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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 September 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 001-16179
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ENERGY PARTNERS, LTD.
(Exact name of registrant as specified in its charter)
Delaware 72-1409562
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification number)
201 St. Charles Avenue, Suite 3400
New Orleans, Louisiana 70170
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (504) 569-1875
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of November 5, 2001, there were 26,850,507 shares of the Registrant's
Common Stock, par value $0.01 per share, outstanding.
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TABLE OF CONTENTS
Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 2001 and
December 31, 2000..........................................................................3
Consolidated Statements of Operations for the three and nine months ended
September 30, 2001 and 2000................................................................4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2001 and 2000................................................................5
Notes to Consolidated Financial Statements ..................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk......................................16
PART II OTHER INFORMATION
Item 4. Submission Of Matters To The Vote Of Security Holders...........................................17
Item 6. Exhibits and Reports on Form 8-K................................................................17
-2-
ITEM 1. FINANCIAL STATEMENTS
ENERGY PARTNERS, LTD.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
September 30, December 31,
2001 2000
------------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 9,989 $ 3,349
Trade accounts receivable 16,946 28,930
Fair value of commodity derivative instruments 1,165 --
Prepaid expenses 2,140 1,465
--------- ---------
Total current assets 30,240 33,744
Property and equipment, at cost under the successful efforts
method of accounting for oil and gas properties 285,681 195,714
Less accumulated depreciation, depletion and amortization (53,818) (24,927)
--------- ---------
Net property and equipment 231,863 170,787
Other assets 2 1,357
Deferred financing costs - net of accumulated amortization
of $1,738 in 2001 and $1,027 in 2000 1,550 2,261
--------- ---------
$ 263,655 $ 208,149
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,023 $ 17,322
Accrued expenses 31,163 24,639
Current maturities of long-term debt 83 --
--------- ---------
Total current liabilities 39,269 41,961
Long-term debt 25,430 100
Deferred income taxes 18,459 9,207
Other 12,761 6,290
--------- ---------
95,919 57,558
--------- ---------
Stockholders' equity:
Preferred Stock, $1 par value, authorized 1,700,000 shares;
none issued -- --
Common stock, par value $0.01 per share. Authorized
50,000,000 shares; issued and outstanding:
2001 - 26,870,757 shares; 2000 - 26,400,147 shares 269 264
Additional paid-in capital 180,680 179,679
Accumulated other comprehensive income 746 --
Accumulated deficit (13,959) (29,352)
--------- ---------
Total stockholders' equity 167,736 150,591
--------- ---------
$ 263,655 $ 208,149
========= =========
See accompanying notes to consolidated financial statements.
-3-
ENERGY PARTNERS, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Revenues:
Oil and gas $ 33,528 $ 30,636 $ 116,986 $ 60,646
Other 152 98 3,843 444
--------- --------- --------- ---------
33,680 30,734 120,829 61,090
--------- --------- --------- ---------
Costs and expenses:
Lease operating 8,581 6,091 27,397 12,540
Taxes, other than on earnings 1,944 2,084 5,752 3,629
Exploration expenditures 7,888 269 12,311 1,093
Depreciation, depletion and amortization 12,916 7,499 35,213 15,785
General and administrative:
Stock-based compensation 293 738 1,358 1,985
Other general and administrative 4,641 3,036 13,467 7,365
--------- --------- --------- ---------
Total costs and expenses 36,263 19,717 95,498 42,397
--------- --------- --------- ---------
Income (loss) from operations (2,583) 11,017 25,331 18,693
--------- --------- --------- ---------
Other income (expense):
Interest income 72 117 298 445
Interest expense (515) (2,783) (1,379) (5,839)
Gain on sale of oil and gas assets 33 -- 74 7,781
--------- --------- --------- ---------
(410) (2,666) (1,007) 2,387
--------- --------- --------- ---------
Income (loss) before income taxes (2,993) 8,351 24,324 21,080
Income taxes 924 (3,161) (8,932) (7,634)
--------- --------- --------- ---------
Net income (loss) $ (2,069) $ 5,190 $ 15,392 $ 13,446
--------- --------- --------- ---------
Less dividends earned on preferred stock
and accretion of issuance costs -- (1,742) -- (5,975)
--------- --------- --------- ---------
Net income (loss) available to
common stockholders $ (2,069) $ 3,448 $ 15,392 $ 7,471
========= ========= ========= =========
Basic income (loss) per share $ (0.08) $ 0.40 $ 0. 57 $ 0.88
========= ========= ========= =========
Diluted income (loss) per share $ (0.08) $ 0.29 $ 0.57 $ 0.75
========= ========= ========= =========
Weighted average common shares used
in computing income (loss) per share:
Basic 26,871 8,555 26,863 8,519
Incremental common shares -- 9,528 96 9,528
--------- --------- --------- ---------
Diluted 26,871 18,083 26,959 18,047
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
-4-
ENERGY PARTNERS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Nine Months Ended
September 30,
---------------------------
2001 2000
--------- ---------
Cash flows from operating activities:
Net income $ 15,392 $ 13,446
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 35,213 15,785
Gain on sale of oil and gas assets (74) (7,781)
Stock-based compensation 1,358 1,985
Deferred income taxes 8,833 7,484
Exploration expenditures 10,909 1,093
Amortization of deferred financing costs 711 548
--------- ---------
72,342 32,560
Changes in operating assets and liabilities:
Trade accounts receivable 11,985 (11,525)
Prepaid expenses (675) (898)
Other assets 1,354 (843)
Accounts payable and accrued expenses (6,679) 8,212
Other liabilities 164 194
--------- ---------
Net cash provided by operating activities 78,491 27,700
--------- ---------
Cash flows used in investing activities:
Property acquisitions (2,649) (119,293)
Exploration and development expenditures (93,731) (15,896)
Other property and equipment additions (660) --
Proceeds from sale of oil and gas assets 127 36,610
--------- ---------
Net cash used in investing activities (96,913) (98,579)
--------- ---------
Cash flows from financing activities:
Deferred financing costs -- (3,113)
Proceeds from long-term debt 30,565 108,000
Repayment of long-term debt (5,152) (44,150)
Other (351) --
--------- ---------
Net cash provided by financing activities 25,062 60,737
--------- ---------
Net increase (decrease) in cash and cash
equivalents 6,640 (10,142)
Cash and cash equivalents at beginning of period 3,349 22,282
--------- ---------
Cash and cash equivalents at end of period $ 9,989 $ 12,140
========= =========
See accompanying notes to consolidated financial statements.
-5-
ENERGY PARTNERS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
(1) BASIS OF PRESENTATION
Certain information and footnote disclosures normally made in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to rules and regulations of the
Securities and Exchange Commission; however, management believes the disclosures
which are made are adequate to make the information presented not misleading.
These consolidated financial statements and footnotes should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2000.
The financial information as of September 30, 2001 and for the three and
nine month periods ended September 30, 2001 and 2000 has not been audited.
However, in the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the results of
operations for the periods presented have been included therein. The results of
operations for the first nine months of the year are not necessarily indicative
of the results of operations, which might be expected for the entire year.
(2) COMPREHENSIVE INCOME
The following table presents comprehensive income for the nine months ended
September 30, 2001 (in thousands).
Accumulated other comprehensive income as of December 31, 2000 $ --
Net income $ 15,392
Other comprehensive income - net of tax:
Hedging activities:
Cumulative effect of change in accounting principle as of January 1, 2001 (2,412)
Current period changes in fair value of settled contracts (954)
Reclassification adjustments for settled contracts 3,318
Changes in fair value of outstanding hedging positions 794
--------
Total other comprehensive income 746 746
-------- --------
Comprehensive income $ 16,138
========
Accumulated other comprehensive income as of September 30, 2001 $ 746
========
The Company did not have any items of comprehensive income for the nine
months ended September 30, 2000.
(3) EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the period. On November 17, 1999 management and director stockholders placed in
escrow 3,304,830 shares of common stock. These shares could not be voted by the
management and director stockholders and all or a portion would only be released
from escrow upon the attainment of specified reserve replacement targets or upon
the completion of an initial public offering. Also, on the same date, a
stockholder returned 3,291,720 shares
-6-
ENERGY PARTNERS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
of common stock, which were cancelled. All of these shares have been excluded
from the calculation of weighted average common shares for the quarter and nine
months ended September 30, 2000. The effect of preferred stock dividends and
accretion of issuance costs on arriving at income available to common
stockholders was none for the three and nine month periods ended September 30,
2001 and $1.7 million and $6.0 million for the three and nine month periods
ended September 30, 2000, respectively.
Diluted earnings per share is computed in the same manner as basic earnings
per share except that the denominator is increased to include the number of
additional common shares that could have been outstanding assuming the exercise
of stock options and convertible preferred stock shares that would have a
dilutive effect on earnings per share. The aggregate number of dilutive
convertible preferred stock shares and stock awards used in computing diluted
earnings per share was 9,528,321 for the three and nine month periods ended
September 30, 2000 and the number of stock awards used in computing diluted
earnings per share was none and 96,293 for the three and nine month periods
ended September 30, 2001, respectively.
Energy Income Fund, L.P., a stockholder of the Company, exercised its
option for a cashless conversion of a warrant in January 2001, receiving 466,245
shares of common stock.
(4) ACQUISITIONS AND DISPOSITION
On March 31, 2000, the Company purchased an 80% working interest in South
Timbalier 26 from Unocal for approximately $44.9 million, which included $1.25
million for pipeline assets. Additionally, on March 31, 2000, the Company
purchased an average 96.1% working interest in East Bay Field (East Bay) from
Ocean Energy, Inc. for approximately $72.3 million. The entire purchase price
for both acquisitions was allocated to property and equipment. The terms of the
acquisitions did not contain any contingent consideration, options or future
commitments.
On April 20, 2000, the Company sold a 50% working interest in South
Timbalier 26 for approximately $36.6 million, resulting in a gain of
approximately $7.8 million.
The unaudited pro forma results of operations, assuming that such
acquisitions and disposition occurred on January 1, 2000 are as follows (in
thousands, except per share amounts):
Nine Months Ended
September 30, 2000
------------------
(Unaudited)
Pro forma:
Revenue ......................... $87,135
Income from operations .......... 32,250
Net income ...................... 21,012
Basic earnings per common share . $ 1.77
Diluted earnings per common share $ 1.16
The pro forma financial information does not purport to be indicative of
the results of operations that would have occurred had the acquisitions and
disposition taken place at the beginning of the period presented or future
results of operations.
(5) HEDGING ACTIVITIES
The Company has entered into derivative commodity instruments to manage
commodity price risks associated with future crude oil and natural gas
production but does not use them for speculative purposes. The Company's
commodity price hedging program utilizes financially-settled zero-cost collar
contracts to establish floor and ceiling prices on anticipated future crude oil
and natural gas production and oil forward sales contracts to fix the price of
anticipated future crude oil production. On
-7-
ENERGY PARTNERS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
January 1, 2001, the Company adopted Statement of Financial Accounting Standards
No. 133 (Statement 133), as amended, Accounting for Derivative Instruments and
Hedging Activities. Statement 133 establishes accounting and reporting standards
requiring that derivative instruments, including certain derivative instruments
embedded in other contracts, be recorded at fair market value and included as
either assets or liabilities in the balance sheet. The accounting for changes in
fair value depends on the intended use of the derivative and the resulting
designation, which is established at the inception of the derivative. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the statement of operations. For
derivative instruments designated as cash-flow hedges, changes in fair value, to
the extent the hedge is effective, will be recognized in other comprehensive
income (a component of stockholders' equity) until settled, when the resulting
gains and losses will be recorded in earnings. Hedge ineffectiveness is measured
at least quarterly based on the relative changes in fair value between the
derivative contract and the hedged item over time. Any change in fair value
resulting from ineffectiveness, as defined by Statement 133, will be charged
currently to earnings. The Company's current derivative instruments qualify as
cash-flow hedges.
As of September 30, 2001, the Company had financially-settled crude oil
collar positions for the period October 2001 through December 2001 related to
the sale of 276,000 barrels of oil with a floor of $24.00 per barrel and an
average cap of $32.17 per barrel. The Company also has financially-settled
natural gas collar positions maturing monthly through December 2001 related to
the net sale of 920,000 mmbtu of natural gas with a floor of $3.00 per mmbtu and
a cap of $9.00 per mmbtu.
Natural gas and crude oil revenues were increased by $0.2 million as a
result of hedging activities in the three months ended September 30, 2001 and
were decreased by $5.0 million in the nine month period ended September 30,
2001. The Company's hedging activities reduced oil revenues by $4.1 million and
$5.9 million for the three and nine months ended September 30, 2000,
respectively.
In accordance with the transition provisions of Statement 133, on January 1,
2001, the Company recorded a net-of-tax cumulative-effect-type loss adjustment
of $2.4 million in accumulated other comprehensive income to recognize at fair
value all derivatives that are designated as cash-flow hedging instruments.
During the first nine months of 2001, losses of $3.3 million were transferred
from accumulated other comprehensive income and the fair value of outstanding
derivative assets increased $0.8 million resulting in an ending balance of $0.7
million related to hedging activities in accumulated other comprehensive income
at September 30, 2001.
As of September 30, 2001, the Company expected to transfer $0.1 million of
the original transition adjustment recorded in other comprehensive income to
reduce earnings during the remainder of 2001. The Company expected to transfer
approximately $1.2 million of net deferred gains in accumulated other
comprehensive income as of September 30, 2001 to earnings during the next three
months when the forecasted transactions actually occur.
(6) CONTINGENCIES
The Company has been named as a defendant in certain lawsuits arising in
the ordinary course of business. While the outcome of these lawsuits cannot be
predicted with certainty, management does not expect these matters to have a
material adverse effect on the financial position, cash flows or results of
operations of the Company.
Management believes that the Company is in substantial compliance with
current federal, state and local environmental laws, regulations and orders
applicable to it and that continued compliance with existing requirements will
not have a material adverse effect on the Company's financial position, cash
flows or results of operations. There can be no assurance, however, that current
regulatory requirements will not change, currently unforeseen environmental
incidents will not occur or non-compliance with environmental laws or
regulations will not be discovered.
-8-
ENERGY PARTNERS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
(7) ACCOUNTING PRONOUNCEMENTS
In 2001, the Financial Accounting Standards Board has issued four new
pronouncements:
o Statement 141, Business Combinations, requires the purchase method of
accounting for all business combinations and applies to all business
combinations initiated after June 30, 2001 and to all business
combinations accounted for by the purchase method that are completed
after June 30, 2001.
o Statement 142, Goodwill and Other Intangible Assets, requires that
goodwill as well as other intangible assets be tested annually for
impairment and is effective for fiscal years beginning after December
15, 2001.
o Statement 143, Accounting for Asset Retirement Obligations, requires
entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred and a
corresponding increase in the carrying amount of the related long-lived
asset and is effective for fiscal years beginning after June 15, 2002.
o Statement 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, provides that long-lived assets to be disposed of by sale be
measured at the lower of carrying amount or fair value less cost to
sell, whether reported in continuing operations or in discontinued
operations, and broadens the reporting of discontinued operations to
include all components of an entity with operations that can be
distinguished from the rest of the entity and that will be eliminated
from the ongoing operations of the entity in a disposal transaction.
This Statement is effective for fiscal years beginning after December
15, 2001.
Statements 141 and 142 will not apply to the Company unless it enters into
a future business combination or acquires other intangible assets. The Company
is currently assessing the impact of Statements 143 and 144 on its financial
condition and results of operations.
(8) RECLASSIFICATIONS
Certain reclassifications have been made to the prior period financial
statements in order to conform to the classification adopted for reporting in
fiscal 2001.
-9-
ENERGY PARTNERS, LTD.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are an independent oil and natural gas exploration and production
company concentrated in the shallow to moderate depth waters of the central
region of the Gulf of Mexico Shelf. We were incorporated in January 1998.
We use the successful efforts method of accounting for our investment in
oil and natural gas properties. Under this method, we capitalize lease
acquisition costs, costs to drill and complete exploration wells in which proven
reserves are discovered and costs to drill and complete development wells.
Seismic, geological and geophysical, and delay rental expenditures are expensed
as incurred. We conduct many of our exploration and development activities
jointly with others and, accordingly, recorded amounts for our oil and natural
gas properties reflect only our proportionate interest in such activities.
In March 2000, we acquired an 80% working interest in South Timbalier 26
and subsequently, in April 2000, sold 50% of our working interest in South
Timbalier 26. On March 31, 2000, we closed the purchase of an average 96.1%
working interest in the East Bay field and in September 2000, we closed the
acquisition of a 14.6% working interest in South Timbalier 22, 23 and 27.
We have included the results of operations from the East Bay and South
Timbalier 26 acquisitions from the closing date of March 31, 2000 and the South
Timbalier 22, 23 and 27 from the closing date of September 7, 2000. We have
experienced substantial revenue and production growth as a result of these
acquisitions.
For the foregoing reasons, the East Bay, South Timbalier 26 and South
Timbalier 22, 23 and 27 acquisitions will affect the comparability of our
results of operations for the nine month periods ended September 30, 2001 and
2000.
Our revenue, profitability and future growth rate depend substantially on
factors beyond our control, such as economic, political and regulatory
developments and competition from other sources of energy. Oil and natural gas
prices historically have been volatile and may fluctuate widely in the future.
Sustained periods of low prices for oil and natural gas could materially and
adversely affect our financial position, our results of operations, the
quantities of oil and natural gas reserves that we can economically produce and
our access to capital.
-10-
ENERGY PARTNERS, LTD.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
RESULTS OF OPERATIONS
The following table presents information about our oil and natural gas
operations.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
2001 2000 2001 2000
------- ------- ------- -------
NET PRODUCTION (per day):
Oil (Bbls) 10,566 9,777 10,575 6,806
Natural gas (Mcf) 35,289 16,146 34,499 10,819
Total (Boe) 16,448 12,468 16,325 8,609
OIL & GAS REVENUES (in thousands)
Oil $24,300 $23,545 $70,218 $48,349
Natural Gas 9,228 7,091 46,768 12,297
Total 33,528 30,636 116,986 60,646
AVERAGE SALES PRICES (1):
Oil (per Bbl) $ 25.00 $ 26.16 $ 24.32 $ 25.92
Natural gas (per Mcf) 2.84 4.77 4.97 4.15
Total (per Boe) 22.16 26.71 26.25 25.71
AVERAGE COSTS (per Boe):
Lease operating expense $ 5.67 $ 5.31 $ 6.15 $ 5.32
Taxes, other than on earnings 1.28 1.82 1.29 1.53
Depreciation, depletion, and amortization 8.54 6.54 7.90 6.69
General and administrative expense
(exclusive of stock-based compensation) 3.07 2.65 3.02 3.12
(1) Net of the effect of hedging transactions
PRODUCTION
CRUDE OIL AND CONDENSATE. Our net oil production for the third quarter of
2001 increased to 10,566 Bbls per day from 9,777 Bbls per day in the third
quarter of 2000. Our net oil production for the first nine months of 2001
increased to 10,575 Bbls per day from 6,806 Bbls per day in the same period in
2000. The increase for the quarter and nine months was primarily due to 38
successful oil well operations, which commenced production after the third
quarter of 2000, and were partially offset by natural declines from other
producing wells.
NATURAL GAS. Our net natural gas production for the third quarter of 2001
increased to 35,289 Mcf per day from 16,146 Mcf per day in the third quarter of
2000. Our net natural gas production for the first nine months of 2001 increased
to 34,499 Mcf per day from 10,819 Mcf per day in the same period of 2000. The
increase for the quarter and nine months was the result of 48 successful natural
gas well operations, which commenced production after the second quarter of
2000, and were partially offset by natural declines from other producing wells.
The overall increase in oil and natural gas production for the nine month
period in 2001 is also attributed to the 2000 acquisitions.
These results were strong as compared to the third quarter of 2000, however
we did not achieve the full growth in volumes we anticipated from the second
quarter of 2001. We encountered down time as a result of Tropical Storm Barry
and some of our production was shut-in at East Bay as a result of maintenance on
the Tennessee Gas Pipeline used to transport our natural gas production. These
interruptions combined for lost production of 570 Boe per day for the quarter.
-11-
ENERGY PARTNERS, LTD.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
REALIZED PRICES
CRUDE OIL AND CONDENSATE. Our average realized oil price in the third
quarter of 2001 was $25.00 per Bbl, a decrease of 4% from an average realized
price of $26.16 per Bbl in the third quarter of 2000. Hedging activities in the
third quarter of 2000 reduced oil price realizations by $4.60 per Bbl or 15%
from the $30.76 per Bbl that would have otherwise been received. As a result of
our oil collar positions, hedging activities did not impact realized prices in
the third quarter of 2001.
Our average realized oil price in the first nine months of 2001 was $24.32
per Bbl, a decrease of 6% from an average realized price of $25.92 per Bbl in
the first nine months of 2000. Hedging activities reduced oil price realizations
by $1.77 per Bbl or 7% from the $26.09 per Bbl that would have otherwise been
received in the first nine months of 2001. In the first nine months of 2000,
hedging activities reduced oil price realizations by $3.18 per Bbl or 11% from
the $29.10 per Bbl that would have otherwise been received.
NATURAL GAS. Our average realized natural gas price in the third quarter of
2001 was $2.84 per Mcf, a decrease of 40% from an average realized price of
$4.77 per Mcf in the third quarter of 2000. Hedging activities in the third
quarter of 2001 increased natural gas realizations by $0.05 per Mcf or 2% from
the $2.79 per Bbl that would have otherwise been received. We had no hedging
positions for natural gas related to production in the third quarter of 2000.
Our average realized natural gas price in the first nine months of 2001 was
$4.97 per Mcf, an increase of 20% over an average realized price of $4.15 per
Mcf in the first nine months of 2000. In the first nine months of 2001, hedging
activities increased natural gas price realizations by $0.02 per Mcf from the
$4.95 per Mcf that would have otherwise been received. We had no hedging
positions for natural gas related to production in the first nine months of
2000.
NET INCOME AND REVENUES
We recognized a net loss of $2.1 million in the third quarter of 2001
compared to net income of $5.2 million in the third quarter of 2000. Our oil and
natural gas revenues increased to $33.5 million in the third quarter of 2001, an
increase of $2.9 million from $30.6 million in the third quarter of 2000.
We recognized net income of $15.4 million in the first nine months of 2001
compared to net income of $13.4 million in the first nine months of 2000.
Exclusive of the gain on sale of assets in April of 2000, our net income would
have been $8.4 million. Our oil and natural gas revenues increased to $117.0
million in the first nine months of 2001, an increase of $56.4 million from
$60.6 million in the first nine months of 2000.
The increases in net income and revenues in the nine month period of 2001
was primarily due to increases in natural gas prices coupled with higher
production volumes from acquisitions and drilling activities. In addition, we
recorded business interruption income of $3.5 million in the first quarter of
2001 as a result of the rupture of a high-pressure natural gas transfer line at
the East Bay field. The rupture occurred in November 2000 and was restored to
service in February 2001. The impact of these increases on net income was
partially offset by higher costs associated with increased production volumes.
The increase in revenues in the third quarter of 2001 was primarily due
higher production volumes from drilling activities while the decrease in net
income in the same period was due to higher exploration expense due to our
increased exploration program along with higher costs associated with increased
production volumes.
-12-
ENERGY PARTNERS, LTD.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
OPERATING EXPENSES
Operating expenses during the three and nine month periods ended
September 30, 2001 and 2000 were impacted by the following:
o Lease operating expense increased to $8.6 million in the third quarter of
2001 from $6.1 million in the third quarter of 2000. The increase was
attributable to additional production from 86 successful well operations,
which commenced production after the third quarter of 2000.
Lease operating expense increased to $27.4 million in the first nine months
of 2001 from $12.5 million in the first nine months of 2000. The increase
was primarily attributable to the acquisitions combined with additional
production from successful well operations and costs incurred on eight
workovers in May 2001 and repairs attributed to Tropical Storm Allison.
o Taxes, other than on earnings remained relatively consistent at $1.9
million in the third quarter of 2001 compared to $2.1 million in the third
quarter of 2000.
Taxes, other than on earnings increased to $5.8 million in the first nine
months of 2001 from $3.6 million in the first nine months of 2000. The
increase was primarily attributable to the acquisition of the East Bay
field on March 31, 2000, where a portion of the production is subject to
Louisiana severance taxes and property taxes. Prior to that time, we did
not hold an interest in properties subject to these taxes.
o Exploration expenditures increased to $7.9 million in the third quarter of
2001 from $0.3 million in the third quarter of 2000. The expense in 2001 is
primarily the result of two exploratory wells that were not commercially
successful.
Exploration expenditures increased to $12.3 million in the first nine
months of 2001 from $1.1 million in the first nine months of 2000. The
increased expense in 2001 is the result of seismic expenditures and dry
hole charges as a result of our increased exploration program.
o Depreciation, depletion and amortization increased to $12.9 million in the
third quarter of 2001 from $7.5 million in the third quarter of 2000.
Depreciation, depletion and amortization increased to $35.2 million in the
first nine months of 2001 from $15.8 million in the first nine months of
2000. The increases were primarily due to increased production volumes and
an increased depreciable asset base resulting from the acquisitions and
drilling activities.
o Other general and administrative expenses increased to $4.6 million in the
third quarter of 2001 from $3.0 million in the third quarter of 2000. The
increase was primarily due to the hiring of additional personnel ($0.3
million), increased office rent and IT costs ($0.3 million) and increased
insurance costs ($0.5 million) as a result of our increased operations.
Other general and administrative expenses increased to $13.5 million in the
first nine months of 2001 from $7.4 million in the first nine months of
2000. The increase was primarily due to increased consultant fees ($0.5
million), the hiring of additional personnel ($2.4 million), increased
office rent and IT costs ($0.7 million) increased insurance costs ($1.2
million) and other costs associated with our acquisitions and growth.
o Non-cash stock-based compensation expense of $0.3 million was recognized in
the third quarter of 2001, a decrease from $0.7 million recognized in the
third quarter of 2000. Non-cash stock-based compensation expense of $1.4
million was recognized in the first nine months of 2001, a decrease from
$2.0 million recognized in the first nine months of 2000. The expense
relates to restricted stock and stock option grants made in April and
October 2000 and will continue to decrease as the grants vest.
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ENERGY PARTNERS, LTD.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
OTHER INCOME AND EXPENSE
INTEREST. Interest expense decreased to $0.5 million in the third quarter
of 2001 from $2.8 million in the third quarter of 2000. Interest expense also
decreased for the year to date period to $1.4 million in 2001 from $5.8 million
in 2000. The decreases are a result of lower interest rates and the repayment of
borrowings under our bank facility which had been drawn for the acquisitions
completed on March 31, 2000.
GAIN ON SALE OF OIL AND GAS ASSETS. On April 20, 2000, we sold a 50%
working interest in the South Timbalier 26 field, resulting in a gain of
approximately $7.8 million ($5.0 million after tax). Sales in 2001 are comprised
of equipment used for our oil and gas operations.
LIQUIDITY AND CAPITAL RESOURCES
We intend to use cash flows from operations and our revolving line of
credit to fund our future development, exploration and acquisition activities.
Our acquisitions in 2000 of the East Bay field, the South Timbalier 22, 23 and
27 interests and the additional interest in South Timbalier 26 field
significantly impacted our cash flows from operations. Our future cash flow from
operations will depend on our ability to maintain and increase production
through our development and exploration drilling program, as well as the prices
of oil and natural gas.
Our credit facility, as amended on August 1, 2001, consists of a $65
million revolving line of credit with a group of banks available through March
31, 2003 (the bank facility). The bank facility permits both prime rate based
borrowings and London interbank offered rate (LIBOR) borrowings plus a floating
spread. The spread will float up or down based on our utilization of the bank
facility. The spread can range from 1.25% to 2.0% above LIBOR and 0% to 0.50%
above prime. Indebtedness under the bank facility is secured by substantially
all of our assets. The credit facility contains customary events of default and
requires that we satisfy various financial covenants. At November 5, 2001, we
had $25 million outstanding and $40 million of credit capacity available under
the bank facility.
Net cash of $96.9 million used in investing activities in the first nine
months of 2001 consisted primarily of oil and gas property capital and
exploration expenditures. Exploration expenditures incurred are excluded from
operating cash flows and included in investing activities. During the first nine
months of 2001, we completed 22 drilling projects and 58 recompletion/workover
projects, 68 of which were successful. During the first nine months of 2000, we
completed 20 drilling projects and 69 recompletion/workover projects, 80 of
which were successful. Cash and cash equivalents at September 30, 2001 were
$10.0 million.
Our 2001 capital expenditure budget is focused on exploitation activities
on prospects with multiple reservoirs, which we expect to increase our
probability of success and to lead to accelerated payback of our investment.
These exploitation activities also provide exploratory potential in deeper
geologic formations. We have capital expenditure plans for the remaining three
months of 2001 ranging between $4 million and $10 million. Actual levels of
capital expenditures may vary significantly due to many factors, including
drilling results, oil and natural gas prices, industry conditions, participation
by other working interest owners and the prices of drilling rigs and other
oilfield goods and services. In response to some of these factors, our
anticipated capital expenditures for the remainder of 2001 reflect a reduction
from our initial capital budget of $120 million for fiscal 2001.
We have experienced and expect to continue to experience substantial
working capital requirements, primarily due to our active capital expenditure
program. We believe that working capital, cash flows from operations and
borrowings under our bank facility will be sufficient to meet our capital
requirements through the end of 2001. However, additional financing may be
required in the future to fund our growth and capital expenditures.
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ENERGY PARTNERS, LTD.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
FORWARD LOOKING INFORMATION
Any statements made in this document, other than those of historical fact,
about an action, event or development, which we hope, believe or anticipate may
or will occur in the future, are "forward-looking statements" under U. S.
securities laws. Such statements are subject to various assumptions, risks and
uncertainties, which are specifically described in our Annual Report on Form
10-K for the year ended December 31, 2000. Forward-looking statements are not
guarantees of future performance or assurances that our current assumptions and
projections are valid. Actual results may differ materially from those
projected.
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ENERGY PARTNERS, LTD.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
We are exposed to changes in interest rates. Changes in interest rates
affect the interest earned on our cash and cash equivalents and the interest
rate paid on borrowings under the credit agreements. Under our current policies,
we do not use interest rate derivative instruments to manage exposure to
interest rate changes. At September 30, 2001, $25 million of our long-term debt
had variable interest rates.
COMMODITY PRICE RISK
Our revenues, profitability and future growth depend substantially on
prevailing prices for oil and natural gas. Prices also affect the amount of cash
flow available for capital expenditures and our ability to borrow and raise
additional capital. The amount we can borrow under the credit agreement is
subject to periodic redetermination based in part on changing expectations of
future prices. Lower prices may also reduce the amount of oil and natural gas
that we can economically produce. We currently sell all of our oil and natural
gas production under price sensitive or market price contracts.
We use derivative commodity instruments to manage commodity price risks
associated with future oil and natural gas production. Our crude oil commodity
price hedging program used only financially-settled crude oil forward sales
contracts through the second quarter of 2001. In April 2001, we expanded our
commodity price hedging program to include financially-settled crude oil collar
positions. As of September 30, 2001, we had contracts maturing monthly through
December 31, 2001 related to the sale of 276,000 barrels of oil with a floor of
$24.00 per barrel and an average cap of $32.17 per barrel.
We also have natural gas hedging positions, which utilize zero-cost collar
contracts. As of September 30, 2001, we had contracts maturing monthly through
December 2001 related to the net sale of 920,000 mmbtu of natural gas with a
floor of $3.00 per mmbtu and a cap of $9.00 per mmbtu.
We may in the future enter into these and other types of hedging
arrangements to reduce our exposure to fluctuations in the market prices of oil
and natural gas. Hedging transactions expose us to risk of financial loss in
some circumstances, including if production is less than expected, the other
party to the contract defaults on its obligations, or there is a change in the
expected differential between the underlying price in the hedging agreement and
actual prices received. Hedging transactions may limit the benefit we would have
otherwise received from increases in the prices for oil and natural gas.
Furthermore, if we do not engage in hedging transactions, we may be more
adversely affected by declines in oil and natural gas prices than our
competitors who engage in hedging transactions.
Our hedged volume as of September 30, 2001, approximated 31% of our
estimated production from proved reserves for the balance of 2001.
We use a sensitivity analysis technique to evaluate the hypothetical
effect that changes in the market value of crude oil may have on fair value of
our derivative instruments. At September 30, 2001, the potential change in the
fair value of commodity derivative instruments assuming a 10% adverse movement
in the underlying commodity price was a $0.4 million decrease in the deferred
asset.
For purposes of calculating the hypothetical change in fair value, the
relevant variables are the type of commodity (crude oil or natural gas), the
commodities futures prices and volatility of commodity prices. The hypothetical
fair value is calculated by multiplying the difference between the hypothetical
price and the contractual price by the contractual volumes.
-16-
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO THE VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amended and Restated Revolving Credit Agreement among Energy
Partners, Ltd., Bank One, N.A., The Chase Manhattan Bank, BNP
Paribas and Whitney National Bank dated as of August 1, 2001.
(b) Reports on Form 8-K:
None
SIGNATURE
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.
ENERGY PARTNERS, LTD.
Date: November 13, 2001 By: /s/ SUZANNE V. BAER
------------------------------------
Suzanne V. Baer
Executive Vice President and Chief
Financial Officer
(Authorized Officer and Principal
Financial Officer)
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EXHIBIT INDEX
Exhibit No. Description
----------- -----------
10.1 Amended and Restated Revolving Credit Agreement among Energy
Partners, Ltd., Bank One, N.A., The Chase Manhattan Bank, BNP
Paribas and Whitney National Bank dated as of August 1, 2001.