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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
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: 000-22433
BRIGHAM EXPLORATION COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 1311 75-2692967
(State of other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
6300 BRIDGEPOINT PARKWAY
BUILDING TWO, SUITE 500
AUSTIN, TEXAS 78730
(512) 427-3300
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
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 twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X . No .
--- ---
As of May 3, 2002, 16,016,113 shares of Common Stock, $.01 per share, were
outstanding.
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BRIGHAM EXPLORATION COMPANY
FIRST QUARTER 2002 FORM 10-Q REPORT
TABLE OF CONTENTS
-----------------
PAGE
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - March 31, 2002 and December 31, 2001. . . . . . . . . . . . . . . 1
Consolidated Statements of Operations - Three months ended March 31, 2002 and 2001. . . . . . . 2
Consolidated Statement of Changes in Stockholders' Equity - Three months ended March 31, 2002 . 3
Consolidated Statements of Cash Flows - Three months ended March 31, 2002 and 2001 . . . . . . 4
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. . . . . . . . . . . . . . . . . . . 17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BRIGHAM EXPLORATION COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
March 31, December 31,
2002 2001
----------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,820 $ 5,112
Accounts receivable 8,783 9,325
Other current assets 2,624 2,531
----------- --------------
Total current assets 19,227 16,968
Oil and natural gas properties, net using the full cost method 155,383 151,891
Other property and equipment, net 1,337 1,331
Deferred loan fees 2,990 3,166
Other noncurrent assets - 52
----------- --------------
$ 178,937 $ 173,408
=========== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,045 $ 8,412
Accrued drilling costs 3,870 1,969
Other current liabilities 7,365 4,885
----------- --------------
Total current liabilities 19,280 15,266
----------- --------------
Notes payable 75,000 75,000
Senior subordinated notes 20,948 16,721
Other noncurrent liabilities 485 206
Commitments and contingencies
Series A Preferred Stock, mandatorily redeemable, $.01 par value, $20 stated and
redemption value, 2,250,000 shares authorized, 1,662,863 and 1,630,692 shares
issued and outstanding at March 31, 2002 and December 31, 2001, respectively 17,312 16,614
Stockholders' equity:
Preferred stock, $.01 par value, 10 million shares authorized, of which 2,250,000
are designated as Series A - -
Common stock, $.01 par value, 50 million shares authorized, 17,127,650 shares issued
and 16,016,113 shares outstanding at March 31, 2002 and December 31, 2001 171 171
Additional paid-in capital 79,768 80,466
Unearned stock compensation (457) (494)
Accumulated other comprehensive income (loss) (2,043) 351
Accumulated deficit (27,362) (26,728)
Treasury stock, at cost; 1,111,537 shares at March 31, 2002 and December 31, 2001 (4,165) (4,165)
----------- --------------
Total stockholders' equity 45,912 49,601
----------- --------------
$ 178,937 $ 173,408
=========== ==============
The accompanying notes are an integral part of these consolidated financial statements.
1
BRIGHAM EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
------------------
2002 2001
-------- --------
Revenues:
Oil and natural gas sales $ 6,434 $ 6,905
Other 10 138
-------- --------
6,444 7,043
-------- --------
Costs and expenses:
Lease operating 871 706
Production taxes 353 466
General and administrative 964 817
Depletion of oil and gas properties 3,137 2,477
Depreciation and amortization 103 152
-------- --------
5,428 4,618
-------- --------
Operating income 1,016 2,425
-------- --------
Other income (expense):
Interest income 19 62
Interest expense, net (1,421) (1,806)
Other income (expense) (248) 221
-------- --------
(1,650) (1,523)
-------- --------
Income (loss) before income taxes (634) 902
Income taxes - -
-------- --------
Net income (loss) (634) 902
Less accretion and dividends on redeemable preferred stock 698 478
-------- --------
Net income (loss) available to common stockholders $(1,332) $ 424
======== ========
Net income (loss) per share available to common stockholders:
Basic $ (0.08) $ 0.03
Diluted $ (0.08) $ 0.02
The accompanying notes are an integral part of these consolidated financial
statements.
2
BRIGHAM EXPLORATION COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
Accumulated Total
Common Stock Additional Unearned Other Accumu- Stock- Compre-
------------------ Paid-in Stock Comprehensive lated Treasury holders' hensive
Shares Amounts Capital Compensation Income (loss) Deficit Stock Equity Loss
-------- -------- --------- -------------- -------------- --------- -------- -------- --------
Balance, December 31, 2001 17,128 $ 171 $ 80,466 $ (494) $ 351 $(26,728) $(4,165) $49,601
Dividends on Series A
mandatorily redeemable
preferred stock - - (643) - - - - (643)
Accretion on Series A
mandatorily redeemable
preferred stock - - (55) - - - - (55)
Amortization of unearned
stock compensation - - - 37 - - - 37
Net loss - - - - - (634) - (634) $ (634)
Other comprehensive loss:
Unrealized loss on cash
flow hedges - - - - (2,394) - - (2,394) (2,394)
--------
Comprehensive loss $(3,028)
-------- -------- --------- -------------- -------------- --------- -------- -------- ========
Balance, March 31, 2002 17,128 $ 171 $ 79,768 $ (457) $ (2,043) $(27,362) $(4,165) $45,912
======== ======== ========= ============== ============== ========= ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
3
BRIGHAM EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
March 31,
------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net income (loss) $ (634) $ 902
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depletion of oil and gas properties 3,137 2,477
Depreciation and amortization 103 152
Interest paid through the issuance of additional senior subordinated notes 227 75
Amortization of deferred loan fee and debt issuance costs 286 343
Market value adjustment for derivative instruments 251 (221)
Changes in working capital and other items:
Accounts receivable 742 (3,586)
Other current assets (394) (4)
Accounts payable (367) 838
Participant advances received 588 164
Other current liabilities 81 111
Other noncurrent assets 2 9
Other noncurrent liabilities 9 (8)
-------- --------
Net cash provided by operating activities 4,031 1,252
-------- --------
Cash flows from investing activities:
Additions to oil and natural gas properties (4,909) (9,223)
Additions to other property and equipment (91) (80)
Decrease in drilling advances paid - 385
-------- --------
Net cash used by investing activities (5,000) (8,918)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of employee stock options - 57
Proceeds from issuance of preferred stock and warrants, net - 9,838
Proceeds from issuance of senior subordinated notes 4,000 9,000
Principal payments on capital lease obligations (13) (37)
Deferred loan fees paid (310) -
-------- --------
Net cash provided by financing activities 3,677 18,858
-------- --------
Net increase in cash and cash equivalents 2,708 11,192
Cash and cash equivalents, beginning of period 5,112 837
-------- --------
Cash and cash equivalents, end of period $ 7,820 $12,029
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
4
BRIGHAM EXPLORATION COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ORGANIZATION AND NATURE OF OPERATIONS
Brigham Exploration Company ("Brigham"), a Delaware corporation formed on
February 25, 1997, explores and develops onshore domestic oil and natural gas
properties using 3-D seismic imaging and other advanced technologies. Brigham
focuses its exploration and development of onshore oil and natural gas
properties primarily in the Anadarko Basin, the Texas Gulf Coast and West Texas.
2. BASIS OF PRESENTATION
The accompanying financial statements include the accounts of Brigham and
its wholly-owned subsidiaries, and its proportionate share of assets,
liabilities and income and expenses of the limited partnerships in which
Brigham, or any of its subsidiaries, has a participating interest. All
significant intercompany accounts and transactions have been eliminated.
The accompanying consolidated financial statements are unaudited, and in
the opinion of management, reflect all adjustments that are necessary for a fair
presentation of the financial position and results of operations for the periods
presented. All such adjustments are of a normal and recurring nature. The
results of operations for the periods presented are not necessarily indicative
of the results to be expected for the entire year. The unaudited consolidated
financial statements should be read in conjunction with Brigham's 2001 Annual
Report on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
3. COMMITMENTS AND CONTINGENCIES
Brigham is, from time to time, party to certain lawsuits and claims arising
in the ordinary course of business. While the outcome of lawsuits and claims
cannot be predicted with certainty, management does not expect these matters to
have a materially adverse effect on the financial condition, results of
operations or cash flows of Brigham.
On November 20, 2001, Brigham filed a lawsuit in the District Court of
Travis County, Texas against Steve Massey Company, Inc. ("Massey") for breach of
contract. The Petition claims Massey furnished defective casing to Brigham,
which ultimately led to the casing failure of the Palmer "347" No. 5 well (the
"Palmer #5") and the loss of the Palmer #5 as a producing well. Brigham believes
the amount of damages incurred due to the loss of the Palmer #5 may exceed $5
million. Massey joined as additional defendants to the lawsuit other parties
that had responsibility for the manufacture, importation or fabrication of the
casing for its use in the Palmer #5. The case is currently in discovery. A trial
has not been set. Brigham believes a trial will not take place before the second
quarter of 2003.
On February 20, 2002, Massey filed an Original Petition to Foreclose Lien
in Brooks County, Texas. Massey's Petition claims Brigham breached its contract
for failure to pay for the casing it furnished Brigham for the Palmer #5 (and
that Brigham's claim is defective, forming the basis of the lawsuit described in
the paragraph above). Massey's Petition claims Brigham owes Massey a total of
$445,819. Brigham recently filed a Motion to Transfer Venue to Travis County,
Texas, to join this case with Brigham's suit against Massey pending in Travis
County. In addition, Brigham has asked for a Plea in Abatement to place the case
on hold until the Travis County suit has been resolved. If Massey is successful
in its Brooks County case, Massey would have the right to foreclose its lien
against the well, associated equipment and Brigham's leasehold interest. At this
point in time, Brigham cannot predict the outcome of either the Travis County
case or the Brooks County case.
On June 1, 2001, Leonel Garcia, a landowner in Brooks County, Texas, filed
suit against Brigham, claiming Brigham transported natural gas under his
property through an existing pipeline, without his consent. Brigham is now using
an alternate pipeline. Mr. Garcia was claiming $1.2 million in actual damages
and $3 million in exemplary damages. The parties have entered into a settlement
agreement. The impact on Brigham's financial condition, results of operation and
cash flow is not material.
5
BRIGHAM EXPLORATION COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. NET INCOME (LOSS) PER SHARE
Basic earnings per common share are computed by dividing net income (loss)
available to common stockholders by the weighted average number of common shares
outstanding for the period. The computation of diluted net income (loss) per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised for or converted into common
stock or resulted in the issuance of common stock that would then share in the
earnings of Brigham. The number of common shares equivalents outstanding is
computed using the treasury stock method.
The following table reconciles the numerators and denominators of the basic
and diluted earnings per common share computations for net income (loss)
available to common stockholders for the three months ended March 31, 2002 and
2001:
Three months ended
March 31,
-----------------
2002 2001
-------- -------
Basic Earnings per Share:
Income (loss) available to common stockholders $(1,332) $ 424
======== =======
Weighed average common shares outstanding 16,016 15,983
======== =======
Basic Earnings per Share $ (0.08) $ 0.03
======== =======
Diluted Earnings per Share:
Income (loss) available to common stockholders $(1,332) $ 424
Plus amortization of compensation expense on stock options - 4
-------- -------
Adjusted income (loss) available to common stockholders - diluted $(1,332) $ 428
======== =======
Weighted average common shares outstanding 16,016 15,983
Effect of potentially dilutive securities:
Warrants - 1,320
Stock options - 585
-------- -------
Potentially dilutive common shares - 1,905
-------- -------
Adjusted weighted average common shares outstanding - diluted 16,016 17,888
======== =======
Diluted Earnings per Share $ (0.08) $ 0.02
======== =======
At March 31, 2002 and 2001, options and warrants to purchase 18.9 million
and 14.3 million shares of common stock, respectively, were outstanding but were
not included in the computation of diluted income (loss) per share because the
effects would have been antidilutive.
5. DERIVATIVE INSTRUMENTS
Brigham utilizes various commodity swap and option contracts to (i) reduce
the effects of volatility in price changes on the oil and natural gas
commodities it produces and sells, (ii) support its capital budgeting plans, and
(iii) lock-in prices to protect the economics related to certain capital
projects.
At March 31, 2002, the fair value of hedging contracts included in
accumulated other comprehensive loss and other liabilities was approximately
$2.0 million of which approximately $270,000 was classified as noncurrent. In
6
BRIGHAM EXPLORATION COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
the three months ended March 31, 2002 and 2001, Brigham recognized gains
(losses) of $289,000 and $(6.6) million which were recorded as an increase
(reduction) of oil and natural gas sales.
Derivative instruments not qualifying as hedging contracts are recorded at
fair value on the balance sheet. At each balance sheet date, the value of
derivatives not qualifying as hedging contracts is adjusted to reflect current
fair value and any gains or losses are recognized as other income or expense. At
March 31, 2002, the fair value of these derivatives included in other current
liabilities was $635,000. In the three months ended March 31, 2002 and 2001,
Brigham recognized $(251,000) and $221,000, respectively, in non-cash gains
(losses) related to changes in the fair values of these derivative contracts.
There were no cash settlement payments made by Brigham to the counterparty for
the three months ended March 31, 2002 and 2001.
The following tables summarize Brigham's outstanding oil and natural gas
derivative instruments as of March 31, 2002:
OIL CONTRACTS
2002 2003
-------------------- -----------------
VOLUMES CONTRACT VOLUMES CONTRACT
FIXED PRICE PRICING REMAINING HEDGED PRICE HEDGED PRICE
SWAPS BASIS CONTRACT TERM (BBLS) ($/BBL) (BBLS) ($/BBL)
- ------------- ------- ------------- -------- ---------- ------- --------
Contract #1 NYMEX 07/02 - 09/02 46,000 $ 25.06 - -
Contract #2 NYMEX 10/02 - 12/02 23,000 $ 24.50 - -
Contract #3 NYMEX 01/03 - 03/03 - - 22,500 $ 23.92
Contract #4 NYMEX 04/03 - 06/03 - - 22,750 $ 23.50
Contract #5 NYMEX 07/03 - 09/03 - - 23,000 $ 23.15
Contract #6 NYMEX 10/03 - 12/03 - - 23,000 $ 22.90
2002 2003
--------------------------- -------------------------
PRICE PRICE
VOLUMES ------------------ VOLUMES ----------------
PRICING REMAINING HEDGED FLOOR CEILING HEDGED FLOOR CEILING
COLLARS BASIS CONTRACT TERM (BBLS) ($/BBL) (BBLS) ($/BBL) ($/BBL) ($/BBL)
- ------------ ------- -------------- ------- --------- ------- ------- ------- -------
Collar # 1 NYMEX 04/02 - 06/02 22,750 $ 18.00 $ 21.95 - - -
Collar # 2 NYMEX 04/02 - 12/02 68,750 $ 18.00 $ 22.35 - - -
Collar # 3 NYMEX 04/02 - 06/03 68,750 $ 18.00 $ 22.56 45,250 $ 18.00 $ 22.56
7
BRIGHAM EXPLORATION COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NATURAL GAS CONTRACTS
2002 2003
-------------------- --------------------
VOLUMES CONTRACT VOLUMES CONTRACT
FIXED PRICE PRICING REMAINING HEDGED PRICE HEDGED PRICE
SWAPS BASIS CONTRACT TERM (MMBTU) ($/MMBTU) (MMBTU) ($/MMBTU)
- --------------- -------- ------------- -------- ---------- -------- ----------
Contract #1 NYMEX 04/02 - 06/02 227,500 $ 2.800 - -
Contract #2 NYMEX 04/02 - 12/02 687,500 $ 2.900 - -
Contract #3 NYMEX 04/02 - 06/03 687,500 $ 3.000 452,500 $ 3.000
Contract #4 NYMEX 07/02 - 09/02 230,000 $ 3.200 - -
Contract #5 NYMEX 10/02 - 12/02 92,000 $ 3.455 - -
Contract #6 NYMEX 01/03 - 03/03 - - 225,000 $ 3.700
Contract #7 NYMEX 04/03 - 06/03 - - 91,000 $ 3.400
Contract #8 NYMEX 07/03 - 09/03 - - 230,000 $ 3.450
Contract #9 NYMEX 10/03 - 12/03 - - 92,000 $ 3.670
FIXED PRICE CAP ANR 04/02 - 06/02 910,000 $ 2.566 - -
Oklahoma
In April 2002, Brigham entered into six natural gas fixed price swap
agreements whereby Brigham exchanged a floating market price for a fixed
contract price of $3.56 per MMBtu for 2,500 MMBtu per day for the period from
July 2002 through September 2002, $3.755 per MMBtu on 2,500 MMBtu per day for
the period from October 2002 through December 2002, $3.895 per MMBtu on 2,500
MMBtu per day for the period from January 2003 through March 2003, $3.515 per
MMBtu on 2,500 MMBtu per day for the period from April 2003 through June 2003,
$3.555 per MMBtu on 2,500 MMBtu per day for the period from July 2003 through
September 2003, and $3.755 per MMBtu on 2,500 MMBtu per day for the period from
October 2003 through December 2003. These derivative instruments qualify for
hedge accounting and will be designated as cash flow hedges.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 143, "Asset Retirement Obligations" ("SFAS 143") which
establishes accounting requirements for retirement obligations associated with
tangible long-lived assets including the timing of the liability recognition,
initial measurement of the liability, allocation of asset retirement cost to
expense, subsequent measurement of the liability and financial statement
disclosures. SFAS 143 requires that an asset retirement cost be capitalized as
part of the cost of the related long-lived asset and subsequently allocated to
expense using a systematic, rational method. Brigham plans to adopt SFAS 143 no
later than January 1, 2003, as required. The transition adjustment resulting
from the adoption will be reported as a cumulative effect of a change in
accounting principle. At this time, Brigham cannot reasonably estimate the
effect of the adoption of SFAS 143 on its financial position, results of
operations or cash flows.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of the three month periods ended March 31, 2002 and 2001
Production. Net equivalent production volumes for the first three months of
2002 increased 10% to 2.3 Bcfe (25.3 MMcfe per day) compared to 2.1 Bcfe (22.9
MMcfe per day) for the first three months of 2001. This increase is the result
of additional production related to wells completed during late 2001 and the
first quarter of 2002 and is offset partly by the natural decline of existing
production. Natural gas production represented 59% of total equivalent
production volumes in the first quarter of 2002 compared to 78% in the first
quarter of 2001. Natural gas production declined 17% from 1,610 MMcf (17.9 MMcf
per day) in the first quarter of 2001 to 1,344 MMcf (14.9 MMcf per day) in the
first quarter of 2002. Oil production increased 104% to 155 MBbls (1,720 Bbls
per day) in the first quarter of 2002 from 76 MBbls (841 Bbls per day) in the
first quarter of 2001.
Revenue from the sale of oil and natural gas. Oil and natural gas sales
declined 7% from $6.9 million in the first quarter of 2001 to $6.4 million in
the first quarter of 2002. A 15% decrease in Brigham's average equivalent sales
price received for natural gas and oil was partially offset by $1.3 million in
revenue related to increased production volumes.
Brigham's average realized sales price for natural gas for the first
quarter of 2002 was 18% lower than the average realized sales price for natural
gas in the first quarter of 2001. Total revenue from the sale of natural gas
decreased 33% to $3.3 million in the first quarter of 2002 compared to $4.9
million in the first quarter of 2001. Cash settlements on natural gas hedging
contracts of $339,000 ($0.25 per Mcf) positively impacted Brigham's revenue and
average realized natural gas sales price in the first quarter of 2002 compared
to a negative impact of $6.6 million ($4.08 per Mcf) in cash settlements on
natural gas hedging contracts in 2001.
The average realized sales price for oil decreased 25% from $26.74 per Bbl
in the first quarter of 2001 to $19.93 per Bbl for the same period in 2002.
Higher oil production volumes for the first quarter 2002 resulted in a 52%
increase in revenue from the sale of oil to $3.1 million for the first three
months of 2002 compared to $2.0 million for the same time period in 2001.
Revenues from the sale of oil and Brigham's average realized oil sales price
were negatively affected by hedging losses of $50,000 ($0.32 per Bbl) in the
first quarter of 2002 and hedging losses of $75,000 ($1.00 per Bbl) for the same
period in 2001.
Other revenue. Other revenue decreased 93% from $138,000 in the first
quarter of 2001 to $10,000 in the first quarter of 2002. This decrease is
primarily due to other revenue for the first quarter 2001 included retroactive
billings for natural gas pipeline transportation revenue.
Lease operating expenses. Lease operating expenses increased 23% from
$706,000 in the first quarter of 2001 to $871,000 in the first quarter of 2002,
and, on a per unit of equivalent production basis increased 12% from $0.34 per
Mcfe to $0.38 per Mcfe. The increase in lease operating expenses was primarily
due to an increase in the number of producing wells in the first quarter of 2002
as compared with the same period in 2001. The increase in lease operating
expenses per unit in the first quarter of 2002 relative to the first quarter of
2001 was primarily due to higher than normal maintenance and workover expense on
certain Brigham operated wells.
Production taxes. Production taxes decreased 24% from $466,000 in the first
quarter of 2001 to $353,000 in the first quarter of 2002. This decrease is
primarily related to production tax refunds on wells that qualify for reduced
severance tax rates and a 59% decrease in the average equivalent price received
for natural gas and oil before the effects of hedging gains and losses, both of
which were partially offset by an increase in production volumes. On a per unit
of equivalent production basis, production taxes for the first three months of
2002 decreased by 30% to $0.16 per Mcfe compared to $0.23 per Mcfe for the same
time period in 2001.
9
General and administrative expenses. General and administrative expenses
increased 18% from $817,000 in the first quarter of 2001 to $964,000 in the
first quarter of 2002. This increase was primarily due to an increase in payroll
and employee benefit and office expenses. On a per unit of equivalent production
basis, general and administrative expenses increased by 5% from $0.40 per Mcfe
in the first quarter of 2001 to $0.42 per Mcfe in the first quarter of 2002.
Depletion of oil and natural gas properties. Depletion of oil and natural
gas properties increased 24% from $2.5 million in the first quarter of 2001 to
$3.1 million in first quarter of 2002. Of this increase, $289,000 was
attributable to higher production volumes and $371,000 was due to an increase in
the depletion rate per unit of equivalent production. On a per unit of
equivalent production basis, depletion expense increased 15% from $1.20 per Mcfe
in the first quarter of 2001 to $1.38 per Mcfe in the first quarter of 2002. The
increase in the depletion rate per unit of equivalent production is primarily
due to an increase in the estimated cost required to fully develop Brigham's
Home Run Field.
Interest expense. Interest expense decreased from $1.8 million in first
quarter of 2001 to $1.4 million in the first quarter of 2002. This decrease is
due to lower interest rates on outstanding debt borrowings during the first
quarter of 2002 as compared to the same period for 2001. The average effective
interest rate on Brigham's total outstanding indebtedness decreased from 10.9%
in the first quarter of 2001 to 7.4% in the first quarter of 2002. The decrease
in Brigham's average effective interest is primarily the result of lower LIBOR
rates for the first quarter of 2002 as compared to the first quarter of 2001.
Brigham's weighted average outstanding debt balance for the first three months
of 2002 was $94.2 million compared to $88.3 million for the first three months
of 2001. Interest expense for the first quarter 2002 included (i) $227,000 in
interest expense that was paid in kind through the issuance of additional debt
in lieu of cash, and (ii) $286,000 of non-cash charges related to the
amortization of deferred loan fees. Interest expense is reflected net of
capitalized interest of $572,000 and $300,000 in the first quarter 2001 and
2002, respectively.
Other income (expense). Other income (expense) decreased from $221,000 in
income for the first quarter of 2001 to $248,000 in expense for the first
quarter of 2002. Brigham recognizes other income or expense primarily related to
the change in the fair market value and the related cash flows of certain oil
and natural gas derivative contracts that do not qualify for hedge accounting
treatment. Other income (expense) in the first quarter of 2001 consisted
entirely of $221,000 of non-cash income related to the changes in the fair
market values of these derivative contracts during the period. Other income
(expense) in the first quarter of 2002 consisted primarily of $251,000 of
non-cash expense related to the change in the fair market value of derivative
contracts during the period.
10
LIQUIDITY AND CAPITAL RESOURCES
Brigham's primary sources of capital have been credit facility and other
debt borrowings, public and private equity financings, the sale of interests in
projects and properties and funds generated by operations. Brigham's primary
capital requirements are 3-D seismic acquisition, processing and interpretation
costs, land acquisition costs and drilling expenditures.
The following table summarizes Brigham's contractual cash obligations at
March 31, 2002 and the effect such obligations are expected to have on its
liquidity and cash flow in future periods:
PAYMENTS DUE BY YEAR
--------------------
TOTAL REMAINDER
CONTRACTUAL OBLIGATIONS: OUTSTANDING OF 2002 2003 - 2004 2005 - 2006 THEREAFTER
- ----------------------------------- ------------ ---------- ------------ ------------ -----------
(IN THOUSANDS)
Senior Credit Facility(1) . . . . . $ 75,000 $ - $ 75,000 $ - $ -
Subordinated Notes Facility(2). . . 20,948 - - 20,948 -
Capital Leases. . . . . . . . . . . 17 17 - - -
Non-cancelable Operating Leases . . 4,616 652 1,762 1,762 440
------------ ---------- ------------ ------------ -----------
Total Contractual Cash Obligations. $ 100,581 $ 669 $ 76,762 $ 22,710 $ 440
============ ========== ============ ============ ===========
<FN>
- ---------------
(1) The $75 million shown as scheduled for payment in 2003 represents the March
31, 2002 balance outstanding on the Senior Credit Facility. The Company
expects to renew as this Senior Credit Facility comes due. See "-Liquidity
and Capital Resources-Senior Credit Facility"
(2) Through November 2002, up to 50% of Brigham's interest payment obligation
on its Subordinated Notes Facility can be satisfied by payment-in-kind
("PIK") through the issuance of additional SCI Notes to Shell Capital Inc.
in lieu of cash. See "-Liquidity and Capital Resources Refinancing
Transactions-Subordinated Notes Facility"
Senior Credit Facility
In January 1998, Brigham entered into a revolving credit agreement (as
amended, the "Senior Credit Facility"), which provided for an initial borrowing
availability of $75 million. The Senior Credit Facility was amended in March
1999 to reduce the borrowing availability, extend the date of borrowing base
redetermination, modify certain financial covenants, include certain additional
covenants that place restrictions on Brigham's ability to incur certain capital
expenditures, and to increase the interest rate on outstanding borrowings.
As a result of the completion of the majority of Brigham's strategic
initiatives to improve its capital resources, including its June 1999 property
divestitures and the application of the net sales proceeds to reduce borrowings
outstanding under the Senior Credit Facility, Brigham and its senior lenders
entered into an amendment to the Senior Credit Facility in July 1999. This
amendment provided Brigham with borrowing availability of $56 million. As
consideration for this amendment, in July 1999 Brigham issued to its senior
lenders warrants to purchase an aggregate of 1,000,000 shares of Brigham common
stock at an exercise price of $2.25 per share. The warrants have a seven-year
term from the date of issuance and are exercisable at the holders' option at any
time. An estimated value of $1.2 million was attributed to these warrants by
Brigham and was recognized as additional deferred loan fees that will be
amortized and included in interest expense over the remaining period to maturity
of the Senior Credit Facility.
In February 2000, Brigham entered into an amended and restated Senior
Credit Facility with its existing senior lenders and a new senior lender. The
Senior Credit Facility was further amended in October 2000. The amended and
restated Senior Credit Facility provides Brigham with $75 million in borrowing
11
availability for a three-year term. In December 2001, Brigham extended the
maturity of the amended and restated Senior Credit Facility by one year to
December 31, 2003.
As a result of the February 2000 amendments, $30 million of the Senior
Credit Facility held by one of the lenders is convertible into shares of Brigham
common stock (the "Convertible Notes") in the following amounts and prices: (i)
$10 million is convertible at $3.90 per share, (ii) $10 million is convertible
at $6.00 per share and (iii) $10 million is convertible at $8.00 per share. As
of March 31, 2002, Brigham had $75 million in borrowings outstanding under the
Senior Credit Facility, of which the Convertible Notes were $30 million.
In connection with Brigham's refinancing of its subordinated notes due 2003
(see "-Subordinated Notes" and "-Refinancing Transactions") in October 2000,
Brigham entered into an amendment to the Senior Credit Facility that, among
other things, permitted the issuance of new subordinated notes and new preferred
stock to provide funding for the repurchase of the subordinated notes due 2003
and equity interests in Brigham held by the Enron Affiliates. In addition, the
minimum interest coverage ratio test of the Senior Credit Facility was amended
to reflect Brigham's expected cash flow and interest expense beginning in the
fourth quarter of 2000 subsequent to the Refinancing Transactions, and Brigham
conditionally waived certain rights to force conversion of the portion of the
borrowings under the Senior Credit Facility that are convertible at $3.90 per
share.
If the Senior Credit Facility is repaid at maturity or is prepaid prior to
maturity without payment of cash premiums, the warrants to purchase Brigham
common stock issued to the new participant in the Senior Credit Facility become
exercisable. Further, to the extent Brigham chooses to prepay any of the
Convertible Notes without the warrants becoming exercisable, and also assuming
the lender chooses not to convert to equity upon notice of such prepayment,
Brigham will be required to a pay a premium above the face value of the
Convertible Notes to the lender. Such premium amounts would range from 150% to
110%, depending upon the timing of the prepayment. Such prepayment, however,
would require prior approval of the original lenders to the Senior Credit
Facility. In addition, certain financial covenants of the Senior Credit Facility
were amended or added in the July 1999, February 2000 and October 2000
amendments. In connection with the February 2000 amendment, Brigham reset the
price of the warrants previously issued to its existing senior lenders to
purchase one million shares of Brigham common stock from the then current
exercise price of $2.25 per share to $2.02 per share.
Principal outstanding under the Senior Credit Facility is due at maturity
on December 31, 2003, with interest due monthly for base rate tranches or
periodically as LIBOR tranches mature. The annual interest rate for borrowings
under the Senior Credit Facility is either the lender's base rate or LIBOR plus
3.00%, at Brigham's option. The interest rate on the Senior Credit facility at
March 31, 2002 was 4.9%. Obligations under the Senior Credit Facility are
secured by substantially all of Brigham's oil and natural gas properties and
other tangible assets.
The Senior Credit Facility has certain financial covenants, including
current and interest coverage ratios. Brigham and its senior lenders effected
the amendments to the Senior Credit Facility described above in part to enable
Brigham to comply with certain financial covenants of the Senior Credit
Facility, including the minimum current ratio minimum interest coverage ratio
and the limitation on capital expenditures related to seismic and land
activities. Should Brigham be unable to comply with certain of the financial or
other covenants, its senior lenders may be unwilling to waive compliance or
amend the covenants in the future. In such instance, Brigham's liquidity may be
adversely affected, which could in turn have an adverse impact on its future
financial position and results of operations. At March 31, 2002 and for the year
then ended, Brigham was in compliance with the covenants.
Subordinated Notes
In August 1998, Brigham issued $50 million of debt and equity securities to
affiliates of Enron Corp. The securities issued by Brigham in connection with
this financing transaction included: (i) $40 million of subordinated notes due
2003, (ii) warrants to purchase an aggregate of one million shares of Brigham
common stock at a price of $10.45 per share, and (iii) 1,052,632 shares of
Brigham common stock at a price of $9.50 per share.
12
As described below, Brigham repurchased the subordinated notes due 2003,
together with all equity interests in Brigham held by the Enron Affiliates, for
$20 million in cash in November 2000. (see "-Refinancing Transactions")
Refinancing Transactions
On October 31, 2000 and November 1, 2000, Brigham entered into a series of
financing agreements to provide funding (i) to repurchase all the debt and
equity securities in Brigham held by affiliates of Enron North America at a
substantial discount, and (ii) to continue and expand Brigham's planned drilling
program.
Financing and Repurchase Transactions. Brigham raised an aggregate of $40
million in these financing transactions through the issuance of (i) $20 million
in new subordinated notes and warrants to purchase Brigham common stock to Shell
Capital Inc., and (ii) $20 million in new mandatorily redeemable preferred stock
and warrants to purchase Brigham common stock to affiliates of Credit Suisse
First Boston (USA), Inc. (the "CSFB Affiliates"). With a portion of the proceeds
from these two financing transactions, Brigham purchased all of the Enron
Affiliates' interests in Brigham, which included (i) $51.2 million of
outstanding subordinated notes due 2003 and associated accrued interest
obligations, (ii) warrants to purchase one million shares of common stock at
$2.43 per share, and (iii) 1,052,632 shares of common stock (collectively, the
"Enron Securities"), for total cash consideration of $20 million. The remaining
approximate $17.5 million in net capital availability raised from these
financing transactions, after the repurchase of the Enron Securities and the
payment of fees and expenses, was available for Brigham to fund its planned
drilling program.
Subordinated Notes Facility. The $20 million of new subordinated notes
issued to Shell Capital Inc. (the "SCI Notes") bear interest at 10.75% per annum
and have no principal repayment obligations until maturity in 2005. The SCI
Notes will be issued pursuant to a multi-draw facility (the "Subordinated Notes
Facility") at borrowing increments of at least $1 million, and such funds cannot
be redrawn once they have been repaid. At Brigham's option, up to 50% of the
interest payments on the SCI Notes during the first two years can be satisfied
by payment-in-kind ("PIK") through the issuance of additional SCI Notes in lieu
of cash. The SCI Notes are secured obligations ranking junior to Brigham's
existing $75 million Senior Credit Facility. The SCI Notes have a five-year
maturity, are redeemable at Brigham's option for face value at anytime, and have
certain financial and other covenants. The warrants to purchase an aggregate of
1,250,000 shares of Brigham common stock issued to Shell Capital Inc. (the "SCI
Warrants") have a term of seven years, an exercise price of $3.00 per share and
a cashless exercise feature. For financial reporting purposes, the SCI Warrants
were valued using the Black-Scholes valuation model and the estimated value of
$2.9 million was recorded as deferred loan costs that will be amortized over the
five-year term of the SCI Notes. During the first quarter of 2002 Brigham
exercised its option to PIK 50% of the interest payments on the SCI Notes
resulting in the issuance of an additional $227,000 in SCI Notes. As of March
31, 2002, Brigham had $20.9 million of borrowings outstanding under the
Subordinated Notes Facility and no additional borrowing capacity.
The SCI Notes contain various restrictive covenants and compliance
requirements, which include minimum current ratio, interest coverage ratio,
limitations on capital expenditures related to seismic and land activities, and
various other financial covenants. At March 31, 2002 and for the year then
ended, Brigham was in compliance with the covenants.
Series A Preferred Stock. See "-Liquidity and Capital
Resources-Equity Placements-Series A Preferred Stock"
Sales of Interests in Projects and Oil and Natural Gas Properties
Duke Project Financing. In February 1999, Brigham entered into a project
financing arrangement with Duke Energy Financial Services, Inc. ("Duke") to fund
the continued exploration of five Anadarko Basin projects covered by
approximately 200 square miles of 3-D seismic data acquired in 1998. In this
transaction, Brigham conveyed 100% of its working interest (land and seismic) in
these project areas to a newly formed limited liability company (the
13
"Brigham-Duke LLC") for total consideration of $10 million. Brigham entered into
this project financing arrangement to enable it to recoup substantially all of
its pre-seismic land and seismic data acquisition costs incurred in these
project areas and to provide the capital to fund the drilling of the first six
wells within these projects. Brigham served as the managing member of the
Brigham-Duke LLC with a 1% interest, and Duke was the sole remaining member with
a 99% interest. Pursuant to the terms of the Brigham-Duke LLC agreement, Brigham
paid 100% of the drilling and completion costs for all wells drilled by the
Brigham-Duke LLC within the designated project areas in exchange for a 70%
working interest in the wells (and their allocable drilling and spacing units),
with the remaining 30% working interest remaining in the Brigham-Duke LLC,
subject in each instance to proportionate reduction by any ownership rights held
by third parties. Upon 100% project payout, Brigham had the right to back-in for
80% of the Brigham-Duke LLC's working interest in all of the then producing
wells (and their allocable drilling and spacing units) and a 94% working
interest in any wells (and their allocable drilling and spacing units) drilled
after payout within the designated project areas governed by the Brigham-Duke
LLC agreement, thereby increasing Brigham's effective working interest in the
Brigham-Duke LLC wells from 70% to 94%. In February 2001, Duke, as majority
member of the Brigham-Duke LLC, elected to dissolve the Brigham-Duke LLC. As a
result of the dissolution of the Brigham-Duke LLC, the remaining undeveloped
land and seismic data in the Brigham-Duke LLC project areas was unconditionally
owned by Duke. In December 2001, Brigham recorded a loss of $94,000 on its
investment in the Brigham-Duke LLC.
Equity Placements
Private Placement of Common Stock. On February 22, 2000, Brigham entered
into an agreement to issue 2,195,122 shares of common stock and 731,707 warrants
to purchase common stock for total consideration of $4.5 million in a private
placement to a group of institutional investors led by affiliates of two members
of Brigham's board of directors. The equity sale consisted of units that include
one share of common stock priced at $2.0525 per share and one-third of a warrant
to purchase Brigham common stock at an exercise price of $2.5625 per share with
a three-year term. Pricing of this private equity placement was based on the
average market price of Brigham common stock during a twenty trading day period
prior to issuance. Net proceeds from this equity placement were used to fund a
portion of Brigham's capital expenditures and working capital obligations during
2000. Warrants associated with this transaction will expire February 22, 2003.
Series A Preferred Stock. On November 1, 2000, $20 million of mandatorily
redeemable preferred stock (the "Series A Preferred Stock") was issued to
affiliates of Credit Suisse First Boston (USA), Inc., which bear dividends at a
rate of 6% per annum if paid in cash and 8% per annum if paid-in-kind through
the issuance of additional Series A Preferred Stock in lieu of cash. At
Brigham's option, up to 100% of the dividend payments on the Series A Preferred
Stock during the first five years (expiring November 2005) can be satisfied
through the issuance of PIK dividends. The Series A Preferred Stock has a
ten-year maturity and is redeemable at Brigham's option at 100% or 101% of par
value (depending upon certain conditions) at anytime prior to maturity.
Warrants, to purchase an aggregate of 6,666,667 shares of Brigham common stock
were also issued to the CSFB Affiliates (the "Series A Warrants"), which have a
term of ten years, an exercise price of $3.00 per share and must be exercised,
if Brigham so requires, in the event that Brigham common stock trades at or
above $5.00 per share for 60 consecutive trading days. The exercise price of the
Series A Warrants is payable either in cash or in shares of Series A Preferred
Stock, valued at liquidation value plus accrued dividends. If Brigham requires
exercise of the Series A Warrants, proceeds from the exercise of the Series A
Warrants will be used to fund the redemption of a similar value of then
outstanding Series A Preferred Stock.
For financial reporting purposes, the Series A Warrants were valued at
$11.5 million using the Black-Scholes valuation model and were recorded as
additional paid-in capital in the year ended December 31, 2000. Pursuant to the
terms of the securities purchase agreement related to the Series A Preferred
Stock, Brigham agreed to nominate one representative of one of the CSFB
Affiliates to serve as a member of Brigham's board of directors so long as the
CSFB Affiliates or their affiliates own at least 10% of the Series A Preferred
Stock issued in November 2000, or at least 5% of the outstanding shares of
Brigham common stock.
Additional Series A Preferred Stock. On March 5, 2001, Brigham sold $10
million of additional Series A Preferred Stock and warrants (the "New CSFB
Warrants") to the CSFB affiliates in a private placement transaction. The
conditions to Brigham's receipt of the proceeds from this transaction were
fulfilled on March 22, 2001. The New CSFB Warrants to purchase an aggregate of
2,105,263 shares of Brigham common stock have a term of ten years, an exercise
price of $4.75 per share and must be exercised, if Brigham so requires, in the
event that Brigham common stock trades at an average of at least 150% of the
14
exercise price (currently, $7.125 per share) for 60 consecutive trading days.
The exercise price of the New CSFB Warrants is payable either in cash or in
shares of Series A Preferred Stock, valued at liquidation value plus accrued
dividends. If Brigham requires exercise of the New CSFB Warrants, proceeds from
the exercise of the New CSFB Warrants will be used to fund the redemption of a
similar value of then outstanding Series A Preferred Stock. For financial
reporting purposes, the New CSFB Warrants were valued at approximately $4.5
million using the Black-Scholes valuation model and were recorded as additional
paid-in capital in March 2001.
As of March 31, 2002 Brigham had $33.3 million (in Liquidation Value) of
Series A Preferred stock outstanding.
Cash Flow Analysis
Cash Flows from Operating Activities. Cash flows provided by operating
activities were $4.0 million in the first three months of 2002, which consisted
of $3.3 million in net operating cash flow (net cash provided by operating
activities before changes in operating assets and liabilities) and a net
$661,000 provided by working capital items. This compares to cash flows provided
by operating activities of $1.3 million in the first three months of 2001, which
consisted of $3.7 million in net operating cash flow (net cash provided by
operating activities before changes in operating assets and liabilities) and a
net $2.5 million used for working capital items.
Cash Flows from Investing Activities. Cash flows used by investing
activities were $5.0 million in the first three months of 2002 as compared with
$8.9 million used by investing activities in the first three months of 2001.
Additions to oil and gas properties decreased $4.3 million, or 47%, to $4.9
million in the first three months of 2002 compared to $9.2 million for the same
period in 2001.
Cash Flows from Financing Activities. Cash flows provided by financing
activities were $3.7 million in the first three months of 2002 as compared with
$18.9 million in the first three months of 2001. The cash flows provided by
financing activities during the first three months of 2002 resulted primarily
from $4.0 million in additional borrowings under the Subordinated Notes
Facility. The cash flows provided by financing activities during the first
three months of 2001 resulted primarily from $9.0 million in borrowings under
the Subordinated Notes Facility and the March 2001 placement of additional
Series A Preferred Stock and warrants that generated proceeds of $9.8 million
after transaction expenses.
Capital Expenditures
Brigham's original capital spending budget for 2002 was $23.7 million. The
majority of Brigham's planned 2002 expenditures will be directed toward the
drilling of its prospect inventory in a continued effort to focus resources on
its primary objective of growing production volumes and cash flow. For 2002,
Brigham expects to drill at least 26 wells with an average working interest of
32%. Capitalizing on the prior discovery of the Home Run Field, Mills Ranch
Field, Triple Crown Field and Providence Field, approximately 80% of Brigham's
2002 drilling expenditures are allocated to development drilling. Spending will
be funded by Brigham's 2002 discretionary cash flow, availability under its
Subordinated Notes Facility and by its beginning cash balance. Given the recent
improvement in natural gas and crude oil prices, Brigham's capital expenditure
plan for 2002 is likely to exceed the Company's original 2002 budget by
approximately $5.0 million. Brigham's capital expenditure plan is subject to
change if market conditions shift. In the event that commodity prices decrease,
Brigham may be required to curtail or delay some of its planned activities.
OTHER MATTERS
Derivative Instruments
Brigham believes that hedging, although not free of risk, allows it to
reduce its exposure to oil and natural gas sales price fluctuations and thereby
achieve a more predictable cash flow. However, hedging arrangements, when
utilized, may limit the benefit to Brigham of increases in the prices of the
hedged commodity. Moreover, Brigham's hedging arrangements generally do not
apply to all of its production and thus provide only partial price protection
15
against declines in commodity prices. Brigham expects that the amount of its
hedges will vary from time to time.
Total natural gas purchased and sold subject to swap arrangements entered
into by Brigham was 675,000 MMBtu in the first quarter of 2002 compared to
1,350,000 MMBtu in the first quarter of 2001. Brigham accounted for these
transactions as hedging activities and, accordingly, adjusted the price received
for natural gas production during the period the hedged transactions occurred.
Adjustments to the price received for natural gas under these swap arrangements
resulted in an increase in natural gas revenues of $339,000 in the first quarter
of 2002 compared to a decrease in natural gas revenues of $6.6 million in first
quarter of 2001. In addition, Brigham's oil revenues were reduced by $50,000 in
the first quarter of 2002 and $75,000 in the first quarter of 2001 as a result
of its crude oil collar hedging arrangements outstanding during the year. At
March 31, 2002, the fair value of hedging contracts included in accumulated
other comprehensive loss and other liabilities was approximately $2.0 million of
which approximately $270,000 was classified as noncurrent liabilities.
In September 1999, Brigham sold call options on a portion of its future oil
and natural gas production. Brigham applied the proceeds from the sale of these
call options to increase the effective fixed swap price on its then existing
natural gas hedging contracts during the months of October 1999 through January
2000 by an average of $0.57 per MMBtu. For accounting purposes, the improvement
in Brigham's fixed natural gas swap price attributable to these transactions was
not reflected in reported revenues. Rather, it was reflected in (i) other income
(expense) on the income statement, and (ii) amortization of deferred loss on
derivatives instruments and market value adjustment for derivatives instruments
on the cash flow statement.
In March 2000, Brigham purchased put options on a portion of its future oil
and natural gas production. These transactions effectively converted a portion
of its existing call options into collars, thus providing a hedge to future
changes in oil and natural gas prices.
Derivative instruments that do not qualify as hedging contracts are
recorded at fair value on the balance sheet. At each balance sheet date, the
value of these derivatives is adjusted to reflect current fair value and any
gains or losses are recognized as other income or expense. At March 31, 2002,
the fair value of these derivatives included in other current liabilities was
$635,000. For the three months ended March 31, 2002 and 2001, Brigham recognized
$(251,000) and $221,000, respectively, in non-cash gains (losses) related to
changes in the fair values of these derivative contracts. There were no cash
settlement payments made by Brigham to the counterparty for the three months
ended March 31, 2002 and 2001.
See Note 5 to the Consolidated Financial Statements for a schedule
regarding Brigham's outstanding natural gas and crude oil derivative contracts
as of March 31, 2002.
Loss of Surface Control Event
On March 24, 2002, Brigham reported a loss of surface control while
drilling the Burkhart #1 in its Providence Field, Matagorda County Texas. On
March 29, 2002, the well bridged off naturally. Brigham is currently drilling a
relief/replacement well to intersect and cement the Burkhart #1 borehole over
the Middle Frio interval that generated the uncontrolled flow. The total cost
cannot be reasonably estimated at this time; however, Brigham has liability and
well control insurance that it believes will be sufficient to cover a
substantial portion of the liabilities to third parties and the cost of drilling
the replacement well.
Effects of Inflation and Changes in Prices
Brigham's results of operations and cash flows are affected by changing oil
and gas prices. If the price of oil and natural gas increases (decreases), there
could be a corresponding increase (decrease) in revenues as well as the
operating costs that Brigham is required to bear for operations. Inflation has
had a minimal effect on Brigham.
16
Environmental and Other Regulatory Matters
Brigham's business is subject to certain federal, state and local laws and
regulations relating to the exploration for and the development, production and
marketing of oil and natural gas, as well as environmental and safety matters.
Many of these laws and regulations have become more stringent in recent years,
often imposing greater liability on a larger number of potentially responsible
parties. Although Brigham believes it is in substantial compliance with all
applicable laws and regulations, the requirements imposed by laws and
regulations are frequently changed and subject to interpretation, and Brigham is
unable to predict the ultimate cost of compliance with these requirements or
their effect on its operations. Any suspensions, terminations or inability to
meet applicable bonding requirements could materially adversely affect Brigham's
financial condition and operations. Although significant expenditures may be
required to comply with governmental laws and regulations applicable to Brigham,
compliance has not had a material adverse effect on the earnings or competitive
position of Brigham. Future regulations may add to the cost of, or significantly
limit, drilling activity.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 143, "Asset Retirement Obligations" ("SFAS 143") which
establishes accounting requirements for retirement obligations associated with
tangible long-lived assets including the timing of the liability recognition,
initial measurement of the liability, allocation of asset retirement cost to
expense, subsequent measurement of the liability and financial statement
disclosures. SFAS 143 requires that an asset retirement cost be capitalized as
part of the cost of the related long-lived asset and subsequently allocated to
expense using a systematic, rational method. Brigham plans to adopt SFAS 143 no
later than January 1, 2003, as required. The transition adjustment resulting
from the adoption will be reported as a cumulative effect of a change in
accounting principle. At this time, Brigham cannot reasonably estimate the
effect of the adoption of SFAS 143 on its financial position, results of
operations or cash flows.
Forward Looking Information
Brigham or its representatives may make forward looking statements, oral or
written, including statements in this report, press releases and filings with
the SEC, regarding estimated future net revenues from oil and natural gas
reserves and the present value thereof, planned capital expenditures (including
the amount and nature thereof), increases in oil and gas production, the number
of wells it anticipates drilling during 2002 and Brigham's financial position,
business strategy and other plans and objectives for future operations. Although
Brigham believes that the expectations reflected in these forward looking
statements are reasonable, there can be no assurance that the actual results or
developments anticipated by Brigham will be realized or, even if substantially
realized, that they will have the expected effects on its business or
operations. Among the factors that could cause actual results to differ
materially from Brigham's expectations are general economic conditions, inherent
uncertainties in interpreting engineering data, operating hazards, delays or
cancellations of drilling operations for a variety of reasons, competition,
fluctuations in oil and gas prices, availability of sufficient capital resources
to Brigham and its project participants, government regulations and other
factors set forth among the risk factors noted below or in the description of
Brigham's business in Item 1 of this report. All subsequent oral and written
forward looking statements attributable to Brigham or persons acting on its
behalf are expressly qualified in their entirety by these factors. Brigham
assumes no obligation to update any of these statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In Part II, Item 7A of Brigham's Form 10-K report for the year ended
December 31, 2001 (see page 54 of Brigham's 2001 Form 10-K), Brigham provided a
discussion of its market risk. See Note 5 to the Consolidated Financial
Statements regarding Brigham's market risk associated with its derivative
instruments at March 31, 2002. There were no material changes during the first
quarter of 2002 in Brigham's exposures to loss from possible future changes in
the prices of oil and natural gas or in interest rates, other than those
described in Brigham's 2001 Form 10-K report, and in Note 5 to the Consolidated
Financial Statements in this Form 10-Q.
17
PART II - OTHER INFORMATION
Item 1. Legal Proceeding
As discussed in Note 3 of Notes to the Consolidated Financial
Statements included in Part I. Financial Information, Brigham is party to
various legal actions arising in the ordinary course of business and does
not expect these matters to have a material adverse effect on its financial
condition, results of operations or cash flow.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
Brigham filed a report on Form 8-K on January 21, 2002, to report the
announcements on January 16, 2002, of the successful completion of the
discovery well for its Providence Field in Matagorda County, Texas, the
successful completion of two development wells in Home Run Field and the
spud of its second development well at Triple Crown Field in Brooks County,
Texas. The Form 8-K included a copy of Brigham's press release that
provided these announcements.
Brigham filed a report on Form 8-K on February 19, 2002, to report the
announcement on February 14, 2002, to disclose its year-end 2001 proved
reserves and announce its planned 2002 capital budget. The Form 8-K
included a copy of Brigham's press release that provided these
announcements.
Brigham filed a report on Form 8-K on February 19, 2002, to report the
announcement on February 19, 2002, that it began producing to sales from
the Providence field and successful discoveries in its Vicksburg and
Springer Focus plays. The Form 8-K included a copy of Brigham's press
release that provided these announcements.
Brigham filed a report on Form 8-K on February 27, 2002, to report the
announcement on February 26, 2002, of its financial results for the fiscal
year and quarter ended December 31, 2001. The Form 8-K included a copy of
Brigham's press release that provided these announcements.
Brigham filed a report on Form 8-K/A on March 19, 2002, to report the
announcement on February 26, 2002, of its financial results for the fiscal
year and quarter ended December 31, 2001. The Form 8-K/A included a copy of
Brigham's press release that provided these announcements.
Brigham filed a report on Form 8-K on March 28, 2002, to report the
announcement on March 24, 2002, that Brigham Oil & Gas, L.P. (a wholly
owned subsidiary of Brigham Exploration Company) had experienced a loss of
surface control while drilling the Burkhart #1 well near Bay City, and to
report the announcement on March 25, 2002, to update the public on the well
control situation with its Burkart #1. The Form 8-K included a copy of
Brigham's press releases that provided these announcements.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on May 9, 2002.
BRIGHAM EXPLORATION COMPANY
By: /s/ BEN M. BRIGHAM
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Ben M. Brigham
Chief Executive Officer, President and
Chairman of the Board
By: /s/ CURTIS F. HARRELL
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Curtis F. Harrell
Executive Vice President and
Chief Financial Officer
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