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 June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------------------------------------------------
Commission file number 1-14344
PATINA OIL & GAS CORPORATION
Delaware 75-2629477
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1625 Broadway, Denver, Colorado 80202
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (303)389-3600
- -------------------------------------------------------------------------------
(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. Yes X No .
There were 19,866,012 Common Shares outstanding as of August 13, 1996, of
which 2,000,000 are designated as Series A Common Shares.
PART I. FINANCIAL INFORMATION
Patina Oil & Gas Corporation (the "Company") was incorporated in January
1996 to hold the assets and operations of Snyder Oil Corporation ("SOCO") in the
Wattenberg Field and to facilitate the acquisition of Gerrity Oil & Gas
Corporation ("GOG"). Previously, SOCO's Wattenberg operations had been conducted
through SOCO or its wholly owned subsidiary, SOCO Wattenberg Corporation
("SWAT"). On May 2, 1996, SOCO contributed the balance of its Wattenberg assets
to SWAT and transferred all of the shares of SWAT to the Company. Immediately
thereafter, GOG merged into another wholly owned subsidiary of the Company ("the
Merger"). As a result of these transactions, SWAT and GOG became wholly owned
subsidiaries of the Company. The results of operations of the Company for
periods prior to the Merger reflected in these financial statements include only
the historical results of SOCO's Wattenberg operations.
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 results of operations.
2
PATINA OIL & GAS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, June 30,
1995 1996
-------------- --------------
(Unaudited)
ASSETS
Current assets
Cash and equivalents $ 1,000 $ 13,213
Accounts receivable 6,611 18,907
Inventory and other 2,000 2,958
------------- -------------
9,611 35,078
------------- -------------
Oil and gas properties, successful efforts method 333,513 551,473
Accumulated depletion, depreciation and amortization (118,919) (136,861)
------------- -------------
214,594 414,612
------------- -------------
Gas facilities and other 4,775 5,922
Accumulated depreciation (4,459) (4,627)
------------- --------------
316 1,295
------------- -------------
Other assets, net - 4,490
------------- -------------
$ 224,521 $ 455,475
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 3,852 $ 15,065
Accrued liabilities 415 10,362
Payable to parent 5,344 4,329
------------ -----------
9,611 29,756
------------ -----------
Senior debt - 116,296
Senior subordinated notes - 104,617
Debt to parent 75,000 -
Other noncurrent liabilities 26,247 3,527
Preferred stock of subsidiary - 9,729
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par, 5,000,000 shares
authorized, -0- and 1,204,847 shares issued
and outstanding - 12
Common stock, $.01 par, 40,000,000 shares
authorized, 14,000,000 and 19,866,012 shares
issued and outstanding 140 199
Capital in excess of par value - 193,378
Investment by parent 113,523 -
Retained earnings (deficit) - (2,039)
------------ -----------
113,663 191,550
------------ ----------
$ 224,521 $ 455,475
============ ===========
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 Six Months
Ended June 30, Ended June 30,
---------------- -------------------
1995 1996 1995 1996
(Unaudited)
Revenues
Oil and gas sales $ 12,887 $ 19,182 $ 27,148 $ 29,816
Other 3 274 29 294
-------- -------- -------- --------
12,890 19,456 27,177 30,110
-------- -------- -------- --------
Expenses
Direct operating 2,503 3,446 4,766 5,401
Exploration 41 81 139 149
General and administrative 1,323 1,570 3,542 3,113
Interest and other 1,351 3,732 2,769 4,979
Depletion, depreciation and amortization 8,331 11,756 16,951 18,723
-------- -------- -------- -------
Income (loss) before taxes (659) (1,129) (990) (2,255)
-------- -------- --------- -------
Provision (benefit) for income taxes
Current - - - -
Deferred (231) - (347) (394)
-------- -------- --------- --------
(231) - (347) (394)
-------- -------- --------- --------
Net income (loss) $ (428) $ (1,129) $ (643) $ (1,861)
======== ======== ======== ========
Net income (loss) per common share $ (.03) $ (.10) $ (.05) $ (.16)
======== ======== ======== ========
Weighted average shares outstanding 14,000 17,919 14,000 15,959
======== ======== ======== =======
The accompanying notes are an integral part of these statements.
4
PATINA OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
(In thousands)
Preferred Stock Common Stock Capital in Retained
------------------ --------------- Excess of Investment Earnings
Shares Amount Shares Amount Par Value By Parent (Deficit)
------ ----- ------ ----- --------- ---------- --------
Balance, December 31, 1994 - $ - 14,000 $ 140 $ - $ 115,706 $ -
Credit in lieu of taxes - - - - - 1,107 -
Change in investment by parent - - - - - (1,196) -
Net loss - - - - - (2,094) -
--------- --------- --------- ---------- --------- --------- ---------
Balance, December 31, 1995 - - 14,000 140 - 113,523 -
Credit in lieu of taxes - - - - - 171 -
Change in investment by parent - - - - - (7,514) -
Net loss through the Merger date - - - - - (532) -
Merger 1,205 12 6,000 60 194,291 (105,648) -
Issuance of common - - 1 - 9 - -
Repurchase of common - - (135) (1) (922) - -
Preferred dividends - - - - - - (710)
Net loss subsequent to the Merger
date - - - - - - (1,329)
--------- ---------- --------- --------- ---------- -------- ---------
Balance, June 30, 1996
(Unaudited) 1,205 $ 12 19,866 $ 199 $ 193,378 $ - $ (2,039)
======== ========== ========= ========= ========== ======== =========
The accompanying notes are an integral part of these statements.
5
PATINA OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended June 30,
-------------------------
1995 1996
------ ----
(Unaudited)
Operating activities
Net loss $ (643) $ (1,861)
Adjustments to reconcile net loss to net
cash provided by operations
Exploration expense 139 149
Depletion, depreciation and amortization 16,951 18,723
Deferred taxes (347) (394)
Amortization of deferred credits (860) (646)
Changes in current and other assets and liabilities
Decrease in
Accounts receivable 1,605 1,384
Inventory and other -- 102
Increase (decrease) in
Accounts payable (11,647) (5,052)
Accrued liabilities 357 1,504
Other liabilities -- 1,059
--------- --------
Net cash provided by operations 5,555 14,968
-------- --------
Investing activities
Acquisition, development and exploration (18,613) (1,375)
Merger expenditures, net of cash acquired -- (1,040)
--------- --------
Net cash used by investing (18,613) (2,415)
--------- --------
Financing activities
Increase (decrease) in payable/debt to parent 4,331 (78,615)
Increase (decrease) in indebtedness (4,333) 96,108
Deferred credits 1,402 624
Change in investment by parent 11,658 (7,514)
Cost of common stock issuance -- (9,310)
Repurchase of common stock -- (923)
Preferred dividends -- (710)
-------- ---------
Net cash realized (used) by financing 13,058 (340)
-------- --------
Increase in cash -- 12,213
Cash and equivalents, beginning of period 1,000 1,000
-------- --------
Cash and equivalents, end of period $ 1,000 $ 13,213
======== ========
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
incorporated in January 1996 to hold all of the assets of Snyder Oil Corporation
("SOCO") in the Wattenberg Field and to facilitate the acquisition of Gerrity
Oil & Gas Corporation ("GOG"). Previously, SOCO's Wattenberg operations had been
conducted through SOCO or its wholly owned subsidiary, SOCO Wattenberg
Corporation ("SWAT"). On May 2, 1996, SOCO contributed the balance of its
Wattenberg assets to SWAT and transferred all of the shares of SWAT to the
Company. Immediately thereafter, GOG merged into another wholly owned subsidiary
of the Company (the "Merger"). As a result of these transactions, SWAT and GOG
became wholly owned subsidiaries of the Company. The Company's operations
currently consist of the acquisition, development, production and exploration of
oil and gas properties in the Wattenberg Field.
SOCO owns approximately 70% of the common stock of the Company. In
conjunction with the Merger, the Company offered to exchange the Company's
preferred stock for GOG's preferred stock (the "Original Exchange Offer"). A
total of 1,204,847 shares were issued in exchange for approximately 75% of GOG's
preferred stock. Subsequent to quarter end, the Company announced that it
intended to amend GOG's certificate of incorporation to provide that all
remaining shares of GOG's preferred stock would be exchanged for the Company's
preferred stock based on the same terms as the Original Exchange Offer. The
expected dividend payments resulting from this exchange have been accrued at
June 30, 1996. Upon consummation of this second exchange, the Company expects to
have approximately 1.6 million preferred shares outstanding.
The above transactions were accounted for as a purchase of GOG. The amounts
and results of the Company for periods prior to the Merger reflected in these
financial statements include the historical amounts and results of SOCO's
Wattenberg 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 prior to the Merger.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Risks and Uncertainties
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 mild weather, increased
production in the region and limited transportation capacity to other regions of
the country. Increases or decreases in prices received could have a significant
impact on the Company's future results of operations.
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. Consequently, 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 a unit-of-production basis
over the life of
7
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 future abandonment costs as management estimates that
salvage value will approximate 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 six months ended June 30, 1995 and 1996, the Company did not provide for any
impairments. Changes in the underlying assumptions or the amortization units
could, however, result in impairments in the future.
Other assets reflect the value assigned to a noncompete agreement entered
into as part of the Merger. The value is being amortized over five years at a
rate intended to approximate the decline in the value of the agreement.
Amortization expense for the two months ended June 30, 1996 was $640,000.
Scheduled amortization for the next five years is $1,924,000 for the remainder
of 1996, $1,540,000 in 1997, $513,000 in 1998, and $257,000 in each of 1999 and
2000.
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 June 30, 1996 were insignificant.
Financial Instruments
The book value and estimated fair value of cash and equivalents was $1.0
million and $13.2 million at December 31, 1995 and June 30, 1996. The book value
approximates fair value due to the short maturity of these instruments. The book
value and estimated fair value of the Company's debt to parent and senior debt
combined was $75.0 million and $116.3 million at December 31, 1995 and June 30,
1996. The fair value is presented at face value given its floating rate
structure. The book value of the senior subordinated notes was $104.6 million at
June 30, 1996. The estimated fair value was $104.1 million at that date. The
fair value is estimated based on their price on the New York Stock Exchange.
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 six
months ended June 30, 1995 and through May 2, 1996 at which point the Company
began paying its own taxes. The Company was charged interest by SOCO on its debt
to SOCO of $2.7 million and $1.6 million for the six months ended June 30, 1995
and 1996, which was reflected as an increase in debt to SOCO.
Certain amounts in prior periods consolidated financial statements have
been reclassified to conform with current classification.
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
Company's 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 June 30, 1996
includes no significant unevaluated leasehold. Acreage is generally held for
exploration, development or resale and its value, if any, is excluded from
amortization. The following table sets forth costs incurred related to oil and
gas properties.
Six
Year Ended Months Ended
December 31, June 30,
1995 1996
------------ -------------
(In thousands)
Acquisition $ 650 $218,297
Development 12,141 736
Exploration 416 149
Other 13 47
--------- --------
$ 13,220 $219,229
========= ========
On May 2, 1996, the Merger discussed in Note 1 was consummated. The
following table summarizes the unaudited pro forma effects on the Company's
financial statements assuming that the Merger and the Exchange Offer had been
consummated on January 1, 1995 and 1996. 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.
Six Months Ended June 30,
------------------------
1995 1996
-------- ---------
(In thousands, except per share data)
Total revenues $ 56,560 $ 47,060
Depletion, depreciation and amortization $ 32,443 $ 37,756
Production direct operating margin $ 45,585 $ 27,945
Net income (loss) $ (884) $ (3,653)
Net income (loss) per common share $ (.12) $ (.25)
Weighted average shares outstanding 20,000 20,000
Production volume (MBOE) 5,146 3,684
(4) INDEBTEDNESS
The following indebtedness was outstanding on the respective dates:
December 31, June 30,
1995 1996
----------- ---------
(In thousands)
Bank credit facilities $ - $116,296
Less current portion - -
-------- --------
Senior debt, net $ - $116,296
======== ========
Senior subordinated notes $ - $104,617
======== ========
Debt to parent $ 75,000 $ -
======== ========
Simultaneously with the Merger, the Company entered into a bank credit
agreement. The agreement consists of (a) a facility provided to the Company and
SOCO Wattenberg (the "Company Facility") and (b) a facility provided to GOG (the
"GOG Facility").
9
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 to fund loans from Patina and/or SOCO
Wattenberg to GOG (the "Intercompany Loan") to finance purchases of the GOG
11.75% Senior Subordinated Notes until the first anniversary of the Merger. At
June 30, 1996, the Company had not utilized the Company Term Facility. The
amount available for borrowing under the Company Revolving Facility will be
limited to a semiannually adjusted borrowing base that equaled $102 million at
June 30, 1996. At June 30, 1996, $81.8 million was outstanding under the Company
Revolving Facility.
The GOG Facility is a revolving credit facility in an aggregate amount up
to $51 million. The amount available for borrowing under the GOG Facility will
be limited to a fluctuating borrowing base that equaled $51 million at June 30,
1996. At June 30, 1996, $34.5 million was outstanding under the GOG Facility.
The GOG Facility was used primarily to refinance GOG's previous bank credit
facility and pay costs associated with the Merger.
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"). During the
period subsequent to the Merger through June 30, 1996, the average interest rate
under the facilities approximated 7.0%.
The bank credit agreement contains certain financial covenants, 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 bank credit agreement also
contains 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.
Simultaneously with the Merger, the Company recorded $100 million of
Senior Subordinated Notes due July 15, 2004 issued by GOG on July 1, 1994. In
connection with the Merger, the Company repurchased $1.2 million of the notes.
As part of the purchase accounting, the remaining notes have been reflected in
the accompanying financial statements at a market value of $104.6 million or
105.875% of their principal amount. Interest is payable each January 15 and July
15. The Notes are redeemable at the option of GOG, in whole or in part, at any
time on or after July 15, 1999, initially at 105.875% of their principal amount,
declining to 100% on or after July 15, 2001. Upon the occurrence of a change of
control, as defined in the Notes, GOG would be obligated to make an offer to
purchase all outstanding Notes at a price of 101% of the principal amount
thereof. In addition, GOG would be obligated, subject to certain conditions, to
make offers to purchase Notes with the net cash proceeds of certain asset sales
or other dispositions of assets at a price of 101% of the principal amount
thereof. The Notes are unsecured general obligations of GOG and are subordinated
to all senior indebtedness of GOG and to any existing and future indebtedness of
GOG's subsidiaries.
The Notes contain covenants that, among other things, limit the ability
of GOG to incur additional indebtedness, pay dividends, engage in transactions
with shareholders and affiliates, create liens, sell assets, engage in mergers
and consolidations and make investments in unrestricted subsidiaries.
Specifically, the Notes restrict GOG from incurring indebtedness (exclusive of
the Notes) in excess of approximately $51 million, if after giving effect to the
incurrence of such additional indebtedness and the receipt and application of
the proceeds therefrom, GOG's interest coverage ratio is less than 2.5:1 or
adjusted consolidated net tangible assets is less than 150% of the aggregate
indebtedness of GOG. GOG currently does not meet the interest coverage ratio
necessary to incur indebtedness in excess of approximately $51 million primarily
as a result of lower than anticipated commodity prices.
10
Prior to the Merger, SOCO financed all of the Company's activities. A
portion of such financing was considered to be an investment by parent in the
Company with the remaining portion being considered Debt to parent. The portion
considered to be Debt to parent versus an investment by parent was a
discretionary percentage determined by SOCO after consideration of the Company's
internally generated cash flows and level of capital expenditures. Subsequent to
the Merger, the $75 million debt to parent was paid in full and the Company does
not expect SOCO to provide any additional funding.
On the portion of such financing which was considered to be Debt to
parent, interest was charged by SOCO to the Company. The Company was charged
interest on the debt payable to SOCO at a rate which approximated the average
interest rate being paid by SOCO under its revolving credit facility (7.0% and
6.4% for 1995 and the six months ended June 30, 1996).
Scheduled maturities of indebtedness for the next five years are zero for
the remainder of 1996, 1997 and 1998, $116.3 million in 1999 and zero in 2000.
The long-term portion of the credit facilities are scheduled to expire in 1999;
however, it is management's intent to review both the short-term and long-term
facilities and extend the maturities on a regular basis.
Cash payments for interest were zero and $649,000, respectively, for the
six months ended June 30, 1995 and 1996.
(5) STOCKHOLDERS' EQUITY
A total of 40 million common shares, $.01 par value, are authorized of
which 19.9 million were issued and outstanding at June 30, 1996. The Company
issued 6.0 million shares in exchange for all of the outstanding stock of GOG
upon consummation of the Merger. Of the 19.9 million shares outstanding, 2.0
million are designated as Series A Common Stock. The Series A Common Stock is
identical to the common shares except that the Series A Common Stock is entitled
to three votes per share rather than one vote per share. The Series A Common
Stock is owned by SOCO and reverts to regular common shares upon certain
conditions. During the second quarter 1996, the Company repurchased 135,000
shares of common stock for $923,000. No dividends have been paid on the
Company's common stock as of June 30, 1996.
A total of 5 million preferred shares, $.01 par value, are authorized of
which 1.2 million were issued and outstanding at June 30, 1996. In May 1996, 1.2
million shares of 7.125% preferred stock were issued to certain GOG preferred
shareholders electing to exchange their preferred shares in an exchange offer
related to the consummation of the Merger. Thus there were no proceeds received
related to this issuance. The stock is convertible into common stock at any time
at $8.61 per share. The 7.125% preferred stock is redeemable at the option of
the Company at any time after May 2, 1998 if the average closing price of the
Patina common stock for 20 of the 30 days prior to not less than five days
preceding the redemption date is greater than $12.92 per share or at any time
after May 2, 1999. The liquidation preference is $25 per share, plus accrued and
unpaid dividends. The Company paid $536,000 ($1.78 per 7.125% convertible share
per annum) in preferred dividends during the six months ended June 30, 1996 and
had accrued an additional $528,000 at June 30, 1996 for dividends.
In 1996, the shareholders adopted a stock option plan for employees
providing for the issuance of options at prices not less than fair market value.
Options to acquire up to three million shares of common stock may be outstanding
at any given time. The specific terms of grant and exercise are determinable by
a committee of independent members of the Board of Directors. A total of 512,000
options were issued in May 1996. The options vest over a three-year period (30%,
60%, 100%) and expire five years from date of grant.
In 1996, the shareholders adopted a stock grant and option plan (the
"Directors' Plan") for non-employee Directors of the Company. The Directors'
Plan provides for each non-employee Director to receive common shares having a
market value equal to $2,250 quarterly in payment of one-half their retainer. A
total of 1,412 shares were issued in June 1996. It also provides for 5,000
options to be granted annually to each non-employee Director. A total of 20,000
options were issued in May 1996. The options vest over a three-year period (30%,
60%, 100%) and expire five years from date of grant.
11
Earnings per share are computed by dividing net income (loss), less
dividends on preferred stock, by weighted average common shares outstanding. Net
income (loss) available to common for the six months ended June 30, 1995 and
1996, was $(643,000) and $(2.6) million, respectively. Differences between
primary and fully diluted earnings per share were insignificant for all periods
presented.
(6) FEDERAL INCOME TAXES
Prior to the Merger, the Company had been included in the 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 tax return of SOCO.
A reconciliation of the statutory rate to the Company's effective rate as
they apply to the benefit for the six months ended June 30, 1995 and 1996
follows:
Six Months Ended June 30,
------------------------
1995 1996
--------- --------
Federal statutory rate (35%) (35%)
Loss in excess of net deferred tax liability - 18%
----- -----
Effective income tax rate (35%) (17%)
===== =====
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 previously owned directly by SOCO. Accordingly,
certain operating losses generated by these properties were 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.
(7) MAJOR CUSTOMERS
During the six months ended June 30, 1995 and 1996, Associated Natural
Gas, Inc. accounted for 54% and 59%, Amoco Production Company accounted for 22%
and 19%, and Total Petroleum accounted for 17% and 14% of revenues,
respectively. Management believes that the loss of any individual purchaser
would not have a long-term material adverse impact on the financial position or
results of operations of the Company.
(8) DEFERRED CREDITS
In 1992, the Company formed a partnership to monetize its Section 29
tax credits. Through May 1996, a revenue increase of more than $.40 per Mcf was
realized on production volumes from qualified Section 29 properties in this
arrangement. The Company recognized $860,000 and $646,000 of this revenue during
the six months ended June 30, 1995 and 1996, respectively. In May 1996, the
Company terminated the partnership and simultaneously entered into a new
agreement to monetize Section 29 tax credits. The new agreement provides for the
Company to receive proceeds from Section 29 tax credits via a variable
production payment. As a result, this arrangement is expected to increase
revenue by more than $.40 per Mcf through 2002. Subsequent to June 30, 1996, the
Company negotiated an agreement whereby additional Section 29 tax credits will
be monetized under this same type of structure.
(9) RELATED PARTY
Prior to the Merger, the Company did not have its own employees.
Employees, certain office space and furniture, fixtures and equipment were
provided by SOCO. SOCO allocated general and administrative expenses to the
Company based on its estimate of expenditures incurred on behalf of the Company.
Subsequent to the Merger, certain field, administrative and executive employees
of SOCO and GOG became employees of the Company. SOCO will continue to provide
certain services to Patina under a corporate services agreement.
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(10) COMMITMENTS AND CONTINGENCIES
In August 1995, SOCO 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 SOCO under a number of various lease
provisions. Substantially all liability under this suit has been assumed by
Patina. In January 1996, GOG was also sued in a similar but separate action
filed in the District Court in and for the City and County of Denver. The
plaintiffs, in both suits, allege that the companies improperly deducted
unspecified "post-production" costs incurred by the companies prior to
calculating royalty payments in breach of the relevant lease provisions and that
the companies fraudulently concealed that fact from the plaintiffs. The
plaintiffs seek unspecified compensatory and punitive damages and a declaratory
judgment that the companies are not permitted to deduct post-production costs
prior to calculating royalties paid to the class. SOCO, Patina and GOG believe
that costs deducted in calculating royalties are and have been proper under the
relevant lease provisions, and they intend to defend these 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.
In March 1996, a complaint was filed in the Court of Chancery for the State
of Delaware against GOG and each of its directors, Brickell Partners v. Gerrity
Oil & Gas Corporation, C.A. No. 14888 (Del. Ch.). The complaint alleges that the
"action is brought (a) to restrain the defendants from consummating a merger
which will benefit the holders of GOG's common stock at the expense of the
holders of the Preferred and (b) to obtain a declaration that the terms of the
proposed merger constitute a breach of the contractual rights of the Preferred."
The complaint seeks, among other things, certification as a class action on
behalf of all holders of GOG's preferred stock, a declaration that the
defendants have committed an abuse of trust and have breached their fiduciary
and contractual duties, an injunction enjoining the Merger and money damages.
Defendants believe that the complaint is without merit and intend to vigorously
defend against the action. 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.
The Company is a party to various other lawsuits incidental to its
business, none of which are anticipated to have a material adverse impact on its
financial position or results of operations.
13
PATINA OIL & GAS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
On May 2, 1996, Gerrity Oil & Gas Corporation ("GOG") was merged into a
wholly owned subsidiary of the Company (the "Merger"). This transaction was
accounted for as a purchase of GOG. Accordingly, the results of operations since
the Merger reflect the impact of the acquisition.
Total revenues for the three month and six month periods ended June 30,
1996 increased to $19.5 million and $30.1 million. The amounts represented
increases of 51% and 11% as compared to the respective prior year periods. The
revenue increases are due to the effect of the Merger and improved product
prices in 1996. The net loss for the second quarter 1996 was $1.1 million
compared to a net loss of $428,000 for the same period in 1995. The increase in
net loss is primarily attributed to a significant increase in interest expense
related to higher average debt balances outstanding and higher average interest
rates due to the 11.75% Senior Subordinated Notes.
Oil and gas sales less direct operating expenses were $15.7 million, a 52%
increase from the prior year quarter. Average daily production in the second
quarter of 1996 was 4,908 barrels and 69.8 MMcf (16,538 barrels of oil
equivalent), increases of 28% and 10%, respectively. The production increases
resulted solely from the Merger. Exclusive of the Merger, production continued
to decline due to 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 64 wells placed on production in the first six months of
1995 compared to 1 well in the first six months of 1996. Total production
volumes are expected to increase in the third quarter due to the full quarter
effect of the Merger and a modest drilling and recompletion program initiated in
the third quarter. 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 substantially increased or additional
acquisitions are consummated. The decision to increase development drilling is
heavily dependent on the current prices being received for production. Unless
prices increase significantly, development drilling is expected to be limited.
Average oil prices increased to $20.24 per barrel compared to $17.24
received in the second quarter of 1995. Natural gas prices increased from $1.19
per Mcf in the first quarter of 1995 to $1.60 in 1996. The increase was
primarily the result of prior year production being marketed under term
arrangements which were based on Rocky Mountain region pricing (which remains
depressed) whereas the 1996 production benefitted from a portion of these
agreements expiring. This allowed 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 $2.29 per BOE
compared to $1.91 in the prior year quarter. The increase is primarily
attributed to focusing more attention on enhancing production through performing
workovers on existing properties rather than through development drilling. As a
result of the Merger, the Company expects to realize efficiencies which will
help hold direct operating expenses per BOE constant even if production
continues to decline.
General and administrative expenses, net of reimbursements, for second
quarter 1996 were $1.6 million, a 19% increase from the same period in 1995 but
only a 2% increase over first quarter 1996. The increases are the result of the
Merger partially offset by reductions in allocated costs by SOCO. Prior to the
Merger, the Company did not have its own employees. Employees and certain office
space and furniture, fixtures and equipment were provided by SOCO. SOCO
allocated general and administrative expenses based on estimates of expenditures
incurred on behalf of the Company. The general and administrative expenses in
1996 through the Merger were lower than the expenses for the comparable period
in 1995, reflecting the lower overhead associated with the reduced drilling
activity and the Company's overall reduction in personnel.
Interest and other expense was $3.7 million compared to $1.4 million in the
second quarter of 1995. The increase is the result of an increase in the average
outstanding debt levels due to additional debt recorded as a result of the
Merger as well as debt incurred to finance certain costs related to the Merger.
The Company's average interest rate climbed to 9.1% compared to 7.0% in the
second quarter 1995. This increase is due primarily to the 11.75% Senior
Subordinated Notes.
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Depletion, depreciation and amortization expense for the second quarter
totalled $11.8 million, an increase of $3.4 million or 41% from the same period
in 1995. The increase resulted from the increase in production and an increased
depletion, depreciation and amortization rate of $7.81 per BOE compared to $6.36
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 and the inclusion of the amortization of a
noncompete agreement entered into in conjunction with the Merger.
Development, Acquisition and Exploration
During the six months ended June 30, 1996, the Company incurred $219.2
million in capital expenditures. Of this amount, $218.3 million related to the
acquisition of GOG by the issuance of stock of the Company. Capital
expenditures, exclusive of acquisitions, totalled only $932,000 as the Company
has continued to limit its development activity based on current Rocky Mountain
natural gas prices.
Financial Condition and Capital Resources
At June 30, 1996, the Company had total assets of $455.5 million. Total
capitalization was $412.5 million, of which 46% was represented by stockholder's
equity, 28% by senior debt and 26% by subordinated debt. During the six months
ended June 30, 1996, net cash provided by operations was $15.0 million, as
compared to $5.6 million for the same period in 1995. As of June 30, 1996, there
were no commitments for capital expenditures. The Company anticipates that 1996
expenditures for development drilling, giving effect to the Merger, will be less
than $10 million, which will 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. 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.
Prior to the Merger, SOCO financed all of the Company's activities. A
portion of such financing was considered to be an investment by parent in the
Company with the remaining portion being considered debt payable to SOCO. In
conjunction with the Merger, the $75 million debt payable to SOCO was paid in
full and the Company does not expect SOCO to provide any additional funding.
Simultaneously with the Merger, the Company entered into a bank credit
agreement. The agreement consists of (i) a facility provided to the Company and
SOCO Wattenberg (the "Company Facility") and (ii) a facility provided to GOG
(the "GOG Facility").
The Company Facility consists of a term loan facility in an amount up to
$87 million and a revolving credit facility in an aggregate amount up to $102
million. The term loan facility will be available to finance purchases of the
GOG 11.75% Senior Subordinated Notes until the first anniversary of the Merger.
At June 30, 1996, the Company had not utilized the term loan facility. The
amount available for borrowing under the revolving credit facility will be
limited to a semiannually adjusted borrowing base that equaled $102 million at
June 30, 1996. At June 30, 1996, $81.8 million was outstanding under the
revolving credit facility.
The GOG Facility is a revolving credit facility in an aggregate amount up
to $51 million. The amount available for borrowing under the GOG Facility will
be limited to a fluctuating borrowing base that equaled $51 million at June 30,
1996. At June 30, 1996, $34.5 million was outstanding under the GOG Facility.
The GOG Facility was used primarily to refinance GOG's previous bank credit
facility and pay costs associated with the Merger.
The bank credit agreement contains certain financial covenants, 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 bank credit agreement also
contains 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;
15
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.
In 1992, the Company formed a partnership to monetize its Section 29 tax
credits. Through May 1996, a revenue a increase of more than $.40 per Mcf was
realized on production volumes from qualified Section 29 properties in this
arrangement. The Company recognized $860,000 and $646,000 of this revenue during
the six months ended June 30, 1995 and 1996, respectively. In May 1996, the
Company terminated the partnership and simultaneously entered into a new
agreement to monetize Section 29 tax credits. The new agreement provides for the
Company to receive proceeds from Section 29 tax credits via a variable
production payment. As a result, this arrangement is expected to increase
revenue by more than $.40 per Mcf through 2002. Subsequent to June 30, 1996, the
Company negotiated an agreement whereby additional Section 29 tax credits will
be monetized under this same type of structure.
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
10.1.1 First Amendment to Credit Agreement dated June 28, 1996 by
and among Patina, Gerrity Oil & Gas Corporation and SOCO
Wattenberg Corporation, as Borrowers, and Texas Commerce
Bank National Association, as Administrative Agent, and
certain commercial lending institutions.
10.3 Agreement dated July 16, 1996 by and between F. H. Smith,
employee, and Patina Oil & Gas Corporation.
10.4 Sublease Agreement dated as of May 1, 1996 by and between
Snyder Oil Corporation, as Sublandlord, and Patina Oil & Gas
Corporation, as Subtenant.
27 Financial Data Schedule
(b) Reports on Form 8-K -
On May 17, 1996, the Company filed with the Securities and Exchange
Commission a Current Report on Form 8-K. The Report disclosed under
Item 1 information regarding the approval of the Amended Agreement and
Plan of Merger among Snyder Oil Corporation, the Company, Patina
Merger Corporation and Gerrity Oil & Gas Corporation.
17
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 /s/ David J. Kornder
--------------------------------
David J. Kornder, Vice President
August 13 1996
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