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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-9498
BELLWETHER EXPLORATION COMPANY
(Exact name of registrant as specified in its charter)
Delaware 76-0437769
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1331 Lamar, Suite 1455, Houston, Texas 77010
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code: (713) 650-1025
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $0.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this 10-K or any amendment to this Form
10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant at September 11, 1996, was approximately $56,800,000.
As of September 11, 1996, the number of outstanding shares of the
registrant's common stock was 9,089,479.
Documents Incorporated by Reference: Portions of the registrant's annual
proxy statement, to be filed within 120 days after June 30, 1996, are
incorporated by reference into Part III.
================================================================================
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
-----------------------------------------------
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
TABLE OF CONTENTS
PAGE
NUMBER
------
PART I
Item 1. Business........................................... 3
Item 2. Properties......................................... 9
Item 3. Legal Proceedings.................................. 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters...................... 13
Item 6. Selected Financial Data............................ 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 15
Item 8. Financial Statements and Supplementary Data........ 21
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............. 46
PART III
Item 10. Directors and Executive Officers of the Registrant. 46
Item 11. Executive Compensation............................. 46
Item 12. Security Ownership of Certain Beneficial Owners and
Management....................................... 46
Item 13. Certain Relationships and Related Transactions..... 46
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K...................................... 46
-- Signatures
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
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PART I
------
ITEM 1. BUSINESS
- -----------------
General
- -------
Bellwether Exploration Company ("Bellwether" or the "Company") is an
independent energy company engaged in the acquisition, exploitation,
development, exploration and production of oil and gas properties and gathering
and processing of natural gas. The Company's operations are concentrated in the
Texas and Louisiana Gulf Coast region. At June 30, 1996, the Company's
estimated proved reserves totaled 1.8 MMBbl of oil and 33.2 Bcf of natural gas.
On a BOE basis, approximately 75% of the Company's estimated net proved reserves
were natural gas at such date. In addition, the Company has interests in
natural gas processing plants in West Texas and owns a gas gathering system in
North Louisiana.
The Company was formed as a Delaware corporation in 1994 to succeed to the
business and properties of its predecessor company pursuant to a merger, the
primary purpose of which was to change the predecessor company's state of
incorporation from Colorado to Delaware. The predecessor company was formed in
1980 from the consolidation of the business and properties of related oil and
gas limited partnerships. References to Bellwether or the Company include the
predecessor company, unless the context requires otherwise.
BACKGROUND
In 1987 and 1988, the Company merged with two independent oil and gas
companies owned by institutional investors and managed by Torch Energy Advisors
Incorporated ("Torch"). Since those mergers, the Company has operated under
management agreements, pursuant to which Torch administers substantially all
business activities of the Company.
In July 1993, the Company acquired an interest in the Snyder and Diamond M
- - Sharon Ridge Gas Processing Plants, the operations of which were subsequently
consolidated (collectively, the "Gas Plant"), for $8.45 million. In December
1993, the Company acquired Associated Gas Resources, Inc. ("AGRI"), a
corporation managed by Torch, for the issuance of approximately 1.4 million
shares of its common stock ("Common Stock") and $0.2 million in cash. AGRI's
assets included additional interests in the Gas Plant. AGRI's assets also
included a Louisiana gathering system, a related long-term gas sales contract,
and interests in oil and gas properties in Louisiana and Oklahoma with estimated
net proved reserves of approximately 4.3 Bcf as of December 31, 1993. The Gas
Plant acquisition and AGRI acquisition diversified the Company's asset base and
its sources of cash flow. In March 1996, the Company assumed the purchase
obligation of the long-term gas sales contract and was paid $9.9 million. As a
result of this transaction, the Company recorded a liability to cover estimated
future losses under the contract. Gas gathering operations and net losses from
the purchase and resale of gas produced by third parties are charged to the
liability as incurred.
In August 1994, Bellwether acquired by merger certain of the assets,
liabilities and properties of Odyssey Partners, Ltd. ("Odyssey"), an
3
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
-----------------------------------------------
exploration company specializing in 3-D seismic and computer-aided exploration
("CAEX") technology, in exchange for 0.9 million shares of Common Stock and $5.6
million in cash. As of June 30, 1994, Odyssey's estimated net proved oil and gas
reserves consisted of 354 MBbls of oil and 3.7 Bcf of gas, and had a with a pre-
tax present value, discounted at 10%, of future net cash flows ("PV-10 Value")
of $8.5 million. The Odyssey merger provided the Company with significant
expertise in 3-D seismic and CAEX technology.
On February 28, 1995, Bellwether acquired Hampton Resources Corporation
("Hampton") by merger for $17.0 million in cash and approximately 1.0 million
shares of Common Stock. Hampton was a publicly held oil and gas company based
in Houston, Texas. As of June 30, 1994, Hampton's estimated net proved reserves
consisted of 1,205 MBbls of oil and 19.0 Bcf of gas, with a PV-10 Value of $22.7
million.
BUSINESS STRATEGY
The Company intends to continue to increase its reserves, production cash
flow and net asset value through a balanced strategy that includes exploration,
exploitation and development drilling activities and strategic acquisitions of
oil and gas properties and other facilities.
Key elements of the Company's strategy include the following:
Torch Relationship. The Company intends to capitalize on its affiliation
with Torch. Torch provides oil and natural gas investment management and
advisory services to domestic and foreign investors and E&P companies. The
Company believes it will benefit from the Torch relationship by having access to
a large staff of financial professionals, accountants, geologists and engineers,
exposure to significant oil and gas acquisition opportunities and increased
access to capital markets. These resources are generally only available to oil
and gas companies that are significantly larger than the Company.
Cash Flow From Mid-Stream Assets. The Company intends to use the cash flow
generated from the Gas Plant to fund the acquisition and exploitation of
additional oil and gas properties. The Gas Plant generates cash flow based on
through-put of natural gas which, although declining over time as reserves are
produced, have the potential to benefit from successful exploitation and
development activities funded by others. Producers in the vicinity of the Gas
Plant have disclosed plans to commit significant expenditures to develop
additional reserves.
Increased Drilling Activities. The Company plans to aggressively exploit
the inventory of development and exploration projects acquired in fiscal 1995.
Application of Advanced Technologies. The Company relies heavily on state-
of-the-art 3-D seismic and CAEX technologies to add value to its drilling
efforts and reduce risk associated with exploration and exploitation activities.
These advanced technologies are particularly useful in the highly
4
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
-----------------------------------------------
faulted structures common to the Company's existing properties and the
geographic areas in which the Company focuses.
Strategic Acquisitions. The Company will continue to seek acquisitions on
a selective basis, with a particular emphasis on identifying properties in close
proximity to the Company's current reserves, in areas where it maintains
geological expertise, and where reserves can be increased through the
application of advanced technology and development drilling.
INDUSTRY SEGMENT INFORMATION
- ----------------------------
For industry segment data, see Note 9 of the Notes to Consolidated
Financial Statements.
MARKETS
- -------
The ability of the Company to market oil and gas from its wells depends
upon numerous factors beyond its control, including the extent of domestic
production and imports of oil and gas, the proximity of the Company's gas
production to gas pipelines, the availability of capacity in such pipelines, the
demand for oil and gas by utilities and other end users, the effects of
inclement weather, state and federal regulation of oil and gas production and
federal regulation of gas sold or transported in interstate commerce. There is
no assurance that the Company will be able to market all of the oil or gas
produced by it or that favorable prices can be obtained for the oil and gas it
produces. In view of the many uncertainties affecting the supply and demand for
crude oil, natural gas and refined petroleum products, the Company is unable to
accurately predict future oil and gas prices and demand or the overall effect
they will have on the Company.
Sales to Texas Gas Transmission Corporation, Warren Petroleum Corporation
and Koch Industries Inc. accounted for 32.9% of 1996 revenues. Sales to Texas
Gas Transmission Corporation and Warren Petroleum Corporation accounted for 42%
of 1995 revenues. Sales to Texas Gas Transmission Corporation, Warren Petroleum
Corporation and United LP Gas Corporation accounted for 58% of revenues in 1994.
Management of the Company does not believe that the loss of any single customer
or contract would materially affect the Company's business.
REGULATION
- ----------
Oil and Gas Regulation
The availability of a ready market for any oil and gas production depends
upon numerous factors beyond the Company's control. These factors include state
and federal regulation of oil and gas production as well as regulations
governing environmental quality and pollution control, state limits on allowable
rates of production by a well or proration unit, the amount of oil and gas
available for sale, the availability of adequate pipeline and other
transportation and processing facilities and the marketing of competitive fuels.
For example, a productive gas well may be "shut-in" because of an over-supply of
gas or lack of an available gas pipeline in the
5
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
-----------------------------------------------
areas in which the Company may conduct operations. State and federal regulations
generally are intended to prevent waste of oil and gas, protect rights to
produce oil and gas between owners in a common reservoir, control the amount of
oil and gas produced by assigning allowable rates of production and control
contamination of the environment. Pipelines and gas plants also are subject to
the jurisdiction of various federal, state and local agencies.
Environmental Regulation
General. The Company's activities are subject to existing federal, state
and local laws and regulations governing environmental quality and pollution
control. It is anticipated that, absent the occurrence of an extraordinary
event, compliance with existing federal, state and local laws, rules and
regulations controlling the release of materials in the environment or otherwise
relating to the protection of the environment will not have a material effect
upon the operations, capital expenditures, earnings or the competitive position
of the Company.
Activities of the Company with respect to exploration, drilling and
production from wells, natural gas facilities, including the operation and
construction of pipelines, plants and other facilities for transporting,
processing, treating or storing natural gas and other products, are subject to
stringent environmental regulation by state and federal authorities including
the Environmental Protection Agency ("EPA"). Such regulation can increase the
cost of planning, designing, installing and operating such facilities. In most
instances, the regulatory requirements relate to water and air pollution control
measures.
Waste Disposal. The Company currently owns or leases, and has in the past
owned or leased, numerous properties that have been used for production of oil
and gas for many years. Although the Company has utilized operating and
disposal practices that were standard in the industry at the time, hydrocarbons
or other wastes may have been disposed of or released on or under the properties
owned or leased by the Company. In addition, many of these properties have been
operated by third parties over whom the Company had no control as to such
entities' treatment of hydrocarbons or other wastes or the manner in which such
substances may have been disposed of or released. State and federal laws
applicable to oil and gas wastes and properties have become more strict. Under
these new laws, the Company could be required to remove or remediate previously
disposed wastes (including wastes disposed of or released by prior owners or
operators) or property contamination (including groundwater contamination) or to
perform remedial plugging operations to prevent future contamination.
The Company may generate wastes, including hazardous wastes, that are
subject to the Federal Resource Conservation and Recovery Act and comparable
state statutes. The EPA has limited the disposal options for certain hazardous
wastes and is considering the adoption of stricter disposal standards for
nonhazardous wastes. Furthermore, certain wastes generated by the Company's oil
and gas operations that are currently exempt from treatment as "hazardous
wastes" may in the future be designated as "hazardous wastes,"
6
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
-----------------------------------------------
and therefore would be subject to more rigorous and costly operating and
disposal requirements.
Superfund. The Federal Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA"), also known as the "Superfund law", imposes joint
and several liability, without regard to fault or the legality of the original
conduct, on certain classes of persons with respect to the release of a
"hazardous substance" into the environment. These persons include the current
owner and operator of a facility and persons that disposed of or arranged for
the disposal of the hazardous substances found at a facility. CERCLA also
authorizes the EPA and, in some cases, third parties to take actions in response
to threats to the public health or the environment and to seek to recover from
the responsible classes of persons the costs of such action. In the course of
its operations, the Company may have generated and may generate wastes that fall
within CERCLA's definition of hazardous substances. The Company may also be an
owner of facilities on which hazardous substances have been released by previous
owners or operators. The Company may be responsible under CERCLA for all or
part of the costs to clean up facilities at which such wastes have been
released. Neither the Company nor, to its knowledge, its predecessors has been
named a potentially responsible person under CERCLA nor does the Company know of
any prior owners or operators of its properties that are named as "potentially
responsible parties" related to their ownership or operation of such property.
Air Emissions. The operations of the Company are subject to local, state
and federal regulations for the control of emissions of air pollution.
Administrative enforcement actions for failure to comply strictly with air
pollution regulations or permits are generally resolved by payment of monetary
fines and correction of any identified deficiencies. Alternatively, regulatory
agencies could require the Company to forego construction, modification or
operation of certain air emission sources, although the Company believes that in
the latter cases it would have enough permitted or permittable capacity to
continue its operations without a material adverse effect on any particular
producing field.
Oil Pollution Act. The Oil Pollution Act of 1990 ("OPA") and regulations
thereunder impose a variety of regulations on responsible parties related to the
prevention of oil spills and liability for damages resulting from such spills in
United States waters. A responsible party includes the owner or operator of a
facility or vessel, or the lessee or permittee of the area in which a facility
covered by OPA is located. OPA assigns joint and several liability to each
responsible party for oil removal costs and a variety of public and private
damages. Few defenses exist to the liability imposed by OPA.
OPA also imposes ongoing requirements on a responsible party, including
proof of financial responsibility to cover at least some costs in a potential
spill. On August 25, 1993, an advance notice of intention to adopt a rule under
OPA was published that would require owners and operators of offshore oil and
gas facilities to establish $150 million in financial responsibility. Under the
proposed rule, financial responsibility could be established through insurance,
guaranty, indemnity, surety bond, letter of credit, qualification
7
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
-----------------------------------------------
as a self-insurer or a combination thereof. There is substantial uncertainty as
to whether insurance companies or underwriters will be willing to provide
coverage under OPA because the statute provides for direct lawsuits against
insurers who provide financial responsibility coverage, and most insurers have
strongly protested this requirement. The financial tests or other criteria that
will be used to judge self-insurance are also uncertain. The Company cannot
predict the final form of the financial responsibility rule that will be adopted
but such rule has the potential to result in the imposition of substantial
additional annual costs on the Company or otherwise materially adversely affect
the Company. The impact of the rule should not be any more adverse to the
Company than it will be to other similarly situated or less capitalized owners
or operators in the Gulf of Mexico.
Management believes that the Company is in substantial compliance with
current applicable environmental laws and regulations and that continued
compliance with existing requirements will not have a material adverse impact on
the Company.
COMPETITION
- -----------
The Company encounters competition from other oil and gas companies in all
areas of its operations, including the acquisition of producing properties and
the marketing of oil and gas. Many of these companies possess greater financial
and other resources than the Company and Torch. Torch also manages companies
that may compete with the Company. Competition for acquisition of producing
properties will be affected by the amount of funds available to the Company,
information about a producing property available to the Company and any standard
established by the Company for the minimum projected return on investment.
Because gathering systems are the only practical method for the intermediate
transportation of natural gas, competition is presented by other pipelines and
gas gathering systems. Competition may also be presented by alternative fuel
sources, including heating oil and other fossil fuels. Because the primary
markets for NGLs are refineries, petrochemical plants and fuel distributors,
prices are generally set by or in competition with the prices for refined
products in the petrochemical, fuel and motor gasoline markets.
8
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
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ITEM 2. PROPERTIES
- -------------------
Reserves, Productive Wells, Acreage and Production
- --------------------------------------------------
The Company holds interests in oil and gas properties, all of which are
located in the United States. The Company's principal developed properties are
located in Texas, Louisiana and the Gulf of Mexico in state waters, and
undeveloped acreage is located primarily in Texas and Louisiana. Estimated net
proved oil and gas reserves at June 30, 1996 increased approximately 238% over
June 30, 1994, primarily as a result of acquisitions of producing properties.
(See Note 3 of the Notes to Consolidated Financial Statements). The Company has
not filed oil or gas reserve information with any foreign government or Federal
authority or agency.
The following table sets forth certain information, as of June 30, 1996,
which relates to the Company's principal oil and gas properties:
Net Proved
Reserves 1996 Net Production
--------------------------------------
OIL GAS OIL GAS
(MBBLS) (MMCF) (MBBLS) (MMCF)
Field
Cove field, TX............ 7 10,401 2 1,002
Fort Trinidad field, TX... 454 3,007 24 152
Fausse Pointe field, LA... 127 3,736 - -
McFarlan field, TX........ 16 2,292 6 955
Giddings field, TX........ 131 1,856 44 460
Lake Hatch field, LA...... 123 819 16 39
S. Bayou Bouef field, LA.. 149 1,283 38 90
S. Bullocks Church
field, TX............... 26 1,409 1 52
S. Fort Trinidad
field, Tx............... 235 - 44 -
N.W. Panther Reef
field, TX............... 20 828 2 112
Others.................... 520 7,563 157 2,237
----- ------ --- -----
1,808 33,194 334 5,099
===== ====== === =====
ACREAGE
- -------
The following table sets forth the acres of developed and undeveloped oil
and gas properties in which the Company held an interest as of June 30, 1996.
Undeveloped acreage is considered to be those leased acres on which wells have
not been drilled or completed to a point that would permit the production of
commercial quantities of oil and gas, regardless of whether or not such acreage
contains proved reserves. A gross acre in the following table refers to the
number of acres in which a working interest is owned directly by the Company.
The number of net acres is the sum of the fractional ownership of working
interests owned directly by the Company in the gross acres expressed as a whole
number and percentages thereof. A net acre is
9
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
-----------------------------------------------
deemed to exist when the sum of fractional ownership of working interests in
gross acres equals one.
GROSS NET
----- ---
Developed Acreage..................................... 481,446 110,513
Undeveloped Acreage................................... 63,549 56,713
------- -------
Total......................................... 544,995 167,226
======= =======
Development of the Company's acreage in Fausse Pointe field began in April 1996.
PRODUCTIVE WELLS
- ----------------
The following table sets forth Bellwether's gross and net interests in
productive oil and gas wells as of June 30, 1996. Productive wells are
producing wells and wells capable of production.
GROSS NET
----- ---
Oil Wells............................................. 359.00 60.82
Gas Wells............................................. 483.00 72.98
------ ------
Total......................................... 842.00 133.80
====== ======
PRODUCTION
- ----------
The Company's principal production volumes during the year ended June
30, 1996 were from the states of Louisiana and Texas, and from the Gulf of
Mexico in Texas state waters.
Data relating to production volumes, average sales prices, average unit
production costs and oil and gas reserve information appear in Note 11 of the
Notes to Consolidated Financial Statements.
DRILLING ACTIVITY AND PRESENT ACTIVITIES
- ----------------------------------------
During the three-year period ended June 30, 1996, the Company's
principal drilling activities occurred in the continental United States and
offshore in Texas state waters.
The Company had three gross (0.66 net) wells drilling at June 30, 1996.
The following table sets forth the results of drilling activity by the Company,
net to its interest, for the last three calendar years. Gross wells, as it
applies to wells in the following tables, refers to the number of wells in which
a working interest is owned directly by the Company. A "net well" is deemed to
exist when the sum of fractional ownership working interests in gross wells
equals one. The number of net wells is the sum of the fractional ownership of
working interests owned directly by the Company in gross wells expressed as
whole numbers and percentages thereof.
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BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
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EXPLORATORY WELLS
-----------------
GROSS NET
--------------------------------------- ----------------------------------------
DRY DRY
PRODUCTIVE HOLES TOTAL PRODUCTIVE HOLES TOTAL
1994 1 1 2 .10 .20 .30
1995 3 4(1) 7 .27 .65 .92
1996 1 3 4 .06 .24 .30
DEVELOPMENT WELLS
-----------------
GROSS NET
--------------------------------------- ----------------------------------------
DRY DRY
PRODUCTIVE HOLES TOTAL PRODUCTIVE HOLES TOTAL
1994 1 2 3 .08 .27 .35
1995 1 2 3 .30 .18 .48
1996 21 1 22 1.66 .90 2.56
(1) Includes well drilled on the Serj Permit in Tunisia.
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BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
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GAS PLANT AND GAS GATHERING FACILITIES
- --------------------------------------
As of June 30, 1996 the Company owned interests in the following gas plant and
gas gathering systems:
1996
-------------------------------
CAPACITY THROUGHPUT OWNERSHIP
FACILITY STATE OPERATOR MMCFD
- -------- ----- -------- -----
Snyder Gas Torch Energy
Plant TX Marketing Inc. 60 21 11.98%
Diamond M- Exxon Company,
Sharon Ridge U.S.A.
Gas Plant TX (1) (1) (1)
Monroe Gas West Monroe Gas
Gathering Gathering Corp., a
System(2) LA subsidiary of the 4.6 4.0 100%
Company
(1) The Company has a 35.78% interest in the operations of the former
Diamond M-Sharon Ridge Gas Plant. This plant was dismantled in December
1993, and the gas is being processed by Snyder Gas Plant pursuant to a
processing agreement.
(2) The Company owns a gas gathering system in Union Parish, Louisiana. In
March 1996, the liability for a gas purchase contract covering natural gas
owned by the Company and others was assumed by the Company. All operations
from that date are recorded as a reduction to the liability. Throughput for
1996 represents operations from July 1995 to February 1996.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
Neither the Company nor its subsidiaries is a party to any material pending
legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
There were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1996.
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BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the NASDAQ National Market
System (NMS) (Symbol: BELW). There were approximately 1,148 stockholders of
record as of September 11, 1996. The Company has not paid dividends on its
common stock and does not anticipate the payment of cash dividends in the
immediate future as it contemplates that cash flows will be used for continued
growth in Company operations. In addition, certain covenants contained in the
Company's financing arrangements restrict the payment of dividends (See
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financing Activities and Note 7 of the Notes to Consolidated
Financial Statements). The following table sets forth the range of the high and
low sales prices, as reported by the NASDAQ for Bellwether common stock for the
periods indicated.
SALES PRICE
-----------
HIGH LOW
---- ---
Quarter Ended:
September 30, 1994.......................... $6.50 $5.13
December 31, 1994........................... $6.00 $4.63
March 31, 1995.............................. $6.25 $4.63
June 30, 1995............................... $6.75 $5.50
September 30, 1995.......................... $6.25 $5.00
December 31, 1995........................... $6.13 $4.06
March 31, 1996.............................. $7.00 $5.00
June 30, 1996............................... $8.00 $5.50
13
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The following selected financial data with respect to the Company should be
read in conjunction with the Consolidated Financial Statements and supplementary
information included in Item 8 (amounts in thousands, except per share data).
AT AND FOR THE YEARS ENDED JUNE 30,
--------------------------------------------------------
1996 1995(1) 1994(2) 1993 1992
--------------------------------------------------------
Gas revenues............... $ 9,856 $ 4,864 $ 2,620 $ 1,807 $ 1,528
Oil revenues............... 5,810 3,643 1,086 1,708 1,246
Gas plant revenues......... 5,345 5,678 4,489 - -
Gas gathering revenues..... 3,374 5,027 2,441 23 51
Interest and other
income................... 116 97 63 116 82
--------------------------------------------------------
Total revenues........ 24,501 19,309 10,699 3,654 2,907
Total expenses (including
income taxes and
minority interest)....... 23,519 18,368 9,885 3,613 2,779
Extraordinary income(3) - - - - 65
--------------------------------------------------------
Net income................. $ 982 $ 941 $ 814 $ 41 $ 193
========================================================
Earnings per common and
common equivalent
share (4) (5)............ $0.11 $0.12 $0.27 $0.02 $0.08
Total assets............... $67,225 $74,650 $35,870 $12,480 $14,140
Long-term debt, net of
current maturities....... $13,048 $18,525 $12,797 $ 1,000 $ -
(1) Reflects operations from Odyssey and Hampton mergers beginning August 1994
and February 1995, respectively.
(2) Includes operations of the Gas Plant and AGRI from dates of acquisition in
July and December 1993, respectively.
(3) Extraordinary income in 1992 represents reductions of income taxes
resulting from utilization of loss carryforwards.
(4) Restated to reflect a 1-for-8 reverse stock split in 1994.
(5) At present, there is no plan to pay dividends. The Company maintains a
policy of reinvesting its discretionary cash flows for continued growth in
company operations (See Note 7 to Notes to Consolidated Financial
Statements).
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BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Capital Resources and Liquidity
- -------------------------------
Sources of Capital
------------------
The Company and certain third parties were the sellers under a gas purchase
contract whereby another party had an obligation to purchase, until May 31,
1999, gas produced and purchased by the Company and gas produced by third
parties from the West Monroe field in Union Parish, Louisiana at a price of
$4.50 per MMBTU. Bellwether supplied a significant portion of the gas sold
pursuant to the gas purchase contract. In March 1996, in exchange for
Bellwether's agreement to assume the purchase obligation under the gas purchase
contract, Bellwether was paid $9.9 million. From the proceeds, $9.5 million was
repaid on the Company's credit facility.
During fiscal year 1996 and 1995, the Company's net cash flows provided by
operating activities were $7.5 million and $5.3 million, respectively.
During fiscal 1994, the Company's primary sources of capital were
borrowings under its Credit Facility, which aggregated $8.5 million, and net
cash flows from operations which aggregated $3.1 million. In addition, in
December 1993, the Company issued 1.4 million shares of common stock in
connection with the acquisition of AGRI.
Uses of Capital
---------------
During the past three fiscal years, the Company's primary uses of its
capital have been to fund the acquisitions of Odyssey and Hampton. During
fiscal 1996 and 1995 capital expenditures of $6.9 million and $3.4 million,
respectively, were incurred in connection with the development and exploration
of the Company's properties.
Financing Activities
--------------------
On February 28, 1995, the Company entered into a credit facility ("Credit
Facility") with a commercial bank providing for an initial borrowing base of
$29.8 million. Borrowings under the Credit Facility are secured by the
Company's interests in oil and gas properties and in the Gathering System and
the Gas Plant. The maturity date, as modified in the second quarter, fiscal
1996 is March 31, 2001 and the borrowing base was revised to $20.1 million. A
principal payment of $9.5 million made in the third quarter of fiscal 1996
extinguished all current maturities. The interest rate is either the agent
bank's prime rate or the adjusted Eurodollar Rate plus 1 1/4%, at the Company's
option. A commitment fee of three-eighths of one percent (0.375%) per annum is
charged on the unused portion of the Credit Facility. The interest rate on the
Company's borrowings at June 30, 1996 was approximately 7.275%.
15
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
-----------------------------------------------
The Credit Facility contains various covenants including certain required
financial measurements for a current ratio, consolidated tangible net worth and
a ratio of consolidated liabilities to consolidated tangible net worth. In
addition, the Company may not pay dividends of greater than 20% of its
consolidated after-tax net income in any fiscal year or make any other payment
on account of its capital stock or redeem or purchase any of its capital stock.
Currently, the Company is negotiating a syndicated credit facility in an
amount up to $50 million, with the original borrowing base of $27 million, to be
redetermined semi-annually. The interest rate, at the Company's option will
vary, based upon borrowing base usage, from LIBOR plus 7/8% to LIBOR plus
1 1/4%, or the greater of the prime rate or Fed Funds plus 1/2%. The credit
facility will be unsecured and will have a termination date four years from
closing.
OTHER MATTERS
- -------------
Dividends
---------
At present, there is no plan to pay dividends on common stock. The Company
maintains a policy of reinvesting its discretionary cash flows for the continued
growth in Company operations.
Gas Balancing Positions
-----------------------
It is customary in the industry for various working interest partners to
sell more or less than their entitled share of natural gas. The settlement or
disposition of gas balancing positions as of June 30, 1996 is not anticipated to
adversely impact the financial condition of the Company.
Financial Accounting Standards Board Statement No. 121
------------------------------------------------------
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121 ("SFAS 121") "Accounting for the Impairment of Long-Lived
Assets to Be Disposed Of." SFAS 121 establishes guidence for determining and
measuring asset impairment and the required timing of asset impairment
evaluations. Management has addressed the requirements of this statement and
believes that it will not have a significant effect on the financial condition
and results of operations of the Company based upon current economic conditions.
Financial Accounting Standards Board Statement No. 123
------------------------------------------------------
In October 1995, the FASB issued Statement No. 123 ("SFAS 123"), Accounting
for Stock-Based Compensation" which is effective for the Company beginning July
1, 1996. SFAS No. 123 permits, but does not require, a fair-value-based method
of accounting for employee stock option plans which results in compensation
expense being recognized in the results of operations when stock options are
granted. The Company plans to continue to use the current intrinsic-value-based
method of accounting for such plans where no compensation expense is recognized.
However, as required by SFAS 123, the
16
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
-----------------------------------------------
Company will provide pro forma disclosure of net income and earnings per share
in the notes to the consolidated financial statements as if the fair-value-based
method of accounting had been applied.
Outlook
-------
The Company has adopted a $10.5 million capital budget for fiscal 1997,
primarily for development drilling activities. The Company believes its working
capital, net cash flows provided by operating activities are sufficient to meet
these capital commitments. The Company is reviewing several acquisitions, any
one of which could materially exceed the planned capital expenditure levels. It
is anticipated that such acquisitions, if consummated, would be funded through
additional borrowings and/or the issuance of securities.
Inflation has not had a material impact on the Company and is not expected
to have a material effect on the Company in the future.
17
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
-----------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth certain oil and gas production information
of the Company for the periods presented.
Year Ended June 30,
---------------------------
1996 1995 1994
-------- ------- --------
Production
Oil and condensate (MBBLS)............ 334 216 71
Natural gas (MMCF).................... 5,099 2,932 1,206
Average sales price (1)
Oil and condensate (per barrel)....... $17.81 $16.89 $15.27
Natural gas (per MCF)................. $ 2.02 $ 1.66 $ 2.17
Average unit production cost per
equivalent barrel (6 MCF equal
1 barrel).............................. $ 4.49 $ 4.05 $ 4.75
Average unit depletion rate per
equivalent barrel (6 MCF equal
1 barrel).............................. $ 5.86 $ 5.52 $ 5.71
(1) Average sales price is exclusive of the effect of natural gas and crude oil
price swaps.
Operations of the Gas Plant, various interests of which were acquired July 30,
1993 and December 31, 1993, are summarized as follows:
1996 1995 1994
------- ------- --------
Product sales volume - (MGALS).. 13,497 16,045 15,756
Average sales price per gallon.. $ 0.31 $ 0.29 $ 0.25
Revenues: ($000)
Product sales............. $ 4,175 $ 4,568 $ 3,868
Operating fees............ 690 786 481
Residual gas sales........ 480 324 140
------- ------- -------
Total revenues.................. 5,345 5,678 4,489
Operating expenses ($000)....... 2,768 3,004 2,421
------- ------- -------
Operating margin ($000)......... $ 2,577 $ 2,674 $ 2,068
======= ======= =======
18
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
-----------------------------------------------
Operations of the Gathering System, acquired in December 1994, are summarized as
follows:
1996(1) 1995 1994
-------- ------- -------
Net throughput (MMCF per day).. 4.0 4.1 3.9
Gas gathering revenues ($000).. $ 3,374 $5,027 $2,441
Operating expenses ($000)...... 2,417 3,074 1,592
------- ------ ------
Operating margin ($000)........ $ 957 $1,953 $ 849
======= ====== ======
(1) Represents operations from July 1995 through February 1996. Subsequent to
February 1996, the Company ceased recognition of such operations following the
Company's assumption of a gas purchase contract and receipt of $9.9 million (See
Note 2 of Notes to Consolidated Financial Statements. See Note 9 for industry
segment information).
REVENUES:
- ---------
Oil and gas revenues for fiscal 1996 were $15.7 million, or 85% higher than
fiscal 1995 oil and gas revenues of $8.5 million. In 1995, oil and gas revenues
were 130% higher than the fiscal 1994 oil and gas revenues of $3.7 million. The
Company's mergers with Odyssey and Hampton are responsible for the increased
revenues during fiscal 1995 and 1996. During the three year period, the
volatility of oil and gas prices directly impacted revenues. Most
significantly, natural gas prices increased in fiscal 1996 to $2.02 per MCF from
$1.66 per MCF in fiscal 1995. During fiscal 1996, the Company utilized various
hedging transactions to manage a portion of the risks associated with natural
gas and crude oil volatility. As a result of these hedges, oil and gas revenues
were reduced by $0.6 million.
Gas plant revenues were $5.3 million in fiscal 1996, or 7% lower than
fiscal 1995 revenues of $5.7 million due primarily to decreased throughput,
partially offset by an 7% increase in natural gas liquids price. Fiscal 1995
revenues were 27% higher than the $4.5 million in fiscal 1994. Such increase
was due to the purchase of interests in the Gas Plant in July and December, 1993
and a 16% increase in prices.
Gas gathering revenues decreased to $3.4 million in fiscal 1996, or 32%
under fiscal 1995 revenues of $5.0 million due to the Company's agreement to
assume payment obligations under a gas purchase contract and its decision to
cease recognition of income from gas gathering operations. Gas gathering
revenues in fiscal 1995 were 106% higher than fiscal 1994 revenues of $2.4
million. The gas gathering facilities were acquired in December, 1993.
EXPENSES:
- ---------
Production expenses for fiscal 1996 totaled $5.3 million, as compared to
$2.9 million in fiscal 1995 and $1.3 million in fiscal 1994. The 83% increase in
fiscal 1996 over fiscal 1995 and the 123% increase between fiscal 1995 and 1994
was attributable primarily to the Odyssey and Hampton mergers. Such mergers
were included in operations for ten and four months, respectively, in fiscal
1995.
19
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
-----------------------------------------------
Gas plant expenses were $2.8 million or 7% lower in fiscal 1996 than in
fiscal 1995 as a result of decreased throughput, offset partially by higher
prices. In 1995, expenses were 25% higher in than in fiscal 1994 due to a full
year of operations in 1995.
Gas gathering expenses in fiscal 1996 of $2.4 million are 23% under the
prior year total of $3.1 million, due to the Company's agreement to accept
assume payment obligations under a gas purchase contract and its decision to
cease gas gathering operations. In fiscal 1995, expenses were 93% higher than in
fiscal 1994. The gas gathering facilities were acquired in the AGRI merger in
December 1993.
Depreciation, depletion and amortization of $8.1 million reflects an
increase of 53% for fiscal 1996 over $5.3 million in fiscal 1995. Such increase
reflects a full year of production volumes from the Odyssey and Hampton mergers
and a 6% increase in the depletion rate per net equivalent barrel due to
additional costs associated with dry holes drilled in Fausse Pointe and Cove
fields. In fiscal 1995, depreciation, depletion and amortization was 112%
higher than the fiscal 1994 amount. This reflects additional production volumes
from the Odyssey and Hampton mergers and a full year of depreciation included
for the gas plants and gas gathering facilities.
General and administrative expenses totaled $3.0 million, $2.7 million and
$1.2 million for the fiscal years ended June 30, 1996, 1995 and 1994,
respectively. The management fee with Torch accounted for $0.3 million and $0.6
million of the increase in general and administrative expenses in fiscal 1996
and fiscal 1995, respectively, and is due to the significant growth of assets
and cash flows experienced by the Company. Additionally, the mergers with
Odyssey and Hampton added to increases in salaries and other administrative
overhead in fiscal 1995 over fiscal 1994.
Interest expense increased to $1.6 million in fiscal 1996 from $1.2 million
in fiscal 1995 and $0.7 million in fiscal 1994. Such increase is due to the
increase in bank debt which financed a portion of the Hampton merger.
The Company recorded a provision for income taxes of $46,000 in fiscal 1996.
Actual payments of $126,000 in fiscal 1996 and $9,000 in fiscal 1995 relate to
alternative minimum tax and state taxes. Prior to the Hampton merger, the
Company's net operating loss was sufficient to eliminate any deferred tax
liability. Upon merging with Hampton, the Company was required to record a
deferred tax liability of $2.4 million.
Net Income
- ----------
Net income of $1.0 million was generated in fiscal 1996, as compared to
$0.9 million and $0.8 million in fiscal 1995 and fiscal 1994, respectively.
20
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
-----------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
-------------------------------------------
PAGE
NUMBER
-------
Independent Auditors' Report................................ 22
Financial Statements:
Consolidated Balance Sheets as of June 30, 1996
and 1995.................................................. 23
Consolidated Statements of Operations for the Years Ended
June 30, 1996, 1995 and 1994.............................. 25
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended June 30, 1996, 1995 and 1994... 26
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1996, 1995 and 1994.............................. 27
Notes to Consolidated Financial Statements................. 29
21
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Stockholders of
Bellwether Exploration Company and Subsidiaries
We have audited the accompanying consolidated balance sheets of Bellwether
Exploration Company and subsidiaries as of June 30, 1996 and 1995, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the three years in the period ended June 30, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Bellwether Exploration Company and
subsidiaries as of June 30, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1996, in conformity with generally accepted accounting principles.
/S/DELOITTE & TOUCHE LLP
Houston, Texas
September 6, 1996
22
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
(Amounts in thousands)
JUNE 30, JUNE 30,
1996 1995
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents............... $ 783 $ 1,088
Accounts receivable and accrued revenues 5,990 5,322
Accounts receivable - related parties... 1,417 ---
Prepaid expenses........................ 314 217
-------- --------
Total current assets................ 8,504 6,627
-------- --------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Oil and gas properties (full cost
method) including $13,453 and $15,125
of unproved properties which
are excluded from amortization in
1996 and 1995, respectively............ 76,043 71,426
Gas gathering system.................... --- 6,011
Gas plant facilities.................... 12,840 13,049
--------- --------
88,883 90,486
Less accumulated depreciation,
depletion and amortization............. (30,748) (23,291)
-------- --------
58,135 67,195
-------- --------
OTHER ASSETS............................ 586 828
-------- --------
$ 67,225 $ 74,650
======== ========
See Notes to Consolidated Financial Statements.
23
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
(Amounts in thousands, except shares)
JUNE 30, JUNE 30,
1996 1995
---------- ---------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities 2,634 1,774
Accounts payable - related parties...... $ 702 $ 76
Current maturities of long-term debt.... --- 6,023
------- -------
Total current liabilities.......... 3,336 7,873
-------- -------
LONG-TERM DEBT, EXCLUDING CURRENT
MATURITIES............................. 13,048 18,525
DEFERRED INCOME TAXES................... 2,861 2,400
OTHER LIABILITIES....................... 1,383 151
MINORITY INTEREST IN GAS PLANT VENTURES. --- 254
CONTINGENCIES........................... --- ---
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value,
1,000,000 shares
authorized, none issued or outstanding --- ---
Common stock, $0.01 par value,
15,000,000 shares authorized, 9,075,479
and 9,045,479 shares issued and
outstanding at June 30, 1996 and 1995,
respectively.......................... 91 90
Additional paid-in capital.............. 41,639 41,472
Retained earnings....................... 4,867 3,885
------- -------
Total stockholders' equity.............. 46,597 45,447
------- -------
$67,225 $74,650
======= =======
See Notes to Consolidated Financial Statements.
24
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Amounts in thousands, except per share data)
Year Ended June 30,
---------------------------
1996 1995 1994
-------- ------- --------
REVENUES:
Gas revenues.......................... $ 9,856 $ 4,864 $ 2,620
Oil revenues.......................... 5,810 3,643 1,086
Gas plant revenues.................... 5,345 5,678 4,489
Gas gathering revenues................ 3,374 5,027 2,441
Interest and other income............. 116 97 63
------- ------- -------
24,501 19,309 10,699
------- ------- -------
COSTS AND EXPENSES:
Production expenses................... 5,317 2,856 1,294
Gas plant expenses.................... 2,768 3,004 2,421
Gas gathering expenses................ 2,417 3,074 1,592
General and administrative expenses... 3,013 2,739 1,234
Depreciation, depletion and
amortization........................ 8,148 5,269 2,489
Interest expense...................... 1,657 1,245 721
Other expenses........................ 153 --- ---
------- ------- -------
23,473 18,187 9,751
------- ------- -------
Income before income taxes and minority
interest.............................. 1,028 1,122 948
Provision for income taxes.............. 46 9 ---
Minority interest in gas plant ventures. --- 172 134
------- ------- -------
Net income.............................. $ 982 $ 941 $ 814
======= ======= =======
Net income per share.................... $ 0.11 $ 0.12 $ 0.27
======= ======= =======
Weighted average common and common
equivalent shares outstanding......... 9,052 7,713 3,006
======= ======= =======
See Notes to Consolidated Financial Statements.
25
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES
----------------------------------
IN STOCKHOLDERS' EQUITY
-----------------------
(Amounts in thousands)
COMMON STOCK PREFERRED STOCK ADDITIONAL TREASURY STOCK
--------------- PAID-IN RETAINED --------------
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT TOTAL
------ ------ ------ ------ ------- -------- ------ ------ -----
Balance June 30, 1993.... 2,318 $ 1,156 -- --- $ 7,598 $2,130 29 $(115) $10,769
Shares issued in merger
with Associated Gas
Resources, Inc.......... 1,419 708 -- --- 6,066 --- -- --- 6,774
To change par value
per share............... --- (1,827) -- --- 1,827 --- -- --- ---
Other.................... --- --- -- --- (1) --- (14) 16 15
Net earnings............. --- --- -- --- --- 814 -- --- 814
----- ------- --- ---- ------- ------ --- ------ -------
Balance June 30, 1994.... 3,737 37 -- --- 15,490 2,944 15 (99) 18,372
Shares issued in public
stock offering.......... 3,400 34 -- --- 17,204 --- -- --- 17,238
Cancelation of
treasury stock.......... (15) --- -- --- --- --- (15) 99 99
Shares issued in merger
with Odyssey Partners,
Ltd..................... 917 9 -- --- 3,944 --- -- --- 3,953
Shares issued in merger
with Hampton
Resources Corporation... 1,006 10 -- --- 4,834 --- -- --- 4,844
Net earnings............. --- --- -- --- --- 941 -- --- 941
----- ------- --- ---- ------- ------ --- ------ -------
Balance June 30, 1995.... 9,045 90 -- --- 41,472 3,885 -- --- 45,447
Stock options
exercised............... 30 1 -- --- 167 --- -- --- 168
Net earnings............. --- --- -- --- --- 982 -- --- 982
----- ------- --- ---- ------- ------ --- ------ -------
Balance June 30, 1996.... 9,075 $ 91 -- $--- $41,639 $4,867 -- $ --- $46,597
===== ======= === ==== ======= ====== === ====== =======
See Notes to Consolidated Financial Statements.
26
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Amounts in Thousands)
Year Ended June 30,
------------------------------
1996 1995 1994
---------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income.............................. $ 982 $ 941 $ 814
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation, depletion and
amortization........................ 8,273 5,382 2,530
Minority interest in gas plant
ventures............................ --- 120 120
Deferred taxes........................ 183 --- ---
Change in assets and liabilities,
net of acquisition effects:
Accounts receivable and accrued
revenues............................ (668) 1,548 (73)
Prepaid expenses...................... 25 117 ---
Accounts payable and accrued expenses. 84 (2,047) (464)
Due (to) from affiliates.............. (791) (633) 750
Other................................. (603) (145) (555)
-------- --------- -------
NET CASH FLOWS PROVIDED BY OPERATING
ACTIVITIES............................. 7,485 5,283 3,122
------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties..... (6,934) (27,039) (782)
Proceeds from sales of properties....... 644 265 36
Additions to gas plant facilities....... (44) (87) (8,567)
Additions to gas gathering system....... (21) (138) (82)
Proceeds from gas contract assignment... 9,875 --- ---
Other................................... 22 (290) (28)
------- -------- -------
NET CASH FLOWS FROM (USED IN) INVESTING
ACTIVITIES............................ 3,542 (27,289) (9,423)
------- -------- -------
See Notes to Consolidated Financial Statements.
27
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
-------------------------------------------------
(Amounts in Thousands)
Year Ended June 30,
-------------------------------
1996 1995 1994
---------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings................ $ --- $ 25,860 $ 8,471
Net proceeds from issuance of common
stock................................. 168 17,238 ---
Payments of long-term debt.............. (11,500) (21,456) (1,151)
Other................................... --- --- 14
-------- -------- -------
NET CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES.................. (11,332) 21,642 7,334
-------- -------- -------
Net decrease in cash and cash
equivalents........................... (305) (364) 1,033
Cash and cash equivalents at beginning
of year............................... 1,088 1,452 419
-------- -------- -------
CASH AND CASH EQUIVALENTS AT END
OF YEAR............................... $ 783 $ 1,088 $ 1,452
======== ======== =======
See Notes to Consolidated Financial Statements.
28
BELLWETHER EXPLORATION COMPANY
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. ORGANIZATION
------------
Bellwether Exploration Company ("the Company") was formed as a Delaware
corporation in 1994 to succeed to the business and properties of its
predecessor company pursuant to a merger, the primary purpose of which was
to change the predecessor company's state of incorporation from Colorado to
Delaware. The predecessor company was formed in 1980 from the
consolidation of the business and properties of related oil and gas limited
partnerships. References to Bellwether or the Company include the
predecessor company, unless the context requires otherwise.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of Bellwether
Exploration Company and its wholly-owned subsidiaries. Snyder Gas Plant
Venture and NGL/Torch Gas Plant Venture and their 11.98% and 35.78%
investments in the Snyder and Diamond M-Sharon Ridge Gas Plants have been
pro rata consolidated. Minority interests have been deducted from results
of operations and stockholders' equity in the appropriate period. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Oil and Gas Properties
----------------------
The Company utilizes the full cost method to account for its investment in
oil and gas properties. Under this method, all costs of acquisition,
exploration and development of oil and gas reserves (including such costs
as leasehold acquisition costs, geological expenditures, dry hole costs and
tangible and intangible development costs) are capitalized as incurred.
Oil and gas properties, the estimated future expenditures to develop
proved reserves, and estimated future abandonment, site remediation and
dismantlement costs are depleted and charged to operations using the unit-
of-production method based on the ratio of current production to proved oil
and gas reserves as estimated by independent engineering consultants.
Costs directly associated with the acquisition and evaluation of unproved
properties are excluded from the amortization computation until it is
determined whether or not proved reserves can be assigned to the properties
or whether impairment has occurred. Depletion expense per equivalent
barrel of production was approximately $5.86 in 1996, $5.52 in 1995 and
$5.71 in 1994. Dispositions of oil and gas properties are recorded as
adjustments to capitalized costs, with no gain or loss recognized unless
such adjustments would significantly alter the relationship between
capitalized costs and proved reserves of oil and gas. To the extent that
capitalized costs of oil and gas properties, net of accumulated
depreciation, depletion and amortization, exceed the discounted future net
revenues of proved oil and gas reserves net of deferred taxes, such
29
BELLWETHER EXPLORATION COMPANY
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
excess capitalized costs would be charged to operations. No such write-down
in book value was required in 1996, 1995 and 1994.
Any reference to oil and gas reserve information in the Notes to
Consolidated Financial Statements is unaudited.
Gas Plants and Gas Gathering System
-----------------------------------
Gas plant facilities include the costs to acquire certain gas plants and to
secure rights-of-way. Capitalized costs associated with gas plants
facilities are amortized primarily over the estimated useful lives of the
various components of the facilities utilizing the straight-line method.
The estimated useful lives of such assets range from four to fifteen years.
The Company's gas gathering subsidiary and certain third parties were the
beneficiaries of an agreement whereby another party had an obligation to
purchase, until May 31, 1999, the gas produced by the Company and such
third parties from the West Monroe field in Union Parish, Louisiana at a
price of $4.50 per MMBTU. Bellwether owned a large majority of the gas
produced and sold pursuant to the Purchase Agreement. In March 1996, in
exchange for Bellwether's agreement to assume the purchase obligations
under the gas purchase contract, Bellwether was paid $9.9 million. As a
result of this transaction, the Company has written off the remaining book
value of the gas gathering system and has recorded a liability to cover the
estimated future losses under the contract. Gas gathering operations of
the subsidiary and payments to third parties are charged to the liability
as incurred. From the proceeds, $9.5 million was paid on the Company's
credit facility.
Gas Imbalances
--------------
The Company uses the sales method of accounting for gas imbalances. Under
this method, gas sales are recorded when revenue checks are received or are
receivable on the accrual basis. The Company's imbalance was immaterial at
June 30, 1996 and 1995.
Financial Accounting Standards Board Statement No. 121
------------------------------------------------------
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121 ("SFAS 121") "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." SFAS 121 is effective
beginning July 1, 1996 and establishes guidelines for determining and
measuring asset impairment and the required timing of asset impairment
evaluations. Management has addressed the requirements of this statement
and believes that it will not have a significant effect on the financial
condition and results of operations of the Company based upon current
economic conditions.
30
BELLWETHER EXPLORATION COMPANY
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
Financial Accounting Standards Board Statement No. 123
------------------------------------------------------
In October 1995, the FASB issued Statement No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation" which is effective for the
Company beginning July 1, 1996. SFAS 123 permits, but does not require, a
fair-value-based method of accounting for employee stock option plans which
results in compensation expense being recognized in the results of
operations when stock options are granted. The Company plans to continue
to use the current intrinsic-value-based method of accounting for such
plans where no compensation expense is recognized. However, as required by
SFAS 123, the Company will provide pro forma disclosure of net income and
earnings per share in the notes to the consolidated financial statements as
if the fair-value-based method of accounting had been applied.
Natural Gas and Crude Oil Hedging
---------------------------------
The Company participated in certain crude oil and natural gas price swaps
to reduce its exposure to price fluctuations on sales during fiscal 1996.
Settlement of gains and losses on price swap contracts are realized
monthly, generally based upon the difference between the contract price and
the average closing New York Merchantile Exchange ("NYMEX") price and are
reported as a component of oil and gas revenues.
Earnings Per Share
------------------
Earnings per share calculations are based on the weighted average number of
common shares and common share equivalents and earnings attributable to
common stockholders. Common share equivalents include dilutive common
stock options. Such options do not have a material effect in the
calculations of earnings per share.
Income Taxes
------------
Deferred taxes are accounted for under the asset and liability method of
accounting for income taxes. Under this method, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax basis of
existing assets and liabilities. The effect on deferred taxes of a change
in tax rates is recognized in income in the period the change occurs.
Statements of Cash Flows
------------------------
For cash flow presentation purposes, the Company considers all highly
liquid debt instruments purchased with an original maturity of three months
or less to be cash equivalents. Interest paid in cash for 1996,
31
BELLWETHER EXPLORATION COMPANY
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
1995 and 1994 was $1.6 million, $1.2 million and $0.7 million,
respectively. Income taxes paid in cash for 1996 and 1995 were $162,000 and
$9,000, respectively. During 1995 and 1994, a portion of the the mergers
with Associated Gas Resources Inc. ("AGRI"), Odyssey Partners, Ltd.
("Odyssey") and Hampton Resources Corporation ("Hampton"), collectively the
("Mergers") was financed by assumption of debt of $6.1 million for AGRI,
$1.4 million for Odyssey and $4.1 million for Hampton. Common stock with a
value of $4.0 million and $4.8 million was issued as part of the costs of
the Odyssey and Hampton mergers in 1995, respectively. In 1994, common
stock with a value of $6.8 million was issued in the AGRI merger.
Use of estimates
----------------
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities as well as reserve information which
affects the depletion calculation and the computation of the full cost
ceiling limitation to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could differ from
these estimates.
Reclassifications
-----------------
Certain reclassifications of prior period statements have been made to
conform with current reporting practices.
3. ACQUISITIONS AND MERGERS
------------------------
During the last three years, the Company has completed the following
mergers and acquisitions:
On February 28, 1995 the Company acquired Hampton in exchange for $17.0
million in cash and 1,006,458 shares of the Company's common stock. The
Company had paid previous to the merger $2.7 million to acquire common and
preferred stock of Hampton and incurred $1.4 million in expenses in
arranging the merger. The total cost of the Hampton acquisition was $25.9
million, consisting of $21.1 million in cash and $4.8 million in common
stock. Hampton was an energy company engaged in the exploration,
acquisition and production of oil and natural gas, primarily in the onshore
Gulf Coast region and offshore in Texas state waters.
On August 26, 1994 the Company acquired Odyssey in exchange for $5.6
million in cash (funded from a common stock offering which closed on the
same date) and 916,665 shares of the Company's common stock, for a total
cost of $9.6 million. Odyssey is an exploration company which assembles,
exploits and operates oil and gas properties using state-of-the-art 3-D
seismic and computer-aided exploration technology. Odyssey's primary areas
of operation have been the onshore Gulf Coast
32
BELLWETHER EXPLORATION COMPANY
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
region and the Permian Basin area of West Texas and Southeast New Mexico.
On December 31, 1993 AGRI merged into the Company in consideration of the
issuance of 1,419,726 shares of the Company's common stock and cash
payments of $232,000, for a total cost of $7.0 million. AGRI's principal
assets are a gas gathering system located in Union Parish, Louisiana (the
"Gathering System"); a 4.12% interest in the Snyder Gas Plant; a 12.52%
interest in the Diamond M-Sharon Ridge Gas Plant (the "Gas Plants");
working interests in approximately 828 wells in Union, Morehouse and
Ouachita Parishes, Louisiana; and small non-operated working interests in
approximately 137 gas wells in Oklahoma.
On July 30, 1993 the Company acquired certain interests in the Gas Plants,
both in Scurry County, Texas, for a purchase price of $8.45 million.
4. RELATED PARTY TRANSACTIONS
--------------------------
The Company is a party to a management agreement with Torch Energy Advisors
Incorporated ("Torch") which was renewed for one year on September 1, 1993
and amended effective January 1, 1994. Torch is currently an affiliate of
Torchmark Corporation ("Torchmark"), an insurance and diversified financial
services holding company and the parent corporation of Torch. The
management agreement requires Torch to administer the business activities
of the Company for a monthly fee equal to the sum of one-twelfth of 2% of
the average of the book value of the Company's total assets, excluding
cash, plus reimbursement of certain costs incurred on behalf of the Company
for the management of its oil and gas properties, plus 2% of annual
operating cash flows (as defined) during the period in which the services
are rendered. The initial term of this agreement (as amended) is six
years. Thereafter, the agreement renews automatically for successive one-
year periods until terminated by either party in accordance with the
applicable provisions of the agreement. For the years ended June 30, 1996,
1995 and 1994, management fees paid to Torch amounted to $1.5 million, $1.2
million and $0.6 million, respectively. Additionally, in the ordinary
course of business, the Company incurs intercompany balances resulting from
the payment of costs and expenses by affiliated entities on behalf of the
Company. Torch may charge interest on any unpaid balances not paid within
30 days, however, no such interest has been charged by Torch since the
inception of the agreement. In December 1993, Torch was issued a warrant
to purchase 187,500 shares of the Company's common stock at a price of
$6.40 per share for its services in identifying and negotiating the AGRI
merger.
33
BELLWETHER EXPLORATION COMPANY
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
A subsidiary of Torch markets oil and natural gas production from certain
oil and gas properties in which the Company owns an interest. The Company
pays fees of 2% of revenues for such marketing services. Such charges were
$114,000, $12,000 and $3,000 in 1996, 1995 and 1994, respectively.
Costs of the evaluation of potential property acquisitions and due
diligence conducted in conjunction with acquisitions closed are incurred by
Torch at the Company's request. The Company was charged $74,000 and
$193,000 for these costs in 1996 and 1995, respectively.
Torch operates certain oil and gas interests owned by the Company. The
Company is charged, on the same basis as other third parties, for all
customary expenses and cost reimbursements associated with these
activities. Operator's overhead charged for these activities for the years
ended June 30, 1996, 1995 and 1994 was $367,000, $164,000 and $45,000,
respectively.
Torch became the operator of the Gas Plants on December 1, 1993. In fiscal
1996, 1995 and 1994, the fees paid by the Company to Torch were $83,000,
$71,000 and $38,000, respectively.
5. STOCKHOLDERS' EQUITY
--------------------
Common and Preferred Stock
--------------------------
The Certificate of Incorporation of the Company authorizes the issuance of
up to 15,000,000 shares of common stock and 1,000,000 shares of preferred
stock, the terms, preferences, rights and restrictions of which are
established by the Board of Directors of the Company. Certain restrictions
contained in the Company's loan agreements limit the amount of dividends
which may be declared. There is no present plan to pay dividends on common
stock as the Company intends to reinvest its cash flows for continued
growth of the Company.
On April 4, 1994, shareholders approved the merger of Bellwether
Exploration Company, a Delaware corporation, into the Company. The common
stock of the Company was converted into one-eighth share of the newly
formed Company's common stock.
During the first quarter of fiscal 1995, the Company consummated the sale
of 3,650,000 shares of common stock. The net proceeds to the Company were
$17.3 million which were used for the Odyssey and Hampton mergers and
general corporate purposes. Of the shares sold, 3,400,000 were newly-
issued by the Company and 250,000 were sold by certain stockholders.
34
BELLWETHER EXPLORATION COMPANY
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
Stock Incentive Plans
---------------------
The Company has stock option plans that provide for granting of options for
the purchase of common stock to directors, officers and key employees of
the Company and Torch. These stock options may be granted subject to terms
ranging from 6 to 10 years at a price equal to the fair market value of the
stock at the date of grant. At June 30, 1996, options under the plans
available for future grants were 18,000.
35
BELLWETHER EXPLORATION COMPANY
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
A summary of activity in the stock option plans is set forth below:
Number Option
of shares Price Range
------------- ----------------
Balance at June 30, 1993...... 151,715 $3.00 - $5.25
Granted..................... 456,950 $4.88 - $7.00
Surrendered................. (114,450) $4.50
Exercised................... (22,890) $3.25
------------- ----------------
Balance at June 30, 1994...... 471,325 $3.00 - $7.00
Granted..................... 450,000 $5.56 - $5.94
------------- ----------------
Balance at June 30, 1995...... 921,325 $3.00 - $7.00
Granted..................... 27,000 $4.375 - $6.375
Surrendered................. (10,000) $5.75
Exercised................... (30,000) $5.625
------------- ----------------
Balance at June 30, 1996...... 908,325 $3.00 - $7.00
============= ================
Exercisable at June 30, 1996.. 830,917 $3.00 - $7.00
===============================
6. DERIVATIVE FINANCIAL INSTRUMENTS
--------------------------------
The Company periodically uses derivative financial instruments to manage
oil and gas price risk. As of June 30, 1996, the Company was a party to an
oil swap price agreement for the month of July for 9,300 barrels of crude
oil with a price of $18.25 per barrel. This contract is accounted for as a
hedge for financial reporting purposes and, accordingly, is deferred until
the related sales are made.
7. LONG-TERM DEBT
--------------
Long-term debt is comprised of the following at June 30, 1996 and 1995 (in
thousands):
1996 1995
---------- ---------
Bank credit facility.....$ 13,048 $ 24,548
Less current maturities.. --- (6,023)
---------- ---------
Long-term debt...........$ 13,048 $ 18,525
========== =========
On February 28, 1995, the Company entered into a credit facility
("Credit Facility") with a commercial bank providing for an initial
borrowing base of $29.8 million. The borrowing base is reviewed
semiannually. Borrowings under the Credit Facility are secured by the
Company's interests in oil and gas properties and in the Gathering System
and the Gas Plant. The maturity date for the credit facility as modified
in the second quarter, fiscal 1996 is March 31, 2001. A
36
BELLWETHER EXPLORATION COMPANY
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
principal payment of $9.5 million made in the third quarter, fiscal 1996
extinguished all current maturities. The interest rate is either the agent
bank's prime rate or the adjusted Eurodollar Rate plus 1 1/4% at the
Company's option. A commitment fee of three-eighths of one percent (0.375%)
per annum is charged on the unused portion of the Credit Facility. The
interest rate on the Company's borrowings at June 30, 1996 was
approximately 7.275%.
Debt maturities by fiscal year are as follows (in thousands):
Year ending June 30, 1997....... $ ---
Year ending June 30, 1998....... 1,929
Year ending June 30, 1999....... 4,766
Year ending June 30, 2000....... 4,170
Year ending June 30, 2001....... 2,183
-------
$13,048
=======
The Credit Agreement has various covenants including certain required
financial measurements for a current ratio, consolidated tangible net worth
and a ratio of consolidated liabilities to consolidated tangible net worth.
In addition, the Company may not pay dividends of greater than 20% of its
consolidated after-tax net income in any fiscal year or make any other
payment on account of its capital stock or redeem or repurchase any of its
capital stock.
Currently, the Company is negotiating a syndicated credit facility in
an amount up to $50 million, with the original borrowing base of $27
million, to be redetermined semi-annually. The interest rate, at the
Company's option will vary, based upon borrowing base usage, from LIBOR
plus 7/8% to LIBOR plus 1 1/4%, or the greater of the prime rate or Fed
Funds plus 1/2%. The debt facility will have a termination date four years
from closing.
8. INCOME TAXES (IN THOUSANDS)
---------------------------
Income tax expense is summarized as follows:
Year Ended June 30,
----------------------------
1996 1995 1994
------ ------- -------
Current
Federal..................... $ 126 $ 9 $
---
State....................... 103 --- ---
---
Deferred - Federal and State.. (183) --- ---
----- ----- -----
Total income tax expense...... $ 46 $ 9 $
---
===== ===== =====
37
BELLWETHER EXPLORATION COMPANY
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
The balances for deferred tax assets and liabilities were modified as of
the effective date of the Hampton merger based on the allocation of the
purchase price.
tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at June 30, 1996 and
1995 are as follows:
At June 30,
---------------------
1996 1995
-------- --------
Net operating loss
carryforwards................ $ 8,922 $ 8,858
Percentage depletion
carryforwards................ 271 271
Alternative minimum tax credit
carryforwards.................. 126 ---
------- -------
Total deferred income tax
assets...................... 9,319 9,129
------- -------
Plant, property and equipment.. (8,841) (11,529)
State income taxes............. (446) ---
------- -------
Total deferred income tax
liabilities.................. (9,287) (11,529)
Valuation allowances........... (2,894) ---
------- -------
Net deferred income tax
liability.................... $(2,862) $(2,400)
======= =======
The Company files a consolidated federal income tax return. Deferred
income taxes are provided for transactions which are recognized in
different periods for financial and tax reporting purposes. Such temporary
differences arise primarily from the deduction for tax purposes of certain
oil and gas development costs which are capitalized for financial statement
purposes. In the years ended June 30, 1995 and 1994, the Company did not
provide a provision for deferred income taxes due to the availability of
sufficient net operating loss ("NOLs") to offset net income.
38
BELLWETHER EXPLORATION COMPANY
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
Total income tax differs from the amount computed by applying the Federal
income tax rate to income (loss) before income taxes and minority interest.
The reasons for the differences are as follows:
At June 30,
-----------------
1996 1995
------ ------
Statutory Federal income tax
rate......................... 34.0% 34.0%
Increase (Decrease) in tax rate
resulting from:
State income taxes, net of
federal benefit............ 7.0% 7.0%
Nondeductable travel and
entertainment................ .3% .3%
Reduction of valuation
allowance due to utilization
of net operating loss
carryforwards................ (36.5) (34.2)
------- -------
4.8% 1.0%
======= =======
The Company issued 3,400,000 shares of its common stock on July 20, 1994.
As a result of the common stock issuance, the Company has undergone an
ownership change. Therefore, the Company's ability to use its NOL for
federal income tax purposes is subject to significant restrictions.
Section 382 of the Internal Revenue Code significantly limits the amount of
NOL and investment tax credit carryforwards that are available to offset
future taxable income and related tax liability when a change in ownership
occurs after December 31, 1986.
At June 30, 1996, the Company had NOL's of approximately $26.2 million
which will expire in future years beginning in 1997. Due to provisions of
Section 382, the Company is limited to approximately $4.6 million
utilization of NOL per year.
39
BELLWETHER EXPLORATION COMPANY
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
9. SEGMENT INFORMATION
-------------------
The Company's operations are concentrated in two segments. The results of
operations of these business segments are as follows (in thousands):
Year Ended June 30,
---------------------------------
1996 1995 1994
----------- --------- ----------
Revenues:
Oil........................... $ 9,856 $ 4,864 $ 2,620
Gas........................... 5,810 3,643 1,086
Gas plants.................... 5,345 5,678 4,489
Gas gathering................. 3,374 5,027 2,441
Other revenues................ 116 97 63
------- ------- -------
Total revenues........... $24,501 $19,309 $10,699
======= ======= =======
Operating profit before income
tax:
Oil and gas................... $ 3,416 $ 1,758 $ 859
Gas plants and gas gathering.. 2,319 3,251 1,847
------- ------- -------
5,735 5,009 2,706
Unallocated corporate expenses.. 2,943 2,823 1,172
Other expenses.................. 153 --- ---
Interest expense................ 1,657 1,245 721
------- ------- -------
Income before taxes............. $ 982 $ 941 $ 813
======= ======= =======
Identifiable assets:
Oil and gas................... $47,727 $53,218 $13,763
Gas plants and gas gathering.. 10,408 18,289 19,285
------- ------- -------
58,135 71,507 33.048
Corporate assets................ 9,090 3,143 2,822
------- ------- -------
Total assets.................... $67,225 $74,650 $35,870
======= ======= =======
Capital expenditures:
Oil and gas................... $ 6,934 $41,676 $ 3,199
Gas plants and gas gathering.. 65 225 18,835
------- ------- -------
$ 6,999 $41,901 $22,034
======= ======= =======
Depreciation, depletion and
amortization:
Oil and gas................... $ 6,933 $ 3,893 $ 1,553
Gas plants and gas gathering.. 1,215 1,376 936
------- ------- -------
$ 8,148 $ 5,269 $ 2,489
======= ======= =======
40
BELLWETHER EXPLORATION COMPANY
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
In 1996, 1995 and 1994, the Company had 3 customers which accounted for 33%
of its revenues, two customers which accounted for 42% of its revenues and
three customers which accounted for 58% of its revenues, respectively.
10. CONTINGENCIES
-------------
The Company has been named as a defendant in certain lawsuits incidental to
its business. Management does not believe that the outcome of such
litigation will have a material adverse impact on the Company.
11. SUPPLEMENTAL INFORMATION - (UNAUDITED)
--------------------------------------
OIL AND GAS PRODUCING ACTIVITIES:
---------------------------------
Included herein is information with respect to oil and gas acquisition,
exploration, development and production activities, which is based on
estimates of year-end oil and gas reserve quantities and estimates of
future development costs and production schedules. Reserve quantities and
future production are based primarily upon reserve reports prepared by the
independent petroleum engineering firms of Williamson Petroleum
Consultants, Inc. and R.T. Garcia & Co. Inc. These estimates are
inherently imprecise and subject to substantial revision.
Estimates of future net cash flows from proved reserves of gas, oil,
condensate and natural gas liquids were made in accordance with Statement
of Financial Accounting Standards No. 69, "Disclosures about Oil and Gas
Producing Activities." The estimates are based on prices at year-end.
Estimated future cash inflows are reduced by estimated future development
and production costs based on year-end cost levels, assuming continuation
of existing economic conditions, and by estimated future income tax
expense. Tax expense is calculated by applying the existing statutory tax
rates, including any known future changes, to the pre-tax net cash flows,
less depreciation of the tax basis of the properties and depletion
allowances applicable to the gas, oil, condensate and NGL production. The
results of these disclosures should not be construed to represent the fair
market value of the Company's oil and gas properties. A market value
determination would include many additional factors including: (i)
anticipated future increases or decreases in oil and gas prices and
production and development costs; (ii) an allowance for return on
investment; (iii) the value of additional reserves, not considered proved
at the present, which may be recovered as a result of further exploration
and development activities; and (iv) other business risks.
41
BELLWETHER EXPLORATION COMPANY
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
Costs incurred (in thousands)
------------------------------
The following table sets forth the costs incurred in property acquisition
and development activities:
Year Ended June 30,
-------------------------------
1996 1995 1994
--------- --------- ---------
Property acquisition:
Proved properties.............. $ 128 $25,072 $ 1,896
Unproved properites............ 424 13,233 295
Exploration...................... 824 530 364
Development...................... 5,558 2,841 644
------- ------- -------
$ 6,934 $41,676 $ 3,199
======= ======= =======
Capitalized costs (in thousands)
---------------------------------
The following table sets forth the capitalized costs relating to oil and
gas activities and the associated accumulated depreciation, depletion and
amortization:
Year Ended June 30,
---------------------------------
1996 1995 1994
--------- --------- ---------
Proved properties.................. $ 62,590 $ 56,300 $ 28,917
Unproved properties................ 13,453 15,125 832
-------- -------- --------
Total capitalized costs............ 76,043 71,425 29,749
Accumulated depreciation, depletion
and amortization................. (28,316) (20,983) (17,043)
-------- -------- --------
Net capitalized costs.............. $ 47,727 $ 50,442 $ 12,706
======== ======== ========
42
BELLWETHER EXPLORATION COMPANY
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
Results of operations for producing activities (in thousands)
- ----------------------------------------------
Year Ended June 30,
--------------------------------
1996 1995 1994
--------- --------- ---------
Revenues from oil and gas producing
activities........................... $ 15,666 $ 8,507 $ 3,706
Production costs...................... 5,317 2,856 1,294
Depreciation, depletion and
amortization......................... 6,933 3,893 1,553
--------- --------- ---------
Results of operations from producing
activities (excluding corporate
overhead and interest costS).......... $ 3,416 $ 1,758 $ 859
========= ========= =========
Per unit sales prices and costs:
- --------------------------------
Year Ended June 30,
--------------------------------
1996 1995 1994
--------- --------- ---------
Average sales price: /1/
Oil (per barrel)..................... $ 17.81 $ 16.89 $ 15.27
Gas (per MCF)........................ $ 2.02 $ 1.66 $ 2.17
Average production cost per
equivalent barrel.................... $ 4.49 $ 4.05 $ 4.75
Average unit depletion rate per
equivalent barrel.................... $ 5.86 $ 5.52 $ 5.71
/1/ Average sales price is exclusive of the effect of natural gas and crude oil
price swaps.
43
BELLWETHER EXPLORATION COMPANY
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
Reserves
- --------
The Company's estimated total proved and proved developed reserves of oil and
gas are as follows:
Year Ended June 30,
------------------------------------------------------------------------
Description 1996 1995 1994
----------- ------------------------ ---------------------- ---------------------
Oil Gas Oil Gas Oil Gas
(MBBL) (MMCF) (MBBL) (MMCF) (MBBL) (MMCF)
--------- ---------- ---------- ---------- --------- ----------
Proved reserves at beginning of year............... 2,597 30,159 393 10,671 438 7,202
Revisions of previous estimates.................... (534) 2,853 (61) (988) (44) 58
Extensions and discoveries......................... 89 7,128 724 1,179 -- --
Production......................................... (334) (5,099) (216) (2,932) (71) (1,206)
Sales of reserves in-place......................... (14) (2,023) (1) (3) -- --
Purchases of reserves in-place..................... 4 176 -- 163 67 287
Reserves added in Mergers.......................... -- -- 1,758 22,069 3 4,330
------ ------ ------ ------ ------ ------
Proved reserves at end of year..................... 1,808 33,194 2,597 30,159 393 10,671
====== ====== ====== ====== ====== ======
Proved developed reserves--
Beginning of year................................. 1,891 23,795 361 9,154 410 7,151
====== ====== ====== ====== ====== ======
End of year....................................... 1,494 22,696 1,891 23,795 361 9,154
====== ====== ====== ====== ====== ======
44
BELLWETHER EXPLORATION COMPANY
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
Discounted future net cash flows (in thousands)
- --------------------------------
The standardized measure of discounted future net cash flows and changes therein
related to proved oil and gas reserves are shown below:
Year Ended June 30,
--------------------------------
1996 1995 1994
---------- ---------- ---------
Future cash inflows.......................... $ 113,550 $ 96,738 $ 31,180
Future production costs...................... (33,117) (34,093) (11,462)
Future income taxes.......................... (11,095) -- --
Future development costs..................... (8,959) (7,738) (402)
--------- --------- ---------
Future net cash flows........................ 60,379 54,907 19,316
10% discount factor.......................... (15,191) (17,616) (7,272)
--------- --------- ---------
Standardized measure of discounted future
net cash flows.............................. $ 45,188 $ 37,291 $ 12,044
========= ========= =========
The following are the principal sources of change in the standardized measure
of discounted future net cash flows:
Year Ended June 30,
--------------------------------
1996 1995 1994
---------- ---------- ---------
Standardized measure - beginning of year..... $ 37,291 $ 12,044 $ 10,519
Sales, net of production costs............... (10,349) (5,651) (2,412)
Purchases of reserves in-place............... 246 162 566
Reserves received in Mergers................. -- 34,039 3,598
Net change in prices and production costs.... 11,458 (8,326) (1,500)
Net change in income taxes................... (2,958) -- --
Extensions, discoveries and improved
recovery, net of future production and
development costs........................... 7,709 5,085 --
Changes in estimated future development
costs....................................... 497 (3,148) (163)
Development costs incurred during the period. 883 629 644
Revisions of quantity estimates.............. (438) (4) (194)
Accretion of discount........................ 3,729 1,204 1,052
Sales of reserves in-place................... (1,614) (5) --
Changes in production rates and other........ (1,266) 1,262 (66)
--------- --------- ---------
Standardized measure-end of year............ $ 45,188 $ 37,291 $ 12,044
========= ========= =========
45
BELLWETHER EXPLORATION COMPANY
------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None
Part III
---------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
Incorporated by reference to the Proxy Statement for the 1996 Annual Meeting of
Shareholders to be held on November 15, 1996, pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
Incorporated by reference to the Proxy Statement for the 1996 Annual Meeting of
Shareholders to be held on November 15, 1996, pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Incorporated by reference to the Proxy Statement for the 1996 Annual Meeting of
Shareholders to be held on November 15, 1996, pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Incorporated by reference to the Proxy Statement for the 1996 Annual Meeting of
Shareholders to be held on November 15, 1996, pursuant to Regulation 14A.
Part IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a) 1. and 2. Financial Statements. See index to Consolidated Financial
Statements and Supplemental Information in Item 8, which
information is incorporated herein by reference.
3. Exhibits
3.1 Certificate of Incorporation of Bellwether Exploration Company -
Incorporated by reference to Exhibit 3.1 to the Company's Registration
Statement No. 33-76570.
3.2 By-laws of Bellwether Exploration company - Incorporated by reference
to Exhibit 3.2 to the Company's Registration Statement No. 33-76570.
10.1 1988 Non-qualified Stock Option Plan - incorporated by reference to
Exhibit 10.37 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1988.
46
BELLWETHER EXPLORATION COMPANY
------------------------------
10.2 Stock Option Agreement dated March 25, 1988 between the Company and
J. Darby Sere' - incorporated by reference to Exhibit 10.38 to the
Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1988.
10.3 Amended and restated credit agreement dated July 30, 1993 to the
Credit Agreement between the Company and First Interstate Bank of
Texas, N.A. - incorporated by reference to Exhibit 10.93.7 to the
Company's Report on Form 8-K dated July 29, 1993.
10.4 Management agreement with Torch Energy Advisors Incorporated
commencing January 1, 1994 - incorporated by reference to Exhibit 94-
10-3 to the Company's Report on Form 10-Q for the quarter ended March
31, 1994.
10.5 Loan agreement with bank dated March 14, 1994, amending previous loan
agreements - incorporated by reference to Exhibit 94.10.2 to the
Company's Report on Form 10-Q for the quarter ended March 31, 1994.
10.6 Amended Joint Venture Agreement dated July 29, 1993 between the
Company and NGL Associates - Incorporated by reference to Exhibit
10.93.5 to the Company's Report on Form 10-K dated July 29, 1993.
10.7 Amended Joint Venture dated July 15, 1993 between Torch Energy
Marketing, Inc. and NGL Associates - Incorporated by reference to
Exhibit 10.93.8 to the Company's report on Form 8-K dated December
31, 1993.
10.8 Agreement and Plan of Merger dated December 15, 1993 among the
Company, BEC Acquisitions, Inc. and Associated Gas Resources, Inc. -
Incorporated by reference to Exhibit 10.93.7 to the Company's Report
on Form 8-K dated December 31, 1993.
10.9 Purchase and Sale Agreement dated December 27, 1993 between Torch
Energy Marketing, Inc. and Associated Gas Resources, Inc. -
Incorporated by reference to Exhibit 10.93.9 to the Company's Report
on Form 8-K dated December 31, 1993.
10.10 Registration Rights Agreement dated December 31, 1993 among the
Company and the Stockholders of Associated Gas Resources, Inc. -
Incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement No. 33-76570.
10.11 1994 Stock Incentive Plan - Incorporated by reference to Exhibit 10.9
to the Company's Registration Statement No. 33-76570.
47
BELLWETHER EXPLORATION COMPANY
------------------------------
10.12 Torch Energy Warrant to Purchase Common Stock of the Company, dated
December 31, 1993 - Incorporated by reference to Exhibit 10.10 to the
Company's Registration Statement No. 33-76570.
10.13 Amendment dated March 14, 1994 to the Amended Joint Venture Agreement
dated as of July 29, 1993 between the Company and NGL Associates -
Incorporated by reference to Exhibit 10.11 to the Company's
Registration Statement No. 33-76570.
10.14 Amendment dated March 14, 1994 to the Amended Joint Venture Agreement
dated as of July 15, 1993 between Torch Energy Marketing, Inc. and
NGL Associates - Incorporated by reference to Exhibit 10.12 to the
Company's Registration Statement No. 33-76570.
10.15 Asset Purchase and Merger Agreement with Odyssey Partners, Ltd. dated
July 19, 1994 - Incorporated by reference to Exhibit 2.1 to the
Company's Registration Statement No. 33-76570.
10.16 Registration Rights Agreement among the Company, Allstate Insurance
Company and the former owners of Odyssey Partners, Ltd. -Incorporated
by reference to Exhibit 10.4 to the Company's Registration Statement
No. 33-76570.
10.17 Amended and Restated Credit Agreement dated February 28, 1995,
between the Company and First Interstate Bank of Texas N.A.
incorporated by reference to Exhibit N to Amendment No. 6 to its
Schedule 13D reporting its acquisition of the common stock of Hampton
Resources Corporation.
10.18 Assignment of gas purchase contract from Texas Gas Transmission
Corporation to Bellwether - incorporated by reference to Exhibit 96-
10-4 to the Company's Report on Form 10-Q for the quarter ended March
31, 1996.
16.1 Letter from predecessor auditors regarding change in certifying
accountant - Incorporated by reference to Exhibit 16.1 to the
Company's Form 8K/A-1 dated June 30, 1994.
21.1 Subsidiaries of Bellwether Exploration Company - Included herewith.
23 Consents of experts:
23.1 Consent of Williamson Petroleum Consultants, Inc.
23.2 Consent of R.T. Garcia & Co. Inc.
48
BELLWETHER EXPLORATION COMPANY
------------------------------
23.3 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
49
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
BELLWETHER EXPLORATION COMPANY
/s/ J. Darby Sere'
------------------
J. Darby Sere'
President and Chief Executive
Officer
Dated September 26, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ J. Darby Sere' Director, President September 26, 1996
- ---------------------- and Chief Executive ------------------
J. Darby Sere' Officer
/s/ J.P. Bryan Chairman of Board of September 26, 1996
- ---------------------- Directors ------------------
J.P. Bryan
/s/ Charles C. Green Vice President September 26, 1996
- ---------------------- ------------------
Charles C. Green
/s/ Michael B. Smith Vice President, Chief September 26, 1996
- ---------------------- Financial Officer and ------------------
Michael B. Smith Principal Accounting Officer
/s/ Vincent H. Buckley Director September 26, 1996
- ---------------------- ------------------
Vincent H. Buckley
/s/ A. K. McLanahan Director September 26, 1996
- ---------------------- ------------------
A. K. McLanahan
/s/ Dr. Jack Birks Director September 26, 1996
- ---------------------- ------------------
Dr. Jack Birks
/s/ Michael D. Watford Director September 26, 1996
- ---------------------- ------------------
Michael D. Watford
/s/ C. Barton Groves Director September 26, 1996
- ---------------------- ------------------
C. Barton Groves
/s/ Habib Kairouz Director September 26, 1996
- ---------------------- ------------------
Habib Kairouz
50