1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 001-16093
WESTPORT RESOURCES CORPORATION
(Exact Name of Registrant as specified in its charter)
DELAWARE 23-3020832
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
410 SEVENTEENTH STREET, SUITE 2300
DENVER, COLORADO 80202
(Address of principal executive offices)
(Zip Code)
(303) 573-5404
(Registrant's telephone number, including area code)
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 / /.
As of August 1, 2001, 38,468,841 shares of the issuer's common stock,
par value $0.01 per share, were outstanding.
2
WESTPORT RESOURCES CORPORATION
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION............................................................................ 1
Item 1. Financial Statements............................................................................. 1
Consolidated Balance Sheets as of June 30, 2001 (unaudited) and
December 31, 2000 ............................................................................... 1
Consolidated Statements of Operations for the three months and six months
ended June 30, 2001 and 2000 (unaudited)......................................................... 2
Consolidated Statements of Cash Flows for the six months ended June 30, 2001
and 2000 (unaudited)............................................................................. 3
Notes to Consolidated Financial Statements....................................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk....................................... 13
PART II - OTHER INFORMATION............................................................................... 14
Item 1. Legal Proceedings................................................................................ 14
Item 2. Changes in Securities and Use of Proceeds........................................................ 14
Item 3. Defaults Upon Senior Securities.................................................................. 14
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 14
Item 5. Other Information................................................................................ 14
Item 6. Exhibits and Reports on Form 8-K................................................................. 15
Signatures ............................................................................................... 16
i
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WESTPORT RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2001 2000
--------- ---------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents ............................................. $ 81,727 $ 20,154
Accounts receivable, net .............................................. 32,249 49,200
Derivative assets ..................................................... 7,401 --
Prepaid expenses ...................................................... 4,235 4,670
--------- ---------
Total current assets .............................................. 125,612 74,024
--------- ---------
Property and equipment, at cost:
Oil and natural gas properties, successful efforts method:
Proved properties ................................................... 654,002 591,367
Unproved properties ................................................. 42,288 40,653
Office furniture and equipment ........................................ 2,945 2,642
Leasehold improvements ................................................ 501 501
--------- ---------
699,736 635,163
Less accumulated depletion, depreciation and amortization ................. (198,789) (157,739)
--------- ---------
Net property and equipment ........................................ 500,947 477,424
--------- ---------
Other assets .............................................................. 230
--------- ---------
383
Total assets ...................................................... $ 626,789 $ 551,831
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ...................................................... $ 22,700 $ 28,547
Accrued expenses ...................................................... 16,977 19,827
Ad valorem taxes payable .............................................. 7,188 4,788
Income taxes payable .................................................. 547 375
--------- ---------
Total current liabilities ......................................... 47,412 53,537
--------- ---------
Long-term debt ............................................................ 162 162
Deferred income taxes ..................................................... 65,633 38,503
Other liabilities ......................................................... 1,504 1,573
--------- ---------
Total liabilities ................................................. 114,711 93,775
--------- ---------
Stockholders' equity:
Common stock , $0.01 par value; 70,000,000 authorized; 38,468,341 and
38,419,041 shares issued and outstanding at June 30, 2001 and
December 31, 2000, respectively .................................... 385 384
Additional paid-in capital ............................................ 474,227 472,576
Retained earnings (accumulated deficit) ............................... 35,785 (14,904)
Other comprehensive income ............................................ 1,681 --
--------- ---------
Total stockholders' equity ......................................... 512,078 458,056
--------- ---------
Total liabilities and stockholders' equity ........................ $ 626,789 $ 551,831
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
1
4
WESTPORT RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Operating revenues:
Oil and natural gas sales ....................... $ 67,803 $ 53,153 $ 162,732 $ 78,616
Commodity price risk management activities:
Non-hedge cash settlements .................... 390 -- 467 --
Non-hedge non-cash change in fair value of
derivatives ................................. 4,669 -- 6,766 --
--------- --------- --------- ---------
Net revenues ........................... 72,862 53,153 169,965 78,616
Operating costs and expenses:
Lease operating expense ......................... 9,522 8,857 19,995 15,480
Production taxes ................................ 2,415 2,376 5,933 4,644
Transportation costs ............................ 1,290 591 2,685 1,068
Exploration ..................................... 8,259 4,392 10,870 6,263
Depletion, depreciation and amortization ........ 20,788 16,404 41,029 22,576
Impairment of unproved properties ............... 743 1,306 1,748 1,541
Stock compensation expense ...................... 727 -- 1,271 3,383
General and administrative ...................... 3,188 2,039 6,710 3,204
--------- --------- --------- ---------
Total operating expenses ................... 46,932 35,965 90,241 58,159
--------- --------- --------- ---------
Operating income ........................... 25,930 17,188 79,724 20,457
--------- --------- --------- ---------
Other income (expense):
Interest expense ................................ (302) (3,240) (591) (5,288)
Interest income ................................. 704 182 1,066 375
Gain (loss) on sale of assets, net .............. -- 6 -- (11)
Other ........................................... (100) 32 (375) 32
--------- --------- --------- ---------
302 (3,020) 100 (4,892)
--------- --------- --------- ---------
Income before income taxes .......................... 26,232 14,168 79,824 15,565
Provision for income taxes:
Current ......................................... (729) -- (2,006) --
Deferred ........................................ (8,846) (4,959) (27,130) (4,959)
--------- --------- --------- ---------
Total provision for income taxes ........... (9,575) (4,959) (29,136) (4,959)
--------- --------- --------- ---------
Net income .......................................... $ 16,657 $ 9,209 $ 50,688 $ 10,606
========= ========= ========= =========
Weighted average number of common shares outstanding:
Basic ...................................... 38,458 29,862 38,447 22,785
========= ========= ========= =========
Diluted .................................... 39,433 30,046 39,342 22,975
========= ========= ========= =========
Net income per common share:
Basic ...................................... $ 0.43 $ 0.31 $ 1.32 $ 0.47
========= ========= ========= =========
Diluted .................................... $ 0.42 $ 0.31 $ 1.29 $ 0.46
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
2
5
WESTPORT RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
2001 2000
--------- ---------
Cash flows from operating activities:
Net income .................................................................. $ 50,688 $ 10,606
Adjustments to reconcile net income to cash provided by operating activities:
Depletion, depreciation and amortization .................................. 41,029 22,576
Exploratory dry hole costs ................................................ 6,239 1,739
Impairment of unproved properties ......................................... 1,748 1,541
Deferred income taxes ..................................................... 27,130 4,959
Stock compensation expense ................................................ 1,271 --
Change in derivative fair value ........................................... (6,394) --
Director retainers settled for stock ...................................... -- 30
Loss on sale of assets .................................................... -- 11
Changes in assets and liabilities, net of effects of acquisitions:
Decrease (increase) in accounts receivable ............................. 16,951 (18,458)
Decrease (increase) in prepaid expenses ................................ 588 (239)
Increase (decrease) in accounts payable ................................ (5,846) 799
Decrease in accrued expenses ........................................... (1,216) (4,402)
Increase in ad valorem taxes payable ................................... 2,400 1,016
Increase in income taxes payable ....................................... 306 --
Decrease in other liabilities .......................................... (69) (1,331)
--------- ---------
Net cash provided by operating activities ....................................... 134,825 18,847
--------- ---------
Cash flows from investing activities:
Additions to property and equipment ....................................... (68,458) (27,892)
Proceeds from sales of assets ............................................. 654 57
Merger with EPGC .......................................................... -- (42,403)
Other acquisitions ........................................................ (5,695) (1,454)
Other ..................................................................... -- (279)
--------- ---------
Net cash used in investing activities ........................................... (73,499) (71,971)
--------- ---------
Cash flows from financing activities:
Repayment of long-term debt ............................................... -- (667)
Proceeds from issuance of long-term debt .................................. -- 50,000
Proceeds from issuance of common stock .................................... 247 --
--------- ---------
Net cash provided by financing activities ....................................... 247 49,333
--------- ---------
Net increase (decrease) in cash and cash equivalents ............................ 61,573 (3,791)
Cash and cash equivalents, beginning of period .................................. 20,154 19,475
--------- ---------
Cash and cash equivalents, end of period ........................................ $ 81,727 $ 15,684
========= =========
Supplemental cash flow information:
Cash paid for interest .................................................... $ 117 $ 3,753
========= =========
Cash paid for income taxes ................................................ $ 1,700 $ --
========= =========
Supplemental schedule of noncash investing and financing activities:
Common stock issued in connection with the EPGC merger .................... $ -- $ 165,363
========= =========
Liabilities assumed in connection with the EPGC merger .................... $ -- $ 1,850
========= =========
EPGC merger costs paid by parent .......................................... $ -- $ 2,895
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
3
6
WESTPORT RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND NATURE OF BUSINESS
On April 7, 2000, Westport Oil and Gas Company, Inc. merged with
Equitable Production (Gulf) Company ("EPGC"), an indirect subsidiary of
Equitable Resources, Inc. that held certain Gulf of Mexico assets (the "EPGC
Properties"). This transaction was effected by a merger between a newly-formed
subsidiary of EPGC and Westport Oil and Gas Company, Inc., resulting in Westport
Oil and Gas Company, Inc. becoming a wholly-owned subsidiary of EPGC, which
subsequently changed its name to Westport Resources Corporation (the "Company").
Business activities of the Company include the exploration for and production of
oil and natural gas primarily in the Gulf of Mexico, the Rocky Mountains, the
Gulf Coast and the West Texas/Mid Continent area.
2. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring items) necessary to present fairly the financial position of the
Company as of June 30, 2001 and the results of operations and cash flows for the
periods presented. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the Securities
and Exchange Commission's rules and regulations. The results of operations for
the periods presented are not necessarily indicative of the results to be
expected for the full year. Management believes the disclosures made are
adequate to ensure that the information is not misleading, and suggests that
these financial statements be read in conjunction with the Company's December
31, 2000 audited financial statements set forth in the Company's Form 10-K.
3. DEBT
The Company entered into a credit agreement as of April 7, 2000 with a
syndicate of banks led by Bank of America, N.A. in the aggregate amount of
$325.0 million. The amount available for borrowing under the credit facility is
limited to a borrowing base of $200.0 million, but is redetermined semi-annually
on April 1 and October 1. The credit agreement matures on April 4, 2003 and is
secured by substantially all of the Company's oil and gas properties. Advances
under the credit agreement can be in the form of either a base rate loan or a
Eurodollar loan. The interest on a base rate loan is a fluctuating rate equal to
(i) the higher of (a) the Federal funds rate plus 0.5% and (b) Bank of America's
prime rate, plus (ii) a margin of either 0% or 0.25% depending on the amounts
outstanding under the credit agreement. The interest on a Eurodollar loan is
equal to the sum of (i) a margin between 1.00% and 1.75% depending on the amount
outstanding under the credit agreement and (ii) the rate obtained by dividing
the Eurodollar rate by one minus the reserve requirement for the Eurodollar
loan. The credit agreement contains various covenants and restrictive provisions
including two financial covenants that require the Company to maintain a current
ratio of not less than 1.0 to 1.0 and a ratio of EBITDA to consolidated interest
expense for the preceding four consecutive fiscal quarters of not less than 2.5
to 1.0.
4. COMMODITY DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company periodically enters into commodity derivative contracts and
fixed-price physical contracts to manage its exposure to oil and natural gas
price volatility. The Company primarily utilizes price swaps, futures contracts
or collars, which are generally placed with major financial institutions or with
counterparties of high credit quality that the Company believes are minimal
credit risks. The oil and natural gas reference prices of these commodity
derivatives contracts are based upon crude oil and natural gas futures which
have a high degree of historical correlation with actual prices received by the
Company.
On January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 ("SFAS No. 133") "Accounting for Derivative
Instruments and Hedging Activities." Under SFAS No. 133, all derivative
instruments are recorded on the balance sheet at fair value. If the derivative
qualifies for hedge accounting, the gain or loss on the derivative is deferred
in other comprehensive income (loss) to the extent the hedge is effective. If
the
4
7
derivative does not qualify for hedge accounting or is not designated as a
hedge, the gain or loss on the derivative is recognized currently in earnings.
Gains and losses on hedging instruments included in accumulated other
comprehensive income (loss) are reclassified to oil and natural gas sales
revenues in the period that the related production is delivered. In accordance
with the transition provisions of SFAS No. 133, on January 1, 2001 the Company
recorded a loss of approximately $4.7 million ($3.1 million after tax) in
accumulated other comprehensive loss representing the cumulative effect of an
accounting change to recognize the fair value of the Company's cash flow
derivatives. The Company also recorded a derivative liability of $4.7 million
and a deferred tax asset of $1.6 million upon adoption of SFAS No. 133.
At June 30, 2001, the Company had six costless collar agreements for a
total of 8,802,000 Mmbtus of natural gas and 1,460,000 Bbls of oil for the
months of July 2001 through December 2003 at a floor price ranging from $4.50
per Mmbtu to $5.50 per Mmbtu and $23.25 per Bbl to $25.00 per Bbl, respectively
and ceiling price ranging from $6.00 per Mmbtu to $8.00 per Mmbtu and $26.00 per
Bbl to $28.00 per Bbl, respectively. See Item 3, "Quantitative and Qualitative
Disclosures about Market Risk." One of these costless collar agreements for
2,208,000 Mmbtus of natural gas for the months of July through December 2001 was
designated as a hedge for accounting purposes. The other five costless collar
agreements for 6,594,000 Mmbtus of natural gas for the months of July 2001
through December 2002 and 1,460,000 Bbls of oil for the months of July 2001
through December 2003 did not qualify as hedges for accounting purposes.
As of June 30, 2001, the Company had a net unrealized hedging gain of
$2.6 million ($1.7 million after tax) which had been recorded in other
comprehensive income for the fair market value of the costless collar that was
designated as a hedge for accounting purposes. During the next six months, the
Company expects to reclassify this amount as an increase to earnings. At June
30, 2001, the Company had derivative assets of $1.7 million related to a natural
gas derivative that qualifies for hedge accounting and derivative assets of $6.0
million related to natural gas derivatives that do not qualify for hedge
accounting.
The Company recognized reductions of oil and natural gas revenues of
$1.5 million and $8.5 million from settled hedging agreements for the six months
ended June 30, 2001 and June 30, 2000, respectively. The Company recognized a
non-cash derivative gain of $6.8 million for the six months ended June 30, 2001
for the change in the fair market value of commodity derivative contracts that
did not qualify as hedges for accounting purposes. The Company also recognized a
gain of $0.5 million for the six months ended June 30, 2001 for a settled
hedging agreement that did not qualify as a hedge for accounting purposes.
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk management objectives and
strategy for undertaking the hedge. This process includes specific
identification of the hedging instrument and the hedge transaction, the nature
of the risk being hedged and how the hedging instrument's effectiveness will be
assessed. Both at the inception of the hedge and on an ongoing basis, the
Company assesses whether the derivatives that are used in hedging transactions
are highly effective in offsetting changes in cash flows of hedged items.
5. INTEREST RATE SWAP AGREEMENT
The Company periodically enters into interest rate swap agreements to
effectively convert a portion of its floating-rate borrowings into fixed rate
obligations. To the extent these swap agreements are effective at offsetting the
related interest, the interest rate differential to be received or paid is
recognized as a current period adjustment to interest expense.
The Company entered into an interest rate swap contract for a period
commencing on March 10, 1999 and ending on March 11, 2002. The contract, as
amended, is for an aggregate notional amount of $25 million with a fixed
interest rate of 5.61% payable by the Company and the variable interest rate, a
three-month LIBOR rate payable by the third party. The difference between the
fixed rate and the three-month LIBOR rate, which is reset every 90 days, is
received or paid by the Company in arrears every 90 days. As a result of the
Company's minimal debt balance at June 30, 2001, the interest rate swap was not
designated as a hedge for accounting purposes. As such, the Company recorded a
mark to market loss and derivative liability of approximately $0.3 million on
the interest rate swap at June 30, 2001.
5
8
6. COMPREHENSIVE INCOME
The Company follows SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting comprehensive income. In addition to
net income, comprehensive income includes all changes in equity during a period,
except those resulting from investments and distributions to the owners of the
Company. The Company had no such changes for the six months ended June 30, 2000.
The components of other comprehensive income and related tax effects for the six
months ended June 30, 2001 are as follows (in thousands):
Tax Net of
Gross Effect Tax
----- ------ -------
Cumulative effect of accounting change $(4,700) $ 1,600 $(3,100)
Change in derivative fair value of hedge 8,864 (3,120) 5,744
Reclassification adjustments - contract settlements (1,517) 554 (963)
------- ------- -------
$ 2,647 $ (966) $ 1,681
======= ======= =======
7. RESTRICTED STOCK AWARDS
The Company issued 26,550 shares of Common Stock as restricted stock
awards pursuant to the Company's 2000 Stock Incentive Plan to certain employees
during the six months ended June 30, 2001. The shares are restricted for various
years ranging from one to three years after the date of grant. Compensation
expense of $0.2 million was recorded as a result of the issuance.
8. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations," which addresses financial accounting and
reporting for business combinations. SFAS No. 141 is effective for all business
combinations initiated after June 30, 2001 and for all business combinations
accounted for under the purchase method initiated before but completed after
June 30, 2001. The adoption of SFAS No. 141 is not expected to have a material
impact on the Company's financial position or results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets," which addresses, among other things, the financial
accounting and reporting for goodwill subsequent to an acquisition. The new
standard eliminates the requirement to amortize acquired goodwill; instead, such
goodwill shall be reviewed at least annually for impairment. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001. The Company has
not yet evaluated the impact of SFAS No. 142, however, if the Company
consummates its merger of Belco Oil & Gas Corp. ("Belco") (see Note 9), the
Company will analyze the impairment provisions of the new standard to determine
whether those provisions will impact its financial statements upon adoption.
9. SUBSEQUENT EVENT
On June 8, 2001, the Company entered into an agreement and plan of
merger with Belco. The merger of the Company into Belco will be accounted for as
a purchase transaction for financial accounting purposes. Because the Company's
stockholders will own a majority of the combined entity's common stock, the
merger will be accounted for as a reverse acquisition in which the Company is
the purchaser of Belco. In the merger the Company stockholders will receive one
share of Belco common stock for each share of Westport common stock they own. In
addition, Belco common stockholders will receive 0.4125 of a share of Belco
common stock for each share of Belco common stock they own. Upon consummation of
the merger, Belco will change its name to Westport Resources Corporation. The
outstanding shares of Belco preferred stock will remain outstanding and the
existing conversion ratio will be adjusted so that holders will receive 0.465795
of a share of common stock upon conversion. (See Registration Statement on Form
S-4, as amended, Registration No. 333-64320 filed with the Securities and
Exchange Commission on July 24, 2001 with Belco as the name of the registrant).
Special meetings of shareholders of both companies to vote on the transaction
are scheduled for August 21, 2001.
6
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion is intended to assist you in understanding our
results of operations and our present financial condition. Our consolidated
financial statements and the accompanying notes contain additional detailed
information that should be referred to when reviewing this material. Statements
in this discussion may be forward-looking. Such forward-looking statements
involve risks and uncertainties that could cause actual results to differ
significantly from those expressed. See "Special Note Regarding Forward-Looking
Statements."
On April 7, 2000, Westport Oil and Gas merged with EPGC. As a result of
the merger, Westport Oil and Gas became a wholly-owned subsidiary of EPGC, which
subsequently changed its name to Westport Resources Corporation, and the
stockholders of Westport Oil and Gas became the majority stockholders of EPGC.
The senior management team of Westport Oil and Gas became the management team
for the combined company, complemented by certain key managers from EPGC. In
connection with this merger, Westport Oil and Gas issued 15.2 million shares of
common stock, paid cash of $50.0 million and assumed liabilities of $1.8
million. Westport Oil and Gas increased its proved reserves by 129.8 Bcfe and
its Gulf of Mexico leasehold by 157,000 net acres.
Our results of operations are significantly impacted by the price of
oil and natural gas. The prices we receive for our oil vary from NYMEX prices
based on the location and quality of the crude oil. The prices we receive for
our natural gas are based on Henry Hub prices reduced by transportation and
processing fees.
The Company accounts for its oil and natural gas operations using the
successful efforts method of accounting. Under this method, all costs associated
with property acquisition, successful exploratory wells and all developmental
wells are capitalized. Items charged to expense generally include geological and
geophysical costs, costs of unsuccessful exploratory wells and oil and natural
gas production costs. All of the Company's oil and natural gas properties are
located within the continental United States, the Gulf of Mexico and Canada.
RESULTS OF OPERATIONS
The merger between EPGC and Westport Oil and Gas was accounted for
using purchase accounting with Westport Oil and Gas as the surviving entity.
Westport Resources Corporation began consolidating the results of EPGC with the
results of Westport Oil and Gas as of the April 7, 2000 closing date. The
discussion below includes a comparison of our results of operations for the
three months and six months ended June 30, 2001 and 2000.
REVENUES. Oil and natural gas revenues for the three months ended June
30, 2001 increased by $14.6 million, or 27%, from $53.2 million to $67.8
million, compared to the three months ended June 30, 2000. The increase was
primarily a result of an increase of 34% in realized natural gas prices and 6%
in realized oil prices including the effects of hedging. Production volumes
increased 4% from 15.6 Mmcfe to 16.2 Mmcfe from recent discoveries. For the
three months ended June 30, 2001 and 2000, respectively, hedging transactions
had the effect of increasing oil and natural gas revenues by $0.2 million, or
$0.01 per Mcfe, and reducing oil and natural gas revenues by $4.9 million, or
$0.31 per Mcfe.
Oil and natural gas revenues for the six months ended June 30, 2001
increased by $84.1 million, or 107%, from $78.6 million to $162.7 million, over
the comparable period in 2000. Production from the acquired EPGC properties
accounted for $33.2 million of the increase. The increase was also a result of
an increase of 83% and 11% in realized natural gas prices and oil prices,
respectively. Production volumes increased 8.6 Mmcfe from 23.7 Mmcfe in 2000 to
32.3 Mmcfe in 2001 (acquired EPGC properties accounted for 2.8 Mmcfe of the
increase). Production volumes also increased 4.3 Mmcfe from recent discoveries
in the Gulf of Mexico, 0.8 Mmcfe from coalbed methane development in the Powder
River Basin area and 0.3 Mmcfe from the drilling program in northern Louisiana.
Hedging transactions had the effect of reducing oil and natural gas revenues by
$1.5 million and $8.5 million, or $0.04 and $0.36 per Mcfe, for the six months
ended June 30, 2001 and 2000, respectively.
7
10
COMMODITY PRICE RISK MANAGEMENT ACTIVITIES. The Company recorded a gain
of $5.1 million in the non-hedge non-cash change in fair value of derivatives
and non-hedge cash settlements for the three months ended June 30, 2001. The
gain relates to cash settlements and changes in fair value on derivatives that
under SFAS No. 133 do not qualify for hedge accounting. The Company had no
derivatives that did not qualify for hedge accounting for the three months ended
June 30, 2000.
For the six months ended June 30, 2001, the Company recorded a gain of
$7.2 million in the non-hedge non-cash change in fair value of derivatives and
non-hedge cash settlements. The gain relates to cash settlements and changes in
fair value on derivatives that under SFAS No. 133 do not qualify for hedge
accounting. The Company had no derivatives that did not qualify for hedge
accounting for the six months ended June 30, 2000.
LEASE OPERATING EXPENSE. Lease operating expense for the three months
ended June 30, 2001 increased by $0.6 million, or 7%, from $8.9 million to $9.5
million, compared to the same period in 2000. An increase of $0.5 million was
due to chemicals used in initiating the alkaline surfactant polymer flood in the
Mellot Ranch field in the Powder River Basin area. The remaining increase was
primarily a result of increased production from recent discoveries. On a per
Mcfe basis, lease operating expense remained relatively flat at $0.59 and $0.57
in the 2001 and 2000 periods, respectively.
Lease operating expense for the six months ended June 30, 2001
increased by $4.5 million, or 29%, from $15.5 million to $20.0 million, compared
to the same period in 2000. Lease operating expenses from the acquired EPGC
properties accounted for $0.9 million of the increase. An increase of $1.0
million was due to chemicals used in initiating the alkaline surfactant polymer
flood in the Mellot Ranch field in the Powder River Basin area in the first and
second quarters of 2001. Lease operating expenses increased in the Gooseberry
field in the Big Horn Basin by $0.5 million as a result of several acid jobs and
workovers to enhance current production. Recent discoveries in the Gulf of
Mexico and additional wells drilled during 2000 in the coalbed methane
development in the Powder River Basin area accounted for $0.5 million and $0.2
million, respectively, of the increase. On a per Mcfe basis, lease operating
expense decreased from $0.65 to $0.62, primarily due to the lower lease
operating expense associated with the acquired EPGC properties.
PRODUCTION TAXES. Production taxes for the three months ended June 30,
2001 and 2000, respectively, were $2.4 million for both periods. As a percent of
oil and natural gas revenues (excluding the effects of hedges), production taxes
decreased from 4.1% to 3.6%. The decrease in production taxes as a percent of
revenue is primarily the result of recent offshore discoveries that are not
subject to production taxes.
Production taxes for the six months ended June 30, 2001 increased by
$1.3 million, or 28%, from $4.6 million to $5.9 million, compared to the same
period in 2000. The increase in production taxes is primarily attributable to an
increase in the average realized price of oil and natural gas and additional
onshore production volumes primarily in the first quarter of 2001. As a percent
of oil and natural gas revenues (excluding the effects of hedges), production
taxes decreased from 5.3% to 3.6%. The decrease in production taxes as a percent
of revenue is primarily the result of the EPGC merger and recent discoveries in
the Gulf of Mexico, which increased the number of offshore properties that are
not subject to production taxes.
TRANSPORTATION COSTS. Transportation costs for the three months ended
June 30, 2001 increased by $0.7 million, or 118%, from $0.6 million to $1.3
million, compared to the same period in 2000. The majority of the increase was
due to additional offshore and coalbed methane wells that started producing in
the latter part of 2000 and the first half of 2001.
Transportation costs for the six months ended June 30, 2001 increased
by $1.6 million, or 151%, from $1.1 million to $2.7 million, compared to the
same period in 2000. Transportation costs from the acquired EPGC properties
accounted for $0.4 million of the increase. The remaining increase was primarily
due to additional offshore and coalbed methane wells that started producing in
the latter part of 2000 and the first half of 2001.
EXPLORATION COSTS. Exploration costs for the three months ended June
30, 2001 increased by $3.9 million, or 88%, from $4.4 million to $8.3 million,
compared to the same period in 2000. Dry hole costs increased $4.7 million as a
result of two unsuccessful exploratory wells drilled in the Gulf of Mexico
during the three months ended
8
11
June 30, 2001. For the three months ended June 30, 2000 there was one
unsuccessful offshore well drilled. The increase was offset by a $0.9 million
decrease primarily attributable to the timing of purchases of Gulf of Mexico 3-D
seismic data.
Exploration costs for the six months ended June 30, 2001 increased by
$4.6 million, or 74%, from $6.3 million to $10.9 million, compared to the same
period in 2000. The increase was attributable to three unsuccessful exploratory
wells drilled in the Gulf of Mexico in 2001 compared to two unsuccessful
offshore wells and one unsuccessful onshore well in 2000.
DEPLETION, DEPRECIATION AND AMORTIZATION (DD&A) EXPENSE. DD&A expense
increased $4.4 million during the three months ended June 30, 2001, from $16.4
million to $20.8 million, compared to the same period in 2000. An increase of
$3.2 million is related to recent discoveries in the Gulf of Mexico and the
remaining increase was primarily due to additions in oil and natural gas
properties in northern Louisiana since June 30, 2000. On a per Mcfe basis, DD&A
expense increased from $1.05 to $1.28 primarily due to the recent discoveries in
the Gulf of Mexico.
DD&A expense increased $18.4 million during the six months ended June
30, 2001, from $22.6 million to $41.0 million, compared to the same period in
2000. Depletion related to the acquired EPGC properties caused DD&A expense to
increase $9.8 million. Recent discoveries in the Gulf of Mexico caused DD&A
expense to increase $5.6 million. The remaining increase was primarily due to
additions in oil and natural gas properties in northern Louisiana since June 30,
2000. On a per Mcfe basis, DD&A expense increased from $0.95 to $1.27 primarily
due to the acquired EPGC properties and recent discoveries in the Gulf of
Mexico.
IMPAIRMENT OF UNPROVED PROPERTIES. During the three months ended June
30, 2001, we recognized unproved property impairments of $0.7 million on
offshore leases, as a result of an assessment of the exploration opportunities
existing on such properties. During the three months ended June 30, 2000, we
recognized unproved property impairments of $1.3 million of which $0.6 million
were associated with offshore leases, $0.4 million were impaired for leases held
in Kansas and the remaining $0.3 million were associated with various leases
held in North Dakota and Wyoming.
During the six months ended June 30, 2001, we recognized unproved
property impairments of $1.7 million on offshore leases, as a result of an
assessment of the exploration opportunities existing on such properties. During
the six months ended June 30, 2000, we recognized unproved property impairments
of $1.5 million of which impairments of $0.6 million were taken on offshore
leases, $0.4 million for leases held in Kansas and the remaining $0.5 million
for various leases held in North Dakota, Wyoming and Louisiana.
STOCK COMPENSATION EXPENSE. During the three months ended June 30,
2001, we recognized $0.6 million of stock compensation expense as a result of
applying the provisions of FASB Interpretation No. 44 and $0.1 million related
to the issuance of restricted stock. During the three months ended June 30,
2000, we did not recognize any stock compensation expense.
During the six months ended June 30, 2001, we recognized $1.1 million
of stock compensation expense as a result of applying the provisions of FASB
Interpretation No. 44 and $0.2 million related to the issuance of restricted
stock. During the six months ended June 30, 2000, we recognized $3.4 million of
stock compensation expense due to a one-time stock compensation expense related
to the repurchase of employee stock options.
GENERAL AND ADMINISTRATIVE (G&A) EXPENSE. G&A expense increased $1.2
million, or 56%, during the three months ended June 30, 2001, from $2.0 million
to $3.2 million, compared to the same period in 2000. The majority of the
increase was related to payroll costs such as salaries and benefits, resulting
from an increase in staff and costs incurred in 2001 as a result of the Company
being public.
G&A expense increased $3.5 million, or 109%, during the six months
ended June 30, 2001, from $3.2 million to $6.7 million, compared to the same
period in 2000. In connection with the EPGC merger additional employees were
hired in the Houston office which accounted for a $2.3 million increase in G&A
expense. A
9
12
majority of the remaining increase was due to payroll costs resulting from an
increase in staff and costs incurred in 2001 as a result of the Company being
public.
OTHER INCOME (EXPENSE). Other income (expense) for the three months
ended June 30, 2001 was $0.3 million compared to ($3.0) million for the three
months ended June 30, 2000. Interest expense decreased $2.9 million during the
three months ended June 30, 2001, as a result of a reduction in our debt
balance. The remaining change was primarily due to an increase of $0.5 million
in interest income caused by the increase in the Company's cash balance.
Other income (expense) for the six months ended June 30, 2001 was $0.1
million compared to ($4.9) million for the six months ended June 30, 2000.
Interest expense decreased $4.7 million during the six months ended June 30,
2001, as a result of a reduction in our debt balance. Interest income increased
$0.7 million due to the increase in the Company's cash balance. The remaining
change was primarily due to recognizing a ($0.3) million derivative loss for the
six months ended June 30, 2001 from an interest rate swap contract that was not
designated as a hedge for accounting purposes.
INCOME TAXES. We recorded income tax expense of $9.6 million ($8.8
million deferred and $0.7 million current) for the three months ended June 30,
2001. Deferred income tax expense of $5.0 million was recorded for the three
months ended June 30, 2000. The difference between the income tax expense
(benefit) for those periods and the amounts that would be calculated by applying
statutory income tax rates to income before income taxes is due primarily to the
utilization of credits generated from applying enhanced recovery methods in both
periods.
We recorded income tax expense of $29.1 million ($27.1 million deferred
and $2.0 million current) for the six months ended June 30, 2001. Deferred
income tax expense of $5.0 million was recorded for the six months ended June
30, 2000 due to the reversal of a portion of the Company's valuation allowance
which offset applicable income taxes. The valuation allowance was fully utilized
during the first quarter of the year ended December 31, 2000. The difference
between the income tax expense (benefit) for those periods and the amounts that
would be calculated by applying statutory income tax rates to income before
income taxes is due primarily to the reversal of deferred tax valuation
allowance in the 2000 period and the utilization of credits generated from
applying enhanced recovery methods in both periods.
NET INCOME. Net income for the three months ended June 30, 2001 was
$16.7 million compared to net income of $9.2 million for the three months ended
June 30, 2000. The variance was primarily attributable to increases in revenues
of $19.7 million and other income of $3.3 million, partially offset by increases
of $10.9 million in operating expenses and $4.6 million in income tax expense.
Net income for the six months ended June 30, 2001 was $50.7 million
compared to net income of $10.6 million for the six months ended June 30, 2000.
The variance was primarily attributable to increases in revenues of $91.3
million and other income of $5.0 million, partially offset by increases of $32.1
million in operating expenses and $24.1 million in income tax expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal uses of capital have been for the exploitation,
acquisition and exploration of oil and natural gas properties.
Cash flow from operating activities was $134.8 million for the six
months ended June 30, 2001 compared to $18.8 million for the six months ended
June 30, 2000. The operating cash flow in the six month period increased
compared to the prior period due to the increase in natural gas prices, increase
in production as a result of the merger with EPGC and recent discoveries in the
Gulf of Mexico and additional production from coalbed methane development.
Cash flow used in investing activities was $73.5 million for the six
months ended June 30, 2001 compared to $72.0 million for the six months ended
June 30, 2000. Of this total, $68.5 million was used for exploitation and
exploration activities and $5.7 million of cash was used for acquisitions,
offset by proceeds from sales of properties
10
13
of $0.7 million. Investing activities for the six months ended June 30, 2000
included $27.9 million for exploitation and exploration activities and $43.9
million for acquisitions, of which $42.4 million resulted from the merger with
EPGC.
Net cash generated from financing activities was $0.2 million from
proceeds from the issuance of common stock for the six months ended June 30,
2001 compared to $49.3 million for the six months ended June 30, 2000. Financing
activities for the six months ended June 30, 2000 reflected borrowings of $50.0
million utilized to consummate the merger with EPGC offset by repayments of
long-term debt of $0.7 million.
The Company expects to execute a new credit agreement with a syndicate
of banks upon closing of the Belco merger. The agreement is expected to provide
for a revolving credit facility of $400 million, initial availability of $400
million and a maturity date of July 1, 2005. Advances under the credit facility
will be in the form of either a base rate loan or a Eurodollar loan. The
interest on a base rate loan is anticipated to be a fluctuating rate based upon
the highest of the rate of interest announced by Chase Manhattan Bank as its
prime rate, the secondary market rate for three months certificates of deposits
plus 1% and the federal funds effective rate plus .05% plus a margin of 0% to
1.25% based upon the ratio of total debt to EBITDAX. The interest on a
Eurodollar loan is anticipated to be a fluctuating rate based upon the rate at
which Eurodollar deposits in the London interbank market are quoted plus a
margin of 1.25% to 1.5% based upon the ratio of total debt to EBITDAX.
Our 2001 capital expenditures (excluding acquisitions) were scheduled
at $170 million approximately 60% of this is allocated to development activities
and 40% to exploration activities. We do not budget for acquisitions, but expect
to continue to grow through acquisitions as we have done successfully in the
past. Any acquisitions could affect the level of our capital expenditures for
drilling and other projects. On a combined basis currently scheduled capital
expenditures for the full year 2001 for both Westport and Belco would be
approximately $260 million. Approximately 70% of this amount is allocated to
development activities and 30% to exploration activities. We expect to fund
these expenditures through anticipated cash flow. Actual levels of capital
expenditures may vary significantly due to a variety of factors, including:
- - drilling results;
- - product prices;
- - industry conditions and outlook; and
- - future acquisitions of properties.
Westport 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 natural gas prices.
Westport cannot assure you 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.
The Company estimates that for the full year 2001 on a combined basis
Westport and Belco would have oil and gas production of 125 to 135 Bcfe and
EBITDAX of $330 million to $340 million assuming average NYMEX oil and gas
prices of approximately $27.00 per barrel of oil and $4.90 per Mcf of gas.
Westport expects the combined level of full year 2001 capital expenditures to be
approximately $260 million.
Note 9 to our financial statements in Item 1 describes our impending
merger with Belco. As stated there, the merger will be accounted for as a
reverse acquisition in which the Company is the purchaser of Belco.
Belco's properties are described in the Form S-4 and are located in
areas of the continental United States in which the Company already operates.
This increase in the size of our asset base and the scope of our operations in
our core operating areas should allow us to operate more efficiently and compete
more aggressively for business opportunities in these areas. The Company
anticipates that the merger will improve our cost structure through economies of
scale, improve our financial flexibility as a result of our increased size,
which should allow us to access additional segments of the capital markets and
through the moderate use of leverage to lower our overall cost of capital. The
merger will also expand the public float of our common stock which should lead
to improved market liquidity and therefore greater access to capital through the
public markets.
11
14
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements. Forward-looking
statements give our current expectations or forecasts of future events. They do
not relate strictly to historical or current facts and may include words such as
"anticipate," "estimate," "expect," "project," "intend," "plan," "believe" and
other words and terms of similar meaning in connection with any discussion of
future operating or financial performance. In particular, these include, among
other things, statements relating to:
- - completion and benefits of the proposed merger;
- - uncertainties related to the integration of Belco and Wesport following
the merger;
- - amount, nature and timing of capital expenditures;
- - drilling of wells;
- - reserve estimates;
- - timing and amount of future production of oil and natural gas;
- - operating costs and other expenses;
- - cash flow and anticipated liquidity;
- - estimates of proved reserves, exploitation potential or exploration
prospect size; and
- - marketing of oil and natural gas.
Any or all forward-looking statements in this report may turn out to be
wrong. They can be affected by inaccurate assumptions we might make or by known
or unknown risks and uncertainties. Many factors mentioned in this report will
be important in determining future results. Actual future results may vary
materially. Factors that could cause results to differ materially from the
results discussed in the forward-looking statements include the following risks:
- - the risks associated with exploration;
- - our ability to find, acquire, market, develop and produce new properties;
- - oil and natural gas price volatility;
- - uncertainties in the estimation of proved reserves and in the projection
of future rates of production and timing of exploitation expenditures;
- - operating hazards attendant to the oil and natural gas business;
- - drilling and completion risks that are generally not recoverable from
third parties or insurance;
- - potential mechanical failure or underperformance of significant wells;
- - climatic conditions;
- - availability and cost of material and equipment;
- - actions or inactions of third-party operators of our properties;
- - our ability to find and retain skilled personnel;
- - availability of capital;
- - the strength and financial resources of our competitors;
- - regulatory developments;
- - environmental risks; and
- - general economic conditions.
When you consider these forward-looking statements, you should keep in
mind these risk factors and the other cautionary statements in this report. Our
forward-looking statements speak only as of the date made.
12
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We currently sell most of our oil and natural gas production under
price sensitive or market price contracts. To reduce our exposure to
fluctuations in oil and natural gas prices, we occasionally enter into
derivative arrangements. However, these contracts may also limit the benefits we
would realize if prices increase.
Through August 1, 2001, we had entered into the following hedging
arrangements covering the period beginning January 1, 2001 and ending December
31, 2003. One Mmbtu approximates one Mcf of natural gas.
Natural Gas Collars Oil Collars
------------------------------------------ -----------------------------------------
Average Average Average
Daily NYMEX Average NYMEX Average NYMEX
Volume Floor Ceiling Average Daily NYMEX Floor Ceiling
Time Period (Mmbtu) Price/Mmbtu Price/Mmbtu Volume (bbl) Price/bbl Price/bbl
- ----------- ---------- ------------ ------------- -------------- ---------- ---------
1/1/01-12/31/01.................... 12,000 $4.50 $6.00 -- -- --
2/1/01-12/31/01 (1).............. 10,000 5.00 7.00 -- -- --
3/1/01-12/31/01 (2).............. 6,000 5.50 8.00 -- -- --
1/1/02-12/31/02 (2) ............. 10,000 4.50 6.75 2,000 $25.00 $28.00
1/1/03-12/31/03 (2).............. -- -- -- 2,000 $23.25 $26.00
(1) Contract is settled annually based on an average of the NYMEX settlement
price for each month of the collar.
(2) The counterparties to these contracts hold options to put a similar volume
of natural gas or oil to the Company over similar time periods at
$3.54/Mmbtu and $3.50/Mmbtu for the 3/1/01 - 12/31/01 natural gas collar
and the 1/1/02 - 12/31/02 natural gas collar, respectively, and $19.75/Bbl
and $18.65/Bbl for the 1/1/02 - 12/31/02 oil collar and the 1/1/03 -
12/31/03 oil collar, respectively.
While it is not our intention to terminate any of the arrangements, we
estimate we would have received approximately $8.7 million to terminate the
existing arrangements on June 30, 2001.
13
16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) During the quarter ended June 30, 2001, we issued 27,750 shares of
Common Stock including 5,000 shares of restricted stock awards pursuant
to the Company's 2000 Stock Incentive Plan.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) Westport held its annual meeting of stockholders on May 18, 2001.
(b) James M. Funk, William F. Wallace and Peter R. Hearl were elected to
continue to serve as directors of the Company.
(c) Three proposals were approved by stockholders at the Annual Meeting,
with the following vote tabulation:
Director For Against or Withheld
-------- --- -------------------
James M. Funk 34,496,902 206,161
William F. Wallace 34,521,962 181,101
Peter R. Hearl 34,521,962 181,101
The adoption of Westport Resources Corporation 2000 Stock Incentive
Plan.
For Against or Withheld Abstain
--- ------------------- -------
33,075,092 1,144,776 15,050
The appointment of Arthur Andersen LLP as independent public
accountants for the fiscal year ending December 31, 2001.
For Against or Withheld Abstain
--- ------------------- -------
34,455,538 247,425 100
ITEM 5. OTHER INFORMATION.
None.
14
17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibits are filed as part of this Form
10-Q:
2.1 Agreement and Plan of Merger, dated as of March 9,
2000, by and among Westport Oil and Gas Company,
Inc., Westport Energy Corporation, Equitable
Production Company, Equitable Production (Gulf)
Company and EPGC Merger Sub Corporation (incorporated
by reference to Exhibit 2.1 to Form S-1, Registration
No. 333-40422).
2.2 Agreement and Plan of Merger, dated as of June 8,
2001, by and among Belco Oil & Gas Corp. and Westport
Resources Corporation (incorporated by reference to
Exhibit 2.1 to Form S-4, Registration No. 333-64320).
3.1 Second Amended and Restated Certificate of
Incorporation of the Company (incorporated by
reference to Exhibit 3.1 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September
30, 2000).
3.2 Second Amended and Restated Bylaws of the Company
(incorporated by reference to Exhibit 3.4 of the
Company's Registration Statement of Form S-1,
Registration No. 333-40422).
4 Specimen Certificate for shares of Common Stock of
the Company (incorporated by reference to Exhibit 4
of the Company's Registration Statement on Form S-1,
Registration No. 333-40422).
10 Second Amended and Restated Shareholders Agreement
dated July 20, 2001 by and among Westport Resources
Corporation, Belco Oil & Gas Corp., ERI Investments,
Inc., Westport Energy LLC and certain stockholders
(incorporated by reference to Exhibit 4.2 to Form
S-4, Registration No. 333-64320).
(b) Reports on Form 8-K
A report on Form 8-K was filed June 11, 2001 with the
Securities and Exchange Commission to announce that
the Company entered into an Agreement and Plan of
Merger with Belco Oil & Gas Corp.
15
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
WESTPORT RESOURCES CORPORATION
Date: August 14, 2001 By: /s/ Donald D. Wolf
----------------------------------------
Name: Donald D. Wolf
Title: Chairman and Chief Executive Officer
Date: August 14, 2001 By: /s/ Lon McCain
----------------------------------------
Name: Lon McCain
Title: Chief Financial Officer
16