FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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, 1996
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 1-14344
PATINA OIL & GAS CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 75-2629477
- ----------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1625 Broadway, Denver, Colorado 80202
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (303)592-4600
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(Former name, former address and former fiscal year,
if changed ince last report.)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No X.
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18,000,000 Common Shares were outstanding as of May 14, 1996
2,000,000 Series A Common Shares were outstanding as of May 14, 1996
PART I. FINANCIAL INFORMATION
The financial statements included herein have been prepared in
conformity with generally accepted accounting principles. The statements are
unaudited, but reflect all adjustments which, in the opinion of management, are
necessary to fairly present the Company's financial position and the results of
operations.
The Company was formed in January 1996 as a wholly-owned subsidiary of
Snyder Oil Corporation ("SOCO"). The Company was formed for the purpose of
consolidating SOCO's operations in the Wattenberg Field (the "Wattenberg
operations"). Such operations had historically been conducted through SOCO or
through another wholly-owned subsidiary, SOCO Wattenberg Corporation. On May 2,
1996, SOCO's Wattenberg operations were consolidated into the Company.
Immediately thereafter, the Company was merged with Gerrity Oil & Gas
Corporation. The amounts and results of operations of the Company included in
these financial statements include the historical amounts and results of
operations of the Wattenberg operations of SOCO prior to the Merger and the
issuance of Company stock for the Wattenberg assets of SOCO.
2
PATINA OIL & GAS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, March 31,
1995 1996
--------------- --------------
(Unaudited)
ASSETS
Current assets
Cash and equivalents $ 1,000 $ 1,000
Accounts receivable 6,611 6,498
Inventory 2,000 2,000
------------ ------------
9,611 9,498
------------ ------------
Oil and gas properties, successful efforts method 338,288 338,502
Accumulated depletion, depreciation and amortization (123,378) (130,345)
------------ ------------
214,910 208,157
------------ ------------
Other assets - 728
------------ ------------
$ 224,521 $ 218,383
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable $ 3,852 $ 3,843
Accrued liabilities 415 551
Payable to parent 5,344 5,104
------------ ------------
9,611 9,498
------------ ------------
Deferred taxes and other 26,247 25,168
Debt to parent 75,000 75,000
Contingencies
Stockholder's equity
Preferred stock, $.01 par, 5,000,000
shares authorized, -0- shares issued
and outstanding - -
Common stock, $.01 par, 40,000,000 shares
authorized, 14,000,000 shares issued and outstanding 140 140
Investment by parent 113,523 108,577
----------- -----------
113,663 108,717
----------- -----------
$ 224,521 $ 218,383
=========== ===========
The accompanying notes are an integral part of these statements.
3
PATINA OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
Three Months Ended March 31,
----------------------------------
1995 1996
----------- -----------
(Unaudited)
Revenues
Oil and gas sales $ 14,261 $ 10,634
Other 26 20
--------- ---------
14,287 10,654
--------- ---------
Expenses
Direct operating 2,263 1,955
Exploration 98 68
General and administrative 2,219 1,543
Interest paid to parent and other 1,418 1,247
Depletion, depreciation and amortization 8,620 6,967
--------- ---------
Loss before taxes (331) (1,126)
--------- ---------
Benefit from income taxes
Current - -
Deferred (116) (394)
--------- ---------
Net loss $ (215) $ (732)
========= =========
Net loss per common share $ (.02) $ (.05)
========= =========
Weighted average shares outstanding 14,000 14,000
========= =========
The accompanying notes are an integral part of these statements.
4
PATINA OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDER'S EQUITY
(In thousands)
Common Stock
------------------------- Investment
Shares Amount By Parent
-------- ---------- -----------
Balance, December 31, 1994 14,000 $ 140 $ 115,706
Net loss - - (2,094)
Credit in lieu of taxes - - 1,107
Change in investment by parent - - (1,196)
-------- ----------- ----------
Balance, December 31, 1995 14,000 140 113,523
Net loss - - (732)
Credit in lieu of taxes - - 171
Change in investment by parent - - (4,385)
--------- ----------- ----------
Balance, March 31, 1996
(Unaudited) 14,000 $ 140 $ 108,577
========= =========== ==========
The accompanying notes are an integral part of these statements.
5
PATINA OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended March 31,
----------------------------------
1995 1996
----------- -----------
(Unaudited)
Operating activities
Net loss $ (215) $ (732)
Adjustments to reconcile net loss to net
cash provided (used) by operations
Exploration expense 98 68
Depletion, depreciation and amortization 8,620 6,967
Deferred taxes (116) (394)
Amortization of deferred credits (430) (420)
Changes in operating assets and liabilities
Decrease in accounts receivable 575 113
Increase (decrease) in
Accounts payable (11,001) (9)
Accrued liabilities 178 290
---------- ----------
Net cash provided (used) by operations (2,291) 5,883
---------- ----------
Investing activities
Acquisition, development and exploration (14,623) (436)
Other asset expenditures - (728)
---------- ----------
Net cash used by investing (14,623) (1,164)
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Financing activities
Increase (decrease) in payable to parent 3,831 (240)
Deferred credits 1,423 (94)
Change in investment by parent 11,660 (4,385)
---------- ----------
Net cash realized (used) by financing 16,914 (4,719)
---------- ----------
Increase in cash - -
Cash and equivalents, beginning of period 1,000 1,000
---------- ----------
Cash and equivalents, end of period $ 1,000 $ 1,000
========== ==========
The accompanying notes are an integral part of these statements.
6
PATINA OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND NATURE OF BUSINESS
Patina Oil & Gas Corporation (the "Company"), a Delaware corporation, was,
at March 31, 1996, a wholly-owned subsidiary of Snyder Oil Corporation (along
with its remaining subsidiaries, collectively referred to as "SOCO"). The
Company was formed in January 1996 for the purpose of consolidating SOCO's
operations in the Wattenberg Field of the Denver-Julesburg Basin (the "DJ
Basin") in Colorado ("Wattenberg"). A portion of SOCO's Wattenberg operations
have historically been conducted through SOCO Wattenberg Corporation, a
wholly-owned subsidiary of SOCO. The Wattenberg operations consist of the
acquisition, exploration, development and production of oil and gas properties
in the Wattenberg Field.
On May 2, 1996, SOCO's Wattenberg operations were consolidated into the
Company. Immediately thereafter, the Company was merged (the "Merger") with
Gerrity Oil & Gas Corporation ("GOG"). Therefore, as of that date, SOCO owns 70%
of the common stock and the former GOG shareholders were issued 30% of the
common stock of the Company. Related to the Merger, the Company commenced an
Exchange Offer to exchange the Company's preferred stock for GOG's preferred
stock. The amounts and results of operations of the Company included in these
financial statements include the historical amounts and results of operations of
the Wattenberg operations of SOCO and the issuance of Company stock for the
Wattenberg assets of SOCO. The effect of the Merger has not been reflected in
the financial statements.
Historically, the market for oil and gas has experienced significant price
fluctuations. Prices for natural gas in the Rocky Mountain region have
traditionally been particularly volatile and have been depressed since 1994. In
large part, the decreased prices are the result of increased production in the
region and limited transportation capacity to other regions of the country.
Through year end 1995, a large portion of the Company's production has been sold
under term marketing agreements which are based on such regional pricing. During
the first quarter of 1996, as a portion of these agreements were expiring, the
Company benefitted from local spot prices which increased significantly as
compared to the regional pricing. The increase was attributed to greater local
demand and less local supply as a result of overall declining production in the
DJ Basin. Increases or decreases in prices received could have a significant
impact on the Company's future results of operations.
Certain amounts in the accompanying financial statements have been
allocated in a reasonable and consistent manner in order to depict the
historical financial position, results of operations and cash flows of the
Company on a stand-alone basis.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Producing Activities
The Company utilizes the successful efforts method of accounting for its
oil and gas properties. Under successful efforts, oil and gas leasehold costs
are capitalized when incurred. Unproved properties are assessed periodically
within specific geographic areas and impairments in value are charged to
expense. Exploratory expenses, including geological and geophysical expenses and
delay rentals, are charged to expense as incurred. Exploratory drilling costs
are initially capitalized, but charged to expense if and when the well is
determined to be unsuccessful. Costs of productive wells, unsuccessful
developmental wells and productive leases are capitalized and amortized on
7
a unit-of-production basis over the life of the remaining proved or proved
developed reserves, as applicable. Gas is converted to equivalent barrels at the
rate of 6 Mcf to 1 barrel. Amortization of capitalized costs has generally been
provided over the entire DJ Basin as the wells are located in the same
reservoir. The Company expects to review the appropriateness of this policy in
the second half of 1996. No accrual has been provided for estimated
dismantlement, restoration and abandonment costs as management estimates that
the salvage value of lease and well equipment will approximate the future
liability for such costs.
During the fourth quarter of 1995, the Company adopted Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
SFAS 121 requires the Company to assess the need for an impairment of
capitalized costs of oil and gas properties on a field-by-field basis. During
the three months ended March 31, 1995 and 1996, the Company did not provide for
any impairments. Changes in the underlying assumptions or the amortization units
could result in impairments in the future.
Gas Imbalances
The Company uses the sales method to account for gas imbalances. Under this
method, revenue is recognized based on the cash received rather than the
Company's proportionate share of gas produced. Gas imbalances at December 31,
1995 and March 31, 1996 were insignificant.
Financial Instruments
The book value and estimated fair value of cash and equivalents was $1.0
million at December 31, 1995 and March 31, 1996. The book value approximates
fair value due to the short maturity of these financial instruments. The book
value and estimated fair value of the Company's debt to parent was $75.0 million
at December 31, 1995 and March 31, 1996. The fair value is estimated based on
current rates offered to the Company for similar debt.
Other
All liquid investments with an original maturity of three months or less
are considered to be cash equivalents.
All cash payments for income taxes were made by SOCO during the three
months ended March 31, 1995 and 1996. The Company was charged interest by SOCO
on its debt to parent of $1.4 million and $1.2 million for the three months
ended March 31, 1995 and 1996, which was reflected as an increase in debt to
parent. As provided by the Merger Agreement, SOCO will retain all ad valorem tax
liabilities applicable to production through closing and will contribute
inventory of $2.0 million. Additionally, the working capital to be contributed
by SOCO to the Company will be zero plus certain items provided for in the
Merger Agreement.
In the opinion of management, those adjustments to the financial statements
(all of which are of a normal and recurring nature) necessary to present fairly
the financial position and results of operations have been made. These interim
financial statements should be read in conjunction with the Patina Oil & Gas
Corporation Proxy Statement/Prospectus dated April 2, 1996 (SEC Registration No.
333-572).
8
(3) OIL AND GAS PROPERTIES
The cost of oil and gas properties at December 31, 1995 and March 31, 1996
includes no unevaluated leasehold. Such properties are generally held for
exploration, development or resale and are excluded from amortization. The
following table sets forth costs incurred related to oil and gas properties.
Three
Year Ended Months Ended
December 31, March 31,
1995 1996
-------------- ------------
(In thousands)
Acquisition $ 650 $ 40
Development 12,141 174
Exploration 416 68
Other 13 -
----------- -----------
$ 13,220 $ 282
=========== ===========
On May 2, 1996, the Merger discussed in Note 1 was consummated. The
following tables summarize the unaudited pro forma effects on the Company's
financial statements assuming that the Merger and the Exchange Offer had been
consummated on March 31, 1996 (for balance sheet data) and January 1, 1995 and
1996 (for statement of operations data). These transactions will be accounted
for as a purchase of GOG. The pro forma effects of the Merger and the Exchange
Offer are based on assumptions set at the time of the filing of the Company's
registration statement declared effective by the Securities and Exchange
Commission. These assumptions have not been updated to reflect certain aspects
of the transactions which were not known until or subsequent to the occurrence
of the transactions. The pro forma condensed consolidated financial statements
should be read in conjunction with the related historical financial statements
included in the Company's registration statement. Future results may differ
substantially from pro forma results due to changes in these assumptions,
changes in oil and gas prices, production declines and other factors. Therefore,
pro forma statements cannot be considered indicative of future operations.
9
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 1996
(In thousands)
GOG Pro Forma Unaudited
Historical Historical Adjustments Pro Forma
---------- ---------- ------------ ---------
ASSETS
Current assets $ 9,498 $ 15,308 $ $ 24,806
Oil and gas properties and equipment, net 208,157 293,630 (83,754) (a) 418,033
Other noncurrent assets 728 6,480 (1,458) (a) 5,750
--------- --------- ---------
$ 218,383 $ 315,418 $ 448,589
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 9,498 $ 18,689 $ (5,104) (b) $ 20,583
(2,500) (c)
Deferred taxes and other 25,168 19,058 (34,225) (a) 10,001
Debt to parent 75,000 - (75,000) (b) -
Long-term debt - 117,500 15,884 (a) 215,988
80,104 (b)
2,500 (c)
Preferred stock of subsidiary - - 13,333 (a) 13,333
Stockholders' equity
Preferred stock, $.01 par - 4 7 (a) 11
Common stock, $.01 par 140 138 (78) (a) 200
Capital in excess of par value - 160,524 (80,628) (a) 188,473
108,577 (d)
Investment by parent 108,577 - (108,577) (d) -
Retained earnings (deficit) - (495) 495 (a) -
--------- --------- ---------
108,717 160,171 188,684
--------- --------- ---------
$ 218,383 $ 315,418 $ 448,589
========= ========= =========
10
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
(In thousands, except per share data)
GOG Pro Forma Unaudited
Historical Historical Adjustments Pro Forma
---------- ---------- ------------- ----------
Revenues
Oil and gas sales $ 50,073 $ 51,513 $ $ 101,586
Other 29 2,347 2,376
---------- ---------- ---------
50,102 53,860 103,962
---------- ---------- ---------
Expenses
Direct operating 8,867 8,366 1,575 (e) 18,308
(500) (f)
Exploration 416 285 701
General and administrative 5,974 7,731 (4,705) (f) 7,425
(1,575) (e)
Interest and other 5,476 14,505 (1,049) (g) 18,932
Depletion, depreciation and amortization 32,591 30,333 (7,054) (h) 55,870
Restructuring expenses - 828 828
---------- ---------- ---------
53,324 62,048 102,064
---------- ---------- ---------
Income (loss) before taxes and dividends on
preferred stock of subsidiary (3,222) (8,188) 1,898
Provision for (benefit from) income taxes (1,128) (215) 2,007 (i) 664
Dividends on preferred stock of subsidiary - - 1,518 (j) 1,518
---------- ---------- ----------
Net loss (2,094) (7,973) (284)
Dividends on preferred stock - 4,554 (2,654) (j) 1,900
---------- ---------- ----------
Net loss applicable to common stock $ (2,094) $ (12,527) $ (2,184)
========== ========== =========
Net loss per share $ (.15) $ (.11)
========== =========
Weighted average shares outstanding 14,000 20,000
========== =========
11
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 1996
(In thousands, except per share data)
GOG Pro Forma Unaudited
Historical Historical Adjustments Pro Forma
---------- ---------- ----------- ----------
Revenues
Oil and gas sales $ 10,634 $ 12,154 $ $ 22,788
Other 20 313 333
--------- --------- ---------
10,654 12,467 23,121
--------- --------- ---------
Expenses
Direct operating 1,955 2,030 394 (e) 4,254
(125) (f)
Exploration 68 59 127
General and administrative 1,543 1,678 (964) (f) 1,863
(394) (e)
Interest and other 1,247 3,408 (166) (g) 4,489
Depletion, depreciation and amortization 6,967 6,677 (1,123) (h) 12,521
--------- --------- ---------
11,780 13,852 23,254
--------- --------- ---------
Loss before taxes and dividends on
preferred stock of subsidiary (1,126) (1,385) (133)
Benefit from income taxes (394) (470) 817 (i) (47)
Dividends on preferred stock of subsidiary - - 380 (j) 380
--------- --------- ---------
Net loss (732) (915) (466)
Dividends on preferred stock - 1,139 (664) (j) 475
--------- --------- ---------
Net loss applicable to common stock $ (732) $ (2,054) $ (941)
========= ========= =========
Net loss per share $ (.05) $ (.05)
========= =========
Weighted average shares outstanding 14,000 20,000
========= =========
The preceding unaudited pro forma condensed consolidated financial
statements reflect the adjustments described below:
Balance Sheet
(a) To reflect the acquisition of GOG, including the issuance of 6,000,000
shares of Common Stock, 3,000,000 Warrants, a warrant to be issued to the prior
chief executive of GOG exercisable for 500,000 shares of Common Stock (the
"Executive Warrant") and 1,066,667 shares of Preferred Stock (reflecting the
estimated exchange of two-thirds of the GOG Preferred Stock pursuant to the
Exchange Offer) at estimated fair value including transaction costs. The
estimated fair value of the common stock issued was based on an assumed trading
price of $8 per share of Common Stock. The trading price was estimated based on
various factors, including the trading price of GOG's Common Stock and trading
multiples of comparable public companies. The fair value of the Warrants and the
Executive Warrant were estimated to be $1.75 and $2.50 per warrant,
respectively, based primarily on a range calculated using the Black-Scholes
options model. The Preferred Stock was valued at $26,667,000 reflecting the
exchange of two-thirds of the GOG Preferred Stock at the liquidation preference
of the newly issued shares. The GOG Preferred Stock was valued at $13,333,000
which was estimated based on the trading price of GOG's Preferred Stock. For
each additional 10% of GOG Preferred Stock exchanged, pro forma preferred stock
of subsidiary would decrease $4,000,000, preferred stock, $.01 par would
increase $1,600 and capital in excess of par value would
12
increase $3,998,400. No trading market or market price existed for the Common
Stock, Warrants, Executive Warrant, or Preferred Stock prior to the Merger.
On a pro forma basis, the Company is expected to have the following equity
instruments outstanding upon consummation of the Merger and the Exchange Offer
(other than shares owned by the Company or GOG):
Shares/Warrants
Outstanding
---------------
Common Stock 20,000,000
Preferred Stock 1,066,667
Warrants 3,000,000
Executive Warrant 500,000
In addition, GOG will have outstanding 1,012,000 Depository Shares
representing interests in GOG Preferred Stock.
(b) To reflect the repayment of the payable to parent through borrowings
under the Company's credit facility.
(c) To reflect the refinancing of GOG's current maturities of debt to
long-term debt through borrowings under the Company's credit facility.
(d) To reclassify the Company's investment by parent to capital in excess
of par value to reflect the Company's new capital structure.
Statement of Operations
(e) To conform the financial statement presentation by GOG of various
overhead charges and recoveries to a basis consistent with that of the Company.
(f) To reflect the reduction in direct operating and general and
administrative expenses that result from the elimination of redundant personnel,
lease space and other corporate services. Under the Merger Agreement, the
Company and SOCO have entered into a Corporate Services Agreement under which
SOCO will provide certain services to the Company so that it will not need to
have these tasks performed by the Company's employees. Administrative
efficiencies from combining headquarters and field operations and eliminating
duplicate executive, professional and administrative personnel are expected to
total approximately $4.7 million per year. Based upon a detailed analysis of the
expenses and personnel that will be required to provide such services following
the GOG Merger, management has estimated that future annual recurring general
and administrative expenses will approximate $5.0 million per year, net of
reimbursements.
(g) To adjust interest expense to reflect the refinancing or payment of (i)
$33.3 million (or 33.3%) of GOG's 11.75% Senior subordinated Notes, (ii) GOG's
bank borrowings under the terms of the Company's credit facility, (iii) the
payable to parent and (iv) transaction costs. The interest expense reflects the
Eurodollar Margin set forth in the credit facilities, which margin was applied
to the current Eurodollar Rate resulting in an average borrowing rate of
approximately 6.75%. Under the terms of GOG's Senior Subordinated Notes, GOG is
obligated to purchase any notes put to GOG at a price of 101% of the principal
amount thereof upon certain asset sales or dispositions. For each additional
$10,000,000 of Notes refinanced, pro forma interest expense would decrease and
net income and earnings per share would increase by $475,000, $308,000 and $0.02
per share for the year ended December 31, 1995 and $119,000, $77,000 and zero
per share for the three months ended March 31, 1996. The net decrease in
interest expense is attributable to the lower interest rate relating to the bank
borrowings used to refinance GOG's Senior Subordinated Notes, as described
above, offset somewhat by the increased debt level.
(h) To adjust depletion, depreciation and amortization of oil and gas
properties based on the purchase price allocated to GOG oil and gas properties
and the use of a combined depletion, depreciation and amortization rate. The
combined rate utilized for 1995 was $5.73 per BOE reflecting a rate of $5.65 per
BOE for the first nine months (based on reserve quantities as of December 31,
1994) and $6.02 per BOE for the last three months (based on reserve
13
quantities as of December 31, 1995). The rate utilized for the three months
ended March 31, 1996 was $6.32 per BOE based on reserve quantities as of
December 31, 1995.
(i) To record the estimated provision for income taxes to reflect the
anticipated effective income tax rate of the combined entity after the Merger.
(j) To reduce dividends paid on GOG Preferred Stock (reflecting the
estimated exchange of two-thirds of the GOG Preferred Stock pursuant to the
Exchange Offer) and reclassify dividends paid on the remaining outstanding
shares of GOG Preferred Stock. For each additional 10% of GOG Preferred Stock
exchanged, pro forma dividends on preferred stock of subsidiary would decrease
and net income would increase $455,000 and $114,000, dividends on preferred
stock would increase $285,000 and $71,000 and net income per share would
increase $.01 and zero for the year ended December 31, 1995 and the three months
ended March 31, 1996, respectively.
(4) INDEBTEDNESS
Historically, SOCO has financed all of the Company's activities. A portion
of such financing is considered to be an investment by SOCO in the Company with
the remaining portion being considered Debt to parent. The portion considered to
be Debt to parent versus an investment by SOCO is a discretionary percentage
determined by SOCO after consideration of the Company's internally generated
cash flows and level of capital expenditures. The classification of historical
financings is not necessarily an indicator of how future financings will be
characterized. Subsequent to the Merger, SOCO does not expect to provide any
additional funding to the Company.
On the portion of such financing which is considered to be debt to parent,
interest is charged by SOCO to the Company. The Company is charged interest on
the debt payable to SOCO at a rate which approximates the average interest rate
being paid by SOCO under its revolving credit facility (7.0% and 6.5% for 1995
and the three months ended March 31, 1996). There were no cash payments for
interest expense during the three months ended March 31, 1995 and 1996.
Simultaneously with the Merger, the Company entered into a credit
facilities agreement. The credit facilities consist of (a) a credit facility
provided to the Company and SOCO Wattenberg (the "Company Facility") and (b) a
credit facility provided to GOG (the "GOG Facility").
The Company Facility consists of a term loan facility (the "Company Term
Facility") in an amount up to $87 million and a revolving credit facility (the
"Company Revolving Facility") in an aggregate amount up to $102 million. The
Company Term Facility will be available (a) in a single borrowing to fund a loan
from Patina and/or SOCO Wattenberg to GOG (the "Intercompany Loan") to finance a
portion of the purchase of the GOG 11.75% Senior Subordinated Notes tendered for
redemption pursuant to the Indenture as a result of the Merger and (b) in
subsequent borrowings until the first anniversary of the Merger. The amount
available for borrowing under the Company Revolving Facility will be limited to
a semiannually adjusted borrowing base that equaled $102 million at the time of
the Merger. The Company Facility matures on July 15, 1999.
The GOG Facility is a revolving credit facility that provides for
borrowings that mature on July 15, 1999. The amount available for borrowing
under the GOG Facility will be limited to a fluctuating borrowing base, which
currently equals $51 million. The GOG Facility will be used among other things
to refinance GOG's existing bank credit facility.
The borrowers may elect that all or a portion of the credit facilities bear
interest at a rate per annum equal to: (i) the higher of (a) prime rate plus a
margin equal to .25% with respect to the GOG Facility and the Company Revolving
Facility and .75% increasing by 1% on the first anniversary of the Merger and by
.5% every six months thereafter with respect to the Company Term Facility (the
"Applicable Margin") and (b) the Federal Funds Effective Rate plus .5% plus the
Applicable Margin, or (ii) the rate at which eurodollar deposits for one, two,
three or six months (as selected by the applicable borrower) are offered in the
interbank eurodollar market in the approximated amount of the requested
borrowing (the "Eurodollar Rate") plus 1.25%, with respect to the GOG Facility
and the Company Revolving Facility, and 1.5% increasing by 1% on the first
anniversary of the Merger and by .5% every six months thereafter with respect to
the Company Term Facility (the "Eurodollar Margin").
14
The GOG Facility is secured by first and prior mortgages encumbering
substantially all of GOG's oil and gas properties and is guaranteed by the
Company. In the event the Company Term Facility is not paid in full by the first
anniversary date of the Merger, the Company will, upon demand by the lenders,
grant first and prior mortgages on at least 80% of their respective proved oil
and gas properties to secure the credit facilities. The credit facilities are
secured by first and prior liens encumbering (a) 100% of the issued and
outstanding capital stock of every class of SOCO Wattenberg and GOG (excluding
preferred stock of GOG outstanding after the Merger that is held by parties
other than the Company and its affiliates), and (b) the Intercompany Loan and
all related documents, instruments and agreements.
(5) FEDERAL INCOME TAXES
The Company has historically been included in the consolidated U.S. federal
income tax return of SOCO. Current and deferred income tax provisions allocated
by SOCO were determined as though the Company filed as an independent company,
making the same tax return elections used in SOCO's consolidated return.
Subsequent to the Merger, the Company will not be included in the consolidated
U.S. federal income tax return of SOCO.
The Company follows FASB Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes," which requires that deferred income taxes
reflect the future tax consequences of temporary differences between the tax
bases of assets and liabilities and their financial reporting amounts. No
differences existed between the federal statutory rate and the Company's
effective rate.
For tax purposes, the Company had regular net operating loss carryforwards
of $44.9 million and alternative minimum tax loss carryforwards of $3.2 million
at December 31, 1995. These carryforwards expire between 2005 and 2009. No cash
payments were made by the Company for federal taxes during 1994 and 1995. As
discussed in Note 1, the accompanying financial statements include certain
Wattenberg operations owned directly by SOCO. Accordingly, certain operating
losses generated by these properties will be retained by SOCO. In addition,
certain taxable income generated by SOCO did not offset the Company's net
operating loss carryforwards. The effect of such items has been reflected as a
charge or credit in lieu of taxes in the Company's statement of changes in
stockholder's equity.
(6) MAJOR CUSTOMERS
During the three months ended March 31, 1995 and 1996, Amoco Production
Company accounted for 20% and 21%, respectively, of revenues. Total Petroleum
accounted for 14% and 18%, subsidiaries of SOCO accounted for 58% and zero and
Associated Natural Gas, Inc. accounted for zero and 58%, respectively.
Management believes that the loss of any individual purchaser would not have a
material adverse impact on the financial position or results of operations of
the Company.
(7) DEFERRED CREDITS
The Company is involved in a partnership formed to monetize Section 29 tax
credits generated by the Company's properties. Contributions of $11 million were
received through 1995 which is expected to increase net income through mid 1996.
A revenue increase of more than $.40 per Mcf is realized on production generated
from qualified Section 29 properties in this partnership. The amounts received
by SOCO applicable to the Company net of revenue recognized are included in
deferred taxes and other. Additionally, the Company recognized $430,000 and
$420,000 of this revenue during the three months ended March 31, 1995 and 1996,
respectively. The Company has reached an agreement to replace the existing
partnership to monetize Section 29 tax credits. The new agreement provides for
the Company to receive proceeds from the sale of an interest in such oil and gas
properties which will entitle the purchaser to receive Section 29 tax credits
associated with future natural gas production from the properties. The Company
will retain a variable production payment from the properties. As a result, this
transaction is anticipated to increase cash flow and net income through 2002. A
revenue increase of more than $.40 per Mcf is expected to be realized on
production generated from qualified Section 29 properties in this arrangement.
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(8) RELATED PARTY
The Company has not historically had its own employees. Employees, certain
office space and furniture, fixtures and equipment have been provided by SOCO.
SOCO has allocated general and administrative expenses to the Company based on
its estimate of actual expenditures incurred on behalf of the Company.
Subsequent to the Merger described in Note 1, certain field, administrative and
executive employees of SOCO and GOG will become employees of the Company and
SOCO will provide certain services to Patina under a corporate services
agreement.
(9) COMMITMENTS AND CONTINGENCIES
In August 1995, the Company was sued in the United States District Court of
Colorado by seven plaintiffs purporting to represent all persons who, at any
time since January 1, 1960, have had agreements providing for royalties from gas
production in Colorado to be paid by the Company under a number of various lease
provisions. The plaintiffs allege that the Company improperly deducted
unspecified "post-production" costs incurred by the Company prior to calculating
royalty payments in breach of the relevant lease provisions and that the Company
fraudulently concealed that fact from the plaintiffs. The plaintiffs seek
unspecified compensatory and punitive damages and a declaratory judgment that
the Company is not permitted to deduct post-production costs prior to
calculating royalties paid to the class. The Company believes that costs
deducted by it in calculating royalties are and have been proper under the
relevant lease provisions, and intends to defend this and any similar suits
vigorously. At this time, the Company is unable to estimate the range of
potential loss, if any, from this uncertainty. However, the Company believes the
resolution of this uncertainty should not have a material adverse effect upon
the Company's financial position, although an unfavorable outcome in any
reporting period could have a material impact on the Company's results of
operations for that period.
16
PATINA OIL & GAS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Total revenues for the three months ended March 31, 1996 declined 25% to
$10.7 million. The revenue decrease was due to a 33% decline in production based
on barrels of oil equivalents ("BOE") partially offset by a 12% increase in the
average price received per BOE. The net loss for the first quarter of 1996 was
$732,000 compared to a net loss of $215,000 for the same period in 1995. The
increase in net loss is attributed to the decrease in total revenues at a higher
rate than the corresponding decreases in expenses.
Oil and gas sales less direct operating expenses were $8.7 million, a 28%
decrease from the prior year quarter. Average daily production in the first
quarter of 1996 was 2,710 barrels and 43 MMcf (9,960 BOE), decreases of 36% and
33%, respectively. The production decreases resulted primarily from the
Company's reduced development schedule and expected initial declines on the
large number of wells drilled and completed in 1994 and early 1995. There were
54 wells placed on production in the first quarter of 1995 compared to one well
in the first quarter of 1996. Production volumes are expected to increase in the
second quarter due to the effect of the Merger. However, from that point, while
production is not expected to continue to decline at the current rate, a
decrease is expected unless development drilling activity is resumed or
additional acquisitions are consummated. The decision to resume development
drilling activity is weighted heavily on the current prices being received for
production. Unless prices increase significantly, development drilling is
expected to be limited.
Average oil prices increased to $18.31 per barrel compared to $16.37
received in the first quarter of 1995. Natural gas prices realized increased
from $1.37 per Mcf in the first quarter of 1995 to $1.55 in 1996. The increase
was primarily the result of prior year production being marketed under term
arrangements which are based on Rocky Mountain region pricing (which remains
depressed) whereas the 1996 production benefitted from a portion of these
agreements expiring allowing the production to be sold at local spot prices
which had increased as a result of higher demand and overall declining
production in the DJ Basin. Direct operating expenses increased to $2.16 per BOE
compared to $1.67 in the prior year quarter. The increase is primarily
attributed to the Company focusing more attention on enhancing production
through performing workovers on existing properties rather than through
development drilling.
General and administrative expenses, net of reimbursements, for first
quarter 1996 were $1.5 million, a 30% decrease from the same period in 1995.
Prior to Merger, the Company did not have its own employees. Employees and
certain office space and furniture, fixtures and equipment have been provided by
SOCO. SOCO has allocated general and administrative expenses based on estimates
of actual expenditures incurred on behalf of the Company. The general and
administrative expenses in 1996 were $676,000 lower than 1995, reflecting the
lower overhead associated with the reduced drilling activity and the Company's
reduction in personnel.
Interest and other expense was $1.2 million compared to $1.4 million in the
first quarter of 1995. The decrease is the result of a decrease in the average
outstanding debt level and lower average interest rates which averaged 7.0% for
the first quarter 1995 compared to 6.5% in the first quarter 1996.
Depletion, depreciation and amortization expense for the first quarter
decreased $1.7 million or 19% from the same period in 1995. The decline in
production resulted in a $2.8 million decrease which was offset somewhat by an
increased depletion, depreciation and amortization rate of $7.50 per BOE
compared to $6.15 in 1995. The primary cause for the increased rate was a
downward revision in reserve quantities due to proved undeveloped reserves being
classified as uneconomic at year end 1995 prices.
Development, Acquisition and Exploration
During 1995 and the three months ended March 31, 1996, the Company incurred
$13.2 million and $282,000 in capital expenditures of which $12.1 million and
$174,000 was for oil and gas development. A total of 88 wells were placed on
production in 1995 (54 in the first quarter) with one in progress at year end
and no dry holes drilled.
17
The one well in progress at year end was completed and placed on production in
the first quarter 1996. No wells were in progress at March 31, 1996. The Company
significantly reduced its drilling activities in 1995 as natural gas prices
continued to remain relatively low.
The Company also expended $650,000 and $40,000 during 1995 and the three
months ended March 31, 1996 for acquisition activities primarily related to the
purchase of incremental interests in various properties and additional acreage.
During 1995 and the three months ended March 31, 1996, the Company expended
$416,000 and $68,000 for exploration activities primarily for delay rentals and
geological and geophysical expenses.
Financial Condition and Capital Resources
At March 31, 1996, the Company had total assets of $218.4 million. Total
capitalization was $208.9 million, of which 52% was represented by stockholder's
equity, 36% by debt to parent and the remainder by deferred taxes and other.
During the three months ended March 31, 1996, net cash provided by operations
was $5.9 million, as compared to $2.3 million net cash used by operations for
the same period in 1995. As of March 31, 1996, commitments for capital
expenditures totalled $82,000. The Company anticipates that 1996 expenditures
for development drilling, giving effect to the Merger, will be limited to less
than $10 million, which should allow for a reduction of indebtedness or provide
funds to pursue additional acquisitions. The level of these and other future
expenditures is largely discretionary, and the amount of funds devoted to any
particular activity may increase or decrease significantly, depending on
available opportunities and market conditions. The Company plans to finance its
ongoing development, acquisition and exploration expenditures using internal
cash flow, proceeds from asset sales and its bank credit facilities. In
addition, joint ventures or future public and private offerings of debt or
equity securities may be utilized. As a result of the Merger, the Company
expects to report increased consolidated net cash provided by operations.
However, due to restrictions outlined in GOG's various credit agreements, cash
generated by GOG will be retained by GOG and will not be available to fund the
Company's other operations or to pay dividends to its stockholders.
Historically, SOCO has financed all of the Company's activities. A portion
of such financing is considered to be an investment by SOCO in the Company with
the remaining portion being considered debt payable to SOCO. The portion
considered to be debt versus an investment by SOCO is a discretionary percentage
determined by SOCO after consideration of the Company's internally generated
cash flows and level of capital expenditures. The classification of historical
financings is not necessarily an indicator of how future financings will be
characterized. Subsequent to the Merger, SOCO does not expect to provide any
additional funding to the Company.
On the portion of such financing which is considered to be debt to parent,
interest is charged by SOCO to the Company. The Company is charged interest on
the debt payable to SOCO at a rate which approximates the average interest rate
being paid by SOCO under its revolving credit facility (7.0% and 6.5% for 1995
and the three months ended March 31, 1996).
Simultaneously with the Merger, the Company entered into a credit
facilities agreement. The credit facilities consist of (a) a credit facility
provided to the Company and SOCO Wattenberg (the "Company Facility") and (b) a
credit facility provided to GOG (the "GOG Facility").
The Company Facility consists of a term loan facility (the "Company Term
Facility") in an amount up to $87 million and a revolving credit facility (the
"Company Revolving Facility") in an aggregate amount up to $102 million. The
Company Term Facility will be available (a) in a single borrowing to fund a loan
from Patina and/or SOCO Wattenberg to GOG (the "Intercompany Loan") to finance a
portion of the purchase of the GOG 11.75% Senior Subordinated Notes tendered for
redemption pursuant to the Indenture as a result of the Merger and (b) in
subsequent borrowings until the first anniversary of the Merger. The amount
available for borrowing under the Company Revolving Facility will be limited to
a semiannually adjusted borrowing base that equaled $102 million at the time of
the Merger. The Company Facility matures on July 15, 1999.
The GOG Facility is a revolving credit facility that provides for
borrowings that mature on July 15, 1999. The amount available for borrowing
under the GOG Facility will be limited to a fluctuating borrowing base, which
18
currently equals $51 million. The GOG Facility will be used among other things
to refinance GOG's existing bank credit facility.
The borrowers may elect that all or a portion of the credit facilities bear
interest at a rate per annum equal to: (i) the higher of (a) prime rate plus a
margin equal to .25% with respect to the GOG Facility and the Company Revolving
Facility and .75% increasing by 1% on the first anniversary of the Merger and by
.5% every six months thereafter with respect to the Company Term Facility (the
"Applicable Margin") and (b) the Federal Funds Effective Rate plus .5% plus the
Applicable Margin, or (ii) the rate at which eurodollar deposits for one, two,
three or six months (as selected by the applicable borrower) are offered in the
interbank eurodollar market in the approximated amount of the requested
borrowing (the "Eurodollar Rate") plus 1.25%, with respect to the GOG Facility
and the Company Revolving Facility, and 1.5% increasing by 1% on the first
anniversary of the Merger and by .5% every six months thereafter with respect to
the Company Term Facility (the "Eurodollar Margin").
The GOG Facility is secured by first and prior mortgages encumbering
substantially all of GOG's oil and gas properties and is guaranteed by the
Company. In the event the Company Term Facility is not paid in full by the first
anniversary date of the Merger, the Company will, upon demand by the lenders,
grant first and prior mortgages on at least 80% of their respective proved oil
and gas properties to secure the credit facilities. The credit facilities are
secured by first and prior liens encumbering (a) 100% of the issued and
outstanding capital stock of every class of SOCO Wattenberg and GOG (excluding
preferred stock of GOG outstanding after the Merger that is held by parties
other than the Company and its affiliates), and (b) the Intercompany Loan and
all related documents, instruments and agreements.
The credit agreement contains certain financial covenants relating to the
borrowers, including but not limited to a maximum total debt to capitalization
ratio, a maximum total debt to EBITDA ratio and a minimum current ratio. The
credit agreement will also contain certain negative covenants, including but not
limited to restrictions on indebtedness; certain liens; guaranties, speculative
derivatives and other similar obligations; asset dispositions; dividends, loans
and advances; creation of subsidiaries; investments; leases; acquisitions;
mergers; changes in fiscal year; transactions with affiliates; changes in
business conducted; sale and leaseback and operating lease transactions; sale of
receivables; prepayment of other indebtedness; amendments to principal
documents; negative pledge clauses; issuance of securities; and non-speculative
commodity hedging.
The Company believes that its capital resources are adequate to meet the
requirements of its business. However, future cash flows are subject to a number
of variables including the level of production and oil and gas prices, and there
can be no assurance that operations and other capital resources will provide
cash in sufficient amounts to maintain planned levels of capital expenditures or
that increased capital expenditures will not be undertaken.
Inflation and Changes in Prices
While certain of its costs are affected by the general level of inflation,
factors unique to the petroleum industry result in independent price
fluctuations. Over the past five years, significant fluctuations have occurred
in oil and gas prices. Although it is particularly difficult to estimate future
prices of oil and gas, price fluctuations have had, and will continue to have, a
material effect on the Company.
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PART II. OTHER INFORMATION
Item 5. Other Information
The following financial statements of Gerrity Oil & Gas Corporation are
hereby incorporated by reference from the Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1996 of Gerrity Oil & Gas Corporation
(Commission File Number 0-18667):
(i) Consolidated Balance Sheet as of March 31, 1996
(ii) Consolidated Statements of Operations for the Quarters Ended
March 31, 1995 and 1996
(iii) Consolidated Statements of Cash Flows for the Quarters Ended
March 31, 1995 and 1996
(iv) Notes to Consolidated Financial Statements
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
27 Financial Data Schedule
99.1 Gerrity Oil & Gas Corporation Consolidated Financial
Statements - incorporated by reference from the Quarterly
Report on Form 10-Q for the quarterly period ended March 31,
1996 of Gerrity Oil & Gas Corporation (Commission File Number
0-18667).
(b) Reports on Form 8-K -
No reports on Form 8-K were filed by Registrant during the quarter
ended March 31, 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PATINA OIL & GAS CORPORATION
By (David J. Kornder)
----------------------------------
David J. Kornder, Vice President
May 14, 1996
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