30
September 30, 2002 2,550 4.61 4.76 620 4.30
December 31, 2002 2,550 4.63 4.84 560 4.45
------------ ---------- --------- ---------- ---------
10,200 $ 4.70 $ 4.89 2,850 $ 4.45
============ ========== ========= ========== =========
NATURAL GAS COLLARS
----------------------------------------------------
NYMEX PRICE ESTIMATED
PER Mmbtu WELLHEAD PRICE
QUARTER ENDING Bbtu FLOOR/CAP PER Mcf
------------------------- ------------ ------------- --------------
March 31, 2003 1,650 $ 3.40 - 5.23 $ 3.60 - 5.43
June 30, 2003 1,650 3.40 - 5.23 3.60 - 5.43
September 30, 2003 1,650 3.40 - 5.23 3.60 - 5.43
December 31, 2003 1,650 3.40 - 5.23 3.60 - 5.43
------------ -------------- --------------
6,600 $ 3.40 - 5.23 $ 3.60 - 5.43
============ ============== ==============
Bbtu - BILLION BRITISH THERMAL UNITS Mmcf - MILLION CUBIC FEET
Mmbtu - MILLION BRITISH THERMAL UNITS Mcf - THOUSAND CUBIC FEET
At June 30, 2001, the natural gas swaps and collars above
represented approximately $17.1 million in unrealized gains.
FORWARD-LOOKING INFORMATION
The forward-looking statements regarding future operating and financial
performance contained in this report involve risks and uncertainties that
include, but are not limited to, the Company's availability of capital,
production and costs of operation, the market demand for and prices of oil and
natural gas, results of the Company's future drilling, the uncertainties of
reserve estimates, environmental risks, availability of financing and other
factors detailed in the Company's filings with the Securities and Exchange
Commission. Actual results may differ materially from forward-looking statements
made in this report.
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- --------------------------------------------------------------------------------
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
On April 17, 2001, the Company filed a Current Report
on Form 8-K dated April 1, 2001 relating to executive retirements.
On May 10, 2001, the Company filed a Current Report
on Form 8-K dated May 9, 2001 relating to Regulation FD disclosures.
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SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
BELDEN & BLAKE CORPORATION
Date: August 8, 2001 By: /s/ John L. Schwager
- ------------------------- ------------------------------------------
John L. Schwager, Director, President
and Chief Executive Officer
Date: August 8, 2001 By: /s/ Robert W. Peshek
- ------------------------- -----------------------------------------
Robert W. Peshek, Vice President
and Chief Financial Officer
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