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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission file number: 1-10671
THE MERIDIAN RESOURCE CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 76-0319553
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1401 ENCLAVE PARKWAY, SUITE 300, HOUSTON, TEXAS 77077
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 281-597-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No[ ]
Number of shares of common stock outstanding at May 4, 2005: 86,592,856
Page 1 of 30
THE MERIDIAN RESOURCE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations (unaudited) for the
Three Months Ended March 31, 2005 and 2004 3
Consolidated Balance Sheets as of March 31, 2005 (unaudited)
and December 31, 2004 4
Consolidated Statements of Cash Flows (unaudited) for the
Three Months Ended March 31, 2005 and 2004 6
Consolidated Statements of Stockholders' Equity (unaudited) for the
Three Months Ended March 31, 2005 and 2004 7
Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the
Three Months Ended March 31, 2005 and 2004 8
Notes to Consolidated Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
Item 4. Controls and Procedures 27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 6. Exhibits 28
SIGNATURES 29
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands of dollars, except per share information)
(unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
-------- --------
REVENUES:
Oil and natural gas $ 50,132 $ 46,140
Price risk management activities (292) --
Interest and other 204 52
-------- --------
50,044 46,192
-------- --------
OPERATING COSTS AND EXPENSES:
Oil and natural gas operating 4,683 3,008
Severance and ad valorem taxes 2,632 2,317
Depletion and depreciation 25,322 23,701
General and administrative 5,013 3,204
Accretion expense 251 119
-------- --------
37,901 32,349
-------- --------
EARNINGS BEFORE OTHER EXPENSES & INCOME TAXES 12,143 13,843
-------- --------
OTHER EXPENSES:
Interest expense 985 2,169
Debt conversion expense -- 1,188
-------- --------
985 3,357
-------- --------
EARNINGS BEFORE INCOME TAXES 11,158 10,486
-------- --------
INCOME TAXES:
Current 590 1,000
Deferred 3,710 2,900
-------- --------
4,300 3,900
-------- --------
NET EARNINGS 6,858 6,586
Dividends on preferred stock 731 1,299
-------- --------
NET EARNINGS APPLICABLE TO COMMON STOCKHOLDERS $ 6,127 $ 5,287
======== ========
NET EARNINGS (LOSS) PER SHARE:
Basic $ 0.08 $ 0.08
Diluted $ 0.07 $ 0.08
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
Basic 79,271 63,010
Diluted 85,024 68,341
See notes to consolidated financial statements.
3
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(thousands of dollars)
MARCH 31, DECEMBER 31,
ASSETS 2005 2004
------ ----------- ------------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 17,367 $ 24,297
Restricted cash 431 891
Accounts receivable, less allowance for doubtful accounts of
$242 [2005 and 2004] 24,216 27,763
Prepaid expenses and other 1,740 2,263
Assets from price risk management activities 291 5,705
----------- ------------
Total current assets 44,045 60,919
----------- ------------
PROPERTY AND EQUIPMENT:
Oil and natural gas properties, full cost method (including
$45,480 [2005] and $34,731 [2004] not subject to depletion) 1,412,741 1,377,649
Land 479 478
Equipment 10,090 10,039
----------- ------------
1,423,310 1,388,166
Less accumulated depletion and depreciation 964,286 938,965
----------- ------------
Total property and equipment, net 459,024 449,201
----------- ------------
OTHER ASSETS 2,157 2,272
----------- ------------
TOTAL ASSETS $ 505,226 $ 512,392
=========== ============
See notes to consolidated financial statements.
4
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(thousands of dollars)
MARCH 31, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2005 2004
------------------------------------ ----------- ------------
(unaudited)
CURRENT LIABILITIES:
Accounts payable $ 9,629 $ 14,983
Revenues and royalties payable 6,861 8,117
Due to affiliates 3,041 3,866
Notes payable 134 870
Accrued liabilities 15,095 21,406
Liabilities from price risk management activities 13,693 8,003
Asset retirement obligations 1,834 1,331
Current income taxes payable 590 105
----------- ------------
Total current liabilities 50,877 58,681
----------- ------------
LONG-TERM DEBT 75,129 75,129
----------- ------------
OTHER:
Deferred income taxes 22,327 22,639
Liabilities from price risk management activities 747 --
Asset retirement obligations 8,316 8,293
Other 15 20
----------- ------------
31,405 30,952
----------- ------------
REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Preferred stock, $1.00 par value (1,500,000 shares authorized,
308,641 [2005] and 315,886 [2004] shares of Series C
Redeemable Convertible Preferred Stock issued at stated value) 30,864 31,589
----------- ------------
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value (200,000,000 shares authorized,
79,620,614 [2005] and 79,215,394 [2004] issued) 826 821
Additional paid-in capital 492,631 490,351
Accumulated deficit (167,117) (173,244)
Accumulated other comprehensive loss (9,047) (1,574)
Unamortized deferred compensation (342) (313)
----------- ------------
Total stockholders' equity 316,951 316,041
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 505,226 $ 512,392
=========== ============
See notes to consolidated financial statements.
5
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands of dollars)
(unaudited)
THREE MONTHS ENDED MARCH 31,
2005 2004
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 6,858 $ 6,586
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depletion and depreciation 25,322 23,701
Amortization of other assets 107 485
Non-cash compensation 427 411
Non-cash price risk management activities 292 --
Debt conversion expense -- 1,188
Accretion expense 251 119
Deferred income taxes 3,710 2,900
Changes in assets and liabilities:
Restricted cash 460 --
Accounts receivable 3,547 1,173
Prepaid expenses and other 523 89
Due to affiliates (825) 946
Accounts payable (5,354) (636)
Revenues and royalties payable (1,256) (1,023)
Accrued liabilities and other (3,928) 1,101
----------- ------------
Net cash provided by operating activities 30,134 37,040
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (34,763) (25,387)
Sale of property and equipment (109) 15
----------- ------------
Net cash used in investing activities (34,872) (25,372)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Reductions in long-term debt -- (5,320)
Reductions - Notes payable (736) (194)
Issuance of stock/exercise of stock options, net (83) 87
Preferred dividends (1,360) (3,057)
Additions to deferred loan costs (13) (9)
----------- ------------
Net cash used in financing activities (2,192) (8,493)
----------- ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (6,930) 3,175
Cash and cash equivalents at beginning of period 24,297 12,821
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,367 $ 15,996
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Non-cash financing activities:
Conversion of preferred stock $ (702) $ (6,357)
Issuance of shares for settlement of accrued liabilities $ (1,210) $ --
Conversion of convertible subordinated debt $ -- $ (20,000)
See notes to consolidated financial statements.
6
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(in thousands)
(unaudited)
Common Stock Accumulated
-------------- Additional Other Unamortized
Par Paid-In Accumulated Comprehensive Deferred
Shares Value Capital (Deficit) Loss Compensation Total
------ ----- ---------- ----------- ------------- ------------ --------
Balance, December 31, 2003 61,725 644 394,177 (202,492) (7,704) (290) 184,335
Issuance of rights to common
stock -- 1 462 -- -- (463) --
Company's 401(k) plan
contribution 14 -- 82 -- -- -- 82
Exercise of stock options 1 -- 5 -- -- -- 5
Compensation expense -- -- -- -- -- 411 411
Accum. other comprehensive
income -- -- -- -- (1,285) -- (1,285)
Issuance for conversion of
pref stock 1,477 14 6,343 -- -- -- 6,357
Issuance for conversion of sub
debt 4,173 42 20,908 -- -- -- 20,950
Preferred dividends -- -- -- (1,299) -- -- (1,299)
Net earnings -- -- -- 6,586 -- -- 6,586
------ ----- ---------- ----------- ------------- ------------ --------
Balance, March 31, 2004 67,390 $ 701 $ 421,977 $ (197,205) $ (8,989) $ (342) $216,142
====== ===== ========== =========== ============= ============ ========
Balance, December 31, 2004 79,215 $ 821 $ 490,351 $ (173,244) $ (1,574) $ (313) $316,041
Issuance of rights to common
stock -- 1 455 -- -- (456) --
Exercise of stock options 20 -- 67 -- -- -- 67
Compensation expense -- -- -- -- -- 427 427
Accum. other comprehensive
income -- -- -- -- (7,473) -- (7,473)
Issuance for conversion of
pref stock 163 2 700 -- -- -- 702
Expenditures assoc. w/stock
offering -- -- (150) -- -- -- (150)
Issuance to settle accrued
liabilities 223 2 1,208 -- -- -- 1,210
Preferred dividends -- -- -- (731) -- -- (731)
Net earnings -- -- -- 6,858 -- -- 6,858
------ ----- ---------- ----------- ------------- ------------ --------
Balance, March 31, 2005 79,621 $ 826 $ 492,631 $ (167,117) $ (9,047) $ (342) $316,951
====== ===== ========== =========== ============= ============ ========
See notes to consolidated financial statements.
7
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(thousands of dollars)
(unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
-------- --------
Net earnings applicable to common stockholders $ 6,127 $ 5,287
-------- --------
Other comprehensive income (loss), net of tax, for unrealized losses from
hedging activities:
Unrealized holding losses arising during period (8,685) (3,634)
Reclassification adjustments on settlement of contracts 1,212 2,349
-------- --------
(7,473) (1,285)
-------- --------
Total comprehensive income (loss) $ (1,346) $ 4,002
======== ========
See notes to consolidated financial statements.
8
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements reflect the accounts of The Meridian
Resource Corporation and its subsidiaries (the "Company") after elimination of
all significant intercompany transactions and balances. The financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2004, as filed with the Securities and Exchange Commission.
The financial statements included herein as of March 31, 2005, and for the three
month periods ended March 31, 2005 and 2004, are unaudited, and in the opinion
of management, the information furnished reflects all material adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
financial position and of the results for the interim periods presented. Certain
minor reclassifications of prior period statements have been made to conform to
current reporting practices. The results of operations for interim periods are
not necessarily indicative of results to be expected for a full year.
2. ACCRUED LIABILITIES
Below is the detail of our accrued liabilities on our balance sheets as of March
31, 2005 and December 31, 2004:
MARCH 31, DECEMBER 31,
2005 2004
--------- ------------
(000) (000)
Capital Expenditures $ 8,621 $ 12,662
Bonuses 1,848 3,355
Dividends 656 1,346
Other 3,972 4,043
--------- ------------
TOTAL $ 15,097 $ 21,406
========= ============
3. DEBT
CREDIT FACILITY. On December 23, 2004, the Company amended its existing credit
facility to provide for a four-year $200 million senior secured credit facility
(the "Credit Facility") with Fortis Capital Corp., as administrative agent, sole
lead arranger and bookrunner; Comerica Bank as syndication agent; and Union Bank
of California as documentation agent. Bank of Nova Scotia and Allied Irish Banks
p.l.c. completed the syndication group. The initial borrowing base under the
Credit Facility is $130 million and it has been reaffirmed by the syndication
group effective April 30, 2005. As of March 31, 2005, outstanding borrowings
under the Credit Facility totaled $75.1 million.
9
The Credit Facility is subject to semi-annual borrowing base redeterminations on
April 30 and October 31 of each year. In addition to the scheduled semi-annual
borrowing base redeterminations, the lenders or the Company, have the right to
redetermine the borrowing base at any time, provided that no party can request
more than one such redetermination between the regularly scheduled borrowing
base redeterminations.
Obligations under the Credit Facility are secured by pledges of outstanding
capital stock of the Company's subsidiaries and by a first priority lien on not
less than 75% (95% in the case of an event of default) of its present value of
proved oil and gas properties. In addition, the Company is required to deliver
to the lenders and maintain satisfactory title opinions covering not less than
70% of the present value of proved oil and gas properties. The Credit Facility
also contains other restrictive covenants, including, among other items,
maintenance of certain financial ratios, restrictions on cash dividends on
Common Stock and under certain circumstances Preferred Stock, limitations on the
redemption of Preferred Stock and an unqualified audit report on the Company's
consolidated financial statements, all of which the Company is in compliance.
Under the Credit Facility, the Company may secure either (i) (a) an alternative
base rate loan that bears interest at a rate per annum equal to the greater of
the administrative agent's prime rate; or (b) federal funds-based rate plus -1/2
of 1%, plus an additional 0.5% to 1.25% depending on the ratio of the aggregate
outstanding loans and letters of credit to the borrowing base or; (ii) a
Eurodollar base rate loan that bears interest, generally, at a rate per annum
equal to the London interbank offered rate ("LIBOR") plus 1.5% to 2.25%,
depending on the ratio of the aggregate outstanding loans and letters of credit
to the borrowing base. At March 31, 2005, the three-month LIBOR interest rate
was 3.12%. The Credit Facility also provides for commitment fees of 0.375%
calculated on the difference between the borrowing base and the aggregate
outstanding loans under the Credit Facility.
4. 8.5% REDEEMABLE CONVERTIBLE PREFERRED STOCK
A private placement of $66.85 million of 8.5% redeemable convertible preferred
stock was completed during May 2002. The preferred stock is convertible into
shares of the Company's Common Stock at a conversion price of $4.45 per share.
Dividends are payable semi-annually in cash or additional preferred stock. At
the option of the Company, one-third of the preferred shares can be forced to
convert to Common Stock if the closing price of the Company's Common Stock
exceeds 150% of the conversion price for 30 out of 40 consecutive trading days
on the New York Stock Exchange. The preferred stock is subject to redemption at
the option of the Company after March 2005, and mandatory redemption on March
31, 2009. The holders of the preferred stock have been granted registration
rights with respect to the shares of Common Stock issued upon conversion of the
preferred stock. During March 2005, $0.7 million of preferred stock was
converted into 0.2 million shares of Common Stock.
In April 2005, the Company completed the conversion of all of the remaining
outstanding shares of preferred stock to Common Stock, with $30.9 million of
stated value being converted into approximately 6.9 million shares of the
Company's Common Stock.
5. COMMITMENTS AND CONTINGENCIES
LITIGATION.
H. L. HAWKINS LITIGATION. In December 2004, the estate of H.L. Hawkins filed a
claim against Meridian for damages "estimated to exceed several million dollars"
for Meridian's alleged gross negligence and willful misconduct under certain
agreements concerning certain wells and property in the S.W. Holmwood and E.
10
Lake Charles Prospects in Calcasieu Parish, as a result of Meridian's satisfying
a prior adverse judgment in favor of Amoco Production Company. Meridian will
file an answer denying Hawkins' claims and assert a counterclaim for attorney's
fees, court costs and other expenses, and for declaratory relief that Meridian
is entitled to retain the amounts that it had been paid by Hawkins. The Company
has not provided any amount for this matter in its financial statements at March
31, 2005.
ENVIRONMENTAL LITIGATION. Various landowners have sued Meridian (along with
numerous other oil companies) in various similar lawsuits concerning the Weeks
Island, Gibson, Bayou Pigeon, West Lake Verret and White Castle Fields. The
lawsuits seek injunctive relief and other relief, including unspecified amounts
in both actual and punitive damages for alleged breaches of mineral leases and
alleged failure to restore the plaintiffs' lands from alleged contamination and
otherwise from the defendants' oil and gas operations. The company has not
provided any amount for these matters in the financial statement at March 31,
2005.
LITIGATION INVOLVING INSURABLE ISSUES. There are no other material legal
proceedings which exceed our insurance limits to which Meridian or any of its
subsidiaries is a party or to which any of its property is subject, other than
ordinary and routine litigation incidental to the business of producing and
exploring for crude oil and natural gas.
6. STOCKHOLDERS' EQUITY
COMMON STOCK. In August 2004, the Company completed a public offering of
13,800,000 shares of Common Stock at a price of $7.25 per share. The total
proceeds of the offering, net of issuance costs, received by the Company were
approximately $94.6 million. The Company repurchased all of the 7,082,030 shares
of its Common Stock that were beneficially owned by Shell Oil Company for $49.3
million and a portion of the remaining proceeds of that equity offering was used
to repay borrowings under the Company's senior secured credit agreement, which
resulted in an increase in funds available to the Company to accelerate planned
capital expenditures for drilling activities and related pipeline construction.
The repurchased 7,082,030 shares of Common Stock that were held in Treasury
Stock were retired as of September 30, 2004. As previously noted, during the
three months ended March 31, 2004, 1.5 million shares of Common Stock were
issued for the conversion of the 8.5% Redeemable Convertible Preferred Stock and
4.2 million shares of Common Stock was issued for the early retirement of the
9-1/2% Convertible Subordinated Notes.
11
7. EARNINGS PER SHARE (in thousands, except per share)
The following tables set forth the computation of basic and diluted net earnings
per share:
THREE MONTHS ENDED MARCH 31,
2005 2004
--------- -------
Numerator:
Net earnings (loss) applicable to common stockholders $ 6,127 $ 5,287
Plus income impact of assumed conversions:
Preferred stock dividends N/A N/A
Interest on convertible subordinated notes N/A N/A
--------- -------
Net earnings (loss) applicable to common stockholders
plus assumed conversions $ 6,127 $ 5,287
--------- -------
Denominator:
Denominator for basic earnings per
share - weighted-average shares outstanding 79,271 63,010
Effect of potentially dilutive common shares:
Warrants 4,536 4,037
Employee and director stock options 1,217 1,294
Convertible subordinated notes -- --
Redeemable preferred stock N/A N/A
--------- -------
Denominator for diluted earnings per share -
weighted-average shares outstanding
and assumed conversions 85,024 68,341
========= =======
Basic earnings per share $ 0.08 $ 0.08
========= =======
Diluted earnings per share $ 0.07 $ 0.08
========= =======
8. OIL AND NATURAL GAS HEDGING ACTIVITIES
The Company may address market risk by selecting instruments with value
fluctuations which correlate strongly with the underlying commodity being
hedged. The Company enters into swaps and other derivative contracts to hedge
the price risks associated with a portion of anticipated future oil and gas
production. While the use of hedging arrangements limits the downside risk of
adverse price movements, it may also limit future gains from favorable
movements. Under these agreements, payments are received or made based on the
differential between a fixed and a variable product price. These agreements are
settled in cash at or prior to expiration or are exchanged for physical delivery
contracts. The Company does not obtain collateral to support the agreements, but
monitors the financial viability of counter-parties and believes its credit risk
is minimal on these transactions. In the event of nonperformance, the Company
would be exposed to price risk. The Company has some risk of accounting loss
since the price received for the product at the actual physical delivery point
may differ from the prevailing price at the delivery point required for
settlement of the hedging transaction.
The Company's results of operations and operating cash flows are impacted by
changes in market prices for oil and natural gas. To mitigate a portion of the
exposure to adverse market changes, the Company has entered into various swap
agreements. These swaps allow the Company to predict with greater certainty the
effective oil and natural gas prices to be received for hedged production.
Although derivatives often fail to achieve 100% effectiveness for accounting
purposes, these derivative instruments continue to be highly effective in
12
achieving the risk management objectives for which they were intended. These
swaps have been designated as cash flow hedges as provided by FAS 133 and any
changes in fair value are recorded in other comprehensive income until earnings
are affected by the variability in cash flows of the designated hedged item. Any
changes in fair value resulting from the ineffectiveness of the hedge are
reported in the consolidated statement of operations as a component of revenues.
The Company recognized a loss related to hedge ineffectiveness of $0.3 million
during the three months ended March 31, 2005, and none during the three months
ended March 31, 2004.
The estimated March 31, 2005 fair value of the Company's oil and natural gas
derivatives was an unrealized loss of $13.9 million ($9.0 million net of tax)
which is recorded in Accumulated Other Comprehensive Loss on the Company's
consolidated balance sheet. Based upon March 31, 2005 oil and natural gas
commodity prices, approximately $13.2 million of the loss deferred in other
comprehensive income could potentially lower gross revenues over the next twelve
months. The swap agreements expire at various dates through July 31, 2006.
Net settlements under these swap agreements reduced oil and natural gas revenues
by $1,864,000 and $3,614,000 for the three months ended March 31, 2005 and 2004,
respectively, as a result of hedging transactions.
The Notional Amount is equal to the total net volumetric hedge position of the
Company during the periods presented. The positions effectively hedge
approximately 41% of our proved developed natural gas production and 37% of our
proved developed oil production during the respective terms of the swap
agreements. The fair values of the hedges are based on the difference between
the strike price and the New York Mercantile Exchange future prices for the
applicable trading months.
The fair value of our hedging agreements is recorded on our consolidated balance
sheet as separately identified assets or liabilities, except for $64 thousand
included in Other Assets. The estimated fair value of our hedging agreements as
of March 31, 2005, is provided below:
Fair Value
Swap / Floor Ceiling March 31,
Notional Price Price 2005
Type Amount ($ per unit) ($ per unit) (in thousands)
------ --------- ------------ ----------------- --------------
NATURAL GAS (mmbtu)
Apr 2005 - Jun 2005 Swap 520,000 $ 3.74 N/A $ (2,022)
Apr 2005 - Oct 2005 Swap 2,610,000 $ 6.34 N/A (3,644)
Apr 2005 - Oct 2005 Collar 2,600,000 $ 6.50 $ 7.90 (900)
----------
Total Natural Gas (6,566)
----------
CRUDE OIL (bbls)
Apr 2005 - Jul 2005 Swap 152,000 $ 23.00 N/A (5,024)
Aug 2005 - Jul 2006 Collar 209,000 $ 37.50 $ 47.50 (2,103)
Aug 2005 - Jul 2006 Collar 48,000 $ 40.00 $ 50.00 (392)
----------
Total Crude Oil (7,519)
----------
$ (14,085)
==========
13
9. STOCK-BASED COMPENSATION
SFAS 123, "Accounting for Stock-Based Compensation," as amended by SFAS 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure,"
established accounting and disclosure requirements using a fair value-based
method of accounting for stock-based employee compensation plans. As provided
for under SFAS 123, there has been no amount of compensation expense recognized
for the Company's stock option plans. The Company accounts for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion 25, "Accounting for Stock Issued to Employees."
Compensation expense is recorded for restricted stock awards over the requisite
vesting periods based upon the market value on the date of the grant. No
stock-based compensation expense was recorded in the three month periods ended
March 31, 2005 and 2004.
The following is a reconciliation of reported earnings and earnings per share as
if the Company used the fair value method of accounting for stock-based
compensation. Fair value is calculated using the Black-Scholes option-pricing
model.
(In thousands, except per share data)
Three Months Ended March 31,
-------------------------------------
2005 2004
------- --------
Net earnings applicable to common stockholders as reported $ 6,127 $ 5,287
Stock-based compensation (expense) benefit determined under
fair value method for all awards, net of tax (58) (4)
------- --------
Net earnings applicable to common stockholders pro forma $ 6,069 $ 5,283
======= ========
Basic earnings per share:
As reported $ 0.08 $ 0.08
Pro forma $ 0.08 $ 0.08
Diluted earnings per share:
As reported $ 0.07 $ 0.08
Pro forma $ 0.07 $ 0.08
In December 2004, the FASB issued SFAS No. 123R which is a replacement statement
to SFAS No. 123 entitled "Share-Based Payment." This statement also amends SFAS
Statement 95. This statement addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments or that may be settled by
the issuance of such equity instruments. The statement would eliminate the
ability to account for share-based compensation transactions using APB Opinion
No. 25, "Accounting for Stock Issued to Employees," and generally would require
instead that such transactions be accounted for using a fair-value-based method.
This statement will be effective for the Company for interim periods beginning
after December 15, 2005. The impact on the results of operations would be
similar to the pro forma disclosures made above.
10. ASSET RETIREMENT OBLIGATIONS
On January 1, 2003, the Company adopted SFAS 143, "Accounting for Asset
Retirement Obligations." This statement requires entities to record the fair
value of a liability for legal obligations associated with the
14
retirement obligations of tangible long-lived assets in the period in which it
is incurred. The fair value of asset retirement obligation liabilities has been
calculated using an expected present value technique. Fair value, to the extent
possible, should include a market risk premium for unforeseeable circumstances.
No market risk premium was included in the Company's asset retirement
obligations fair value estimate since a reasonable estimate could not be made.
When the liability is initially recorded, the entity increases the carrying
amount of the related long-lived asset. Over time, accretion of the liability is
recognized each period, and the capitalized cost is amortized over the useful
life of the related asset. Upon settlement of the liability, an entity either
settles the obligation for its recorded amount or incurs a gain or loss upon
settlement. This standard requires the Company to record a liability for the
fair value of our dismantlement and abandonment costs, excluding salvage values.
The following table describes the change in the Company's asset retirement
obligations for the three months ended March 31, 2005, and for the year ended
December 31, 2004 (thousands of dollars):
Asset retirement obligation at December 31, 2003 $ 4,102
Additional retirement obligations recorded in 2004 1,051
Settlements during 2004 (972)
Revisions to estimates during 2004 4,842
Accretion expense for 2004 601
---------
Asset retirement obligation at December 31, 2004 9,624
Revisions to estimates during 2005 275
Accretion expense for 2005 251
---------
Asset retirement obligation at March 31, 2005 $ 10,150
=========
11. NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123R which is a replacement statement
to SFAS No. 123 entitled "Share-Based Payment." This statement also amends SFAS
Statement 95. This statement addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments or that may be settled by
the issuance of such equity instruments. The statement would eliminate the
ability to account for share-based compensation transactions using APB Opinion
No. 25, "Accounting for Stock Issued to Employees," and generally would require
instead that such transactions be accounted for using a fair-value-based method.
This statement will be effective for the Company for interim periods beginning
after December 15, 2005. The impact on the results of operations would be
similar to the pro forma disclosures presented in Note 9.
12. SUBSEQUENT EVENT
In April 2005, the Company completed the conversion of all of the remaining
outstanding shares of the 8.5% Redeemable Convertible Preferred Stock to Common
Stock, with $30.9 million of stated value being converted into approximately 6.9
million shares of the Company's Common Stock.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of Meridian's financial operations for the three
months ended March 31, 2005 and 2004. The Company's consolidated financial
statements included in this report, as well as our Annual Report on Form 10-K
for the year ended December 31, 2004 (and the notes attached thereto), should be
read in conjunction with this discussion.
GENERAL.
During 2005, the Company continued to make strides in its business plan of solid
financial footing coupled with an inventory of lower risk, lower cost, and
multi-well plays, incorporating a blended exposure to higher potential prospect
opportunities. During the first quarter of 2005, the Company reported continued
improvement in several financial metrics including an increase in the price
received for its oil and natural gas sales, resulting in a 9% increase in oil
and natural gas revenues, from $46.1 million for the quarter ended March 31,
2004, to $50.1 million for the most recent quarter ended March 31, 2005. Capital
expenditures for the first quarter of 2005 totaled approximately $34.8 million
and were focused primarily in the Company's Biloxi Marshlands project area, as
well as the Ramos Complex area. During 2005, the Company utilized many of the
seismic processing and interpretative techniques employed in the Biloxi
Marshlands project area to further expand its multi-well play concept, which
resulted in new project areas like the Ramos Complex. The Company's 2005 capital
expenditures program is currently set at $139 million and is expected to be
funded entirely from cash flow. Below is a brief discussion of the Company's
capital expenditure activities for the first quarter of 2005.
OPERATIONS OVERVIEW. During 2005, the Company's exploration activities have been
primarily focused in the Ramos Complex area and the Biloxi Marshlands ("BML")
project area. In the Ramos Complex, the Company recently announced production
test results on its CL&F No. 71 well at an initial daily flow rate of 4.3
million cubic feet of gas ("Mmcf") with no accompanying water production. The
Company reported in its 10-K report that the original well had encountered
approximately 80 feet of apparent pay in the well. The well was recently placed
on production following completion of the production facilities and pipeline
tie-ins. Meridian owns a 92% working interest in the well.
Following the drilling and completion of the CL&F No. 71 well, the rig utilized
to drill the CL&F No. 71 well was mobilized to another prospect within the
Company's Ramos Complex area to drill the Avoca #5-2 well. That well has been
drilled to its total depth and is currently being completed and prepared for
production testing. The Company owns a 92% working interest in the Avoca #5-2
well. Meridian is focusing a portion of its 2005 drilling program on projects
that have larger reserve potential in the Ramos Complex, which represents a new
core area for the Company utilizing its internal processing capabilities to
develop an additional low risk exploration play concept similar to those
discovered at the Thornwell and Biloxi Marshlands fields. Meridian has scheduled
additional drilling activities in this project area and is planning to utilize
between one and two rigs in this region as part of its exploration program
during the remainder of 2005 and 2006.
During 2005, the Company successfully recompleted its Thibodeaux #3 well in its
Ramos producing field and has placed the well on production at a rate of 2.5
Mmcfe per day. Although the current operations were successful in curtailing the
majority of the associated water production from the lower sections in the
producing sand, the rate will be managed and monitored to maximize the ultimate
recoveries from this well bore. The Company's Thibodeaux No.1 well has the same
zone up hole from its current producing zone, which provides an additional
take-point should the water not be able to be curtailed in this well, at which
time the Thibodeaux No. 3 well would be completed in the upper productive zone.
The drilling rig utilized for the recompletion activities on the Thibodeaux #3
well was mobilized to drill the Company's CL&F No. 72 well in the Ramos Complex
area. The well was recently spud and will be drilled to a total depth of 13,500
feet and the Company owns a 92% working interest.
During January 2005, the Company also drilled its Twin Island - LA Cutler #1
well to test the M19 sand interval. The well was drilled to a total depth of
approximately 11,700 feet and failed to encounter commercial hydrocarbons and
was subsequently abandoned. The Company had a 92% working interest in the well.
In addition, the Company completed drilling operations on its Ferdinand
Boudreaux well on the Zwan prospect to its total depth of approximately 13,700
feet to test the Camerina sand interval. The well was subsequently abandoned.
The Company had a 59.5% working interest in the well.
16
In the Company's Biloxi Marshlands project area, the Company has drilled 32
wells since inception of the project which have tested various potentially
productive horizons, including the Deltaic, Tex W, Big Hum, Cris "I", Cib Op,
and Rob L sand sections. The Company has tested or placed on production 20 wells
representing an overall 63% success rate. Most recently, the Company expanded
the BML field to the extreme southeast quadrant of the play known as the
Hornet's Nest area. Of five wells drilled to date in the Hornet's Nest area, two
were discoveries, two were dry holes, with one temporarily abandoned for further
evaluation of apparent pay indicated by electric logs in the Tex W sand section.
The discoveries were placed on production during January 2005 at daily flow
rates of approximately 3.7 Mmcfe and 4.3 Mmcfe, respectively.
As previously reported, during March 2005 the Company completed its southwestern
extension of its gathering system and production facility to tie-in its South
Apollo, LA Prejean No. 1 well. The Prejean well was placed on production at
initial flow rates of 5.3 Mmcf with no corresponding water production. Meridian
owns a 92% working interest in this well.
Other activity in the north central region of the BML play included the drilling
of the South Ceres - Lake Eugenie Land & Development No. 31-1 well which
encountered sands but not sufficient hydrocarbons to justify a completion. This
well is under evaluation for a possible additional well based on the Company's
newly merged and processed 3-D seismic received subsequent to the test well.
The Company continues to extend the Biloxi Marshlands play to different areas in
an effort to test the five identified sand sections in the area. The most recent
well, the String of Pearls - SL 18315 No. 1, tested the Basal Deltaic sand
section in the northeast quadrant of the play. Electric logs indicated 70 feet
of natural gas pay in the well. The well was tested through five feet of
perforations between 5,883 feet and 5,888 feet at a gross daily flow rate of
approximately 6.2 Mmcf. Production from the well will require construction of a
pipeline and facility tie-ins, which the Company expects to have completed
during the second quarter of 2005.
The rig utilized to drill the String of Pearls prospect is currently being
mobilized to the Company's Pan prospect, to drill the SL 18157 No. 1 well. The
well will be drilled to an estimated total depth of approximately 9,000 feet to
test the Cris "I" sand interval.
During February 2005, the Company initiated its 2005 3-D seismic data
acquisition program in the BML project area. The field work on the 2005 program
has been completed and includes 142 square miles of new proprietary data and
when combined with the Company's existing 3-D data in the BML project area, will
include over 750 square miles of 3-D data, of which approximately 480 square
miles are proprietary. The Company has recently begun to take delivery of the
new data and the data will be processed and merged to create one data set over
substantially all of the BML project area.
During the first quarter of 2005, the Company successfully bid on 14 leases in
the State of Louisiana lease sales on acreage in its Biloxi Marshlands project
area and has applied for over 53 permits in the area. As an active participant
in the leasing and drilling in this region, Meridian has received support of the
State of Louisiana with its permits and has been granted 8 permits to drill with
the expectations of continuing permitting that will allow it to continue to
utilize at least one to two drilling rigs in the BML area on an ongoing basis
during the balance of 2005.
The Company expects to maintain an active drilling program utilizing a minimum
of three to four drilling rigs focused primarily in the BML project area and
other similarly styled plays such as the Ramos Complex. The Company continues to
develop new exploration plays and prospects within its region of focus in south
Louisiana from its seismic and land asset base consisting of over 8,000 square
miles of 3-D seismic data and approximately 300,000 gross acres under leases and
options. The Company's current capital expenditure budget for 2005 totals
approximately $139 million of which a substantial portion will be devoted to
exploratory drilling projects. The Company expects to fund its 2005 capital
expenditures program entirely from cash flow and accordingly the Company has
hedged a significant portion of its 2005 future production at attractive prices
(see page 12 - "Oil and Natural Gas Hedging Activities").
INDUSTRY CONDITIONS. Revenues, profitability and future growth rates of Meridian
are substantially dependent upon prevailing prices for oil and natural gas. Oil
and natural gas prices have been extremely volatile in recent years and are
affected by many factors outside of our control. Our average oil price (after
adjustments for
17
hedging activities) for the three months ended March 31, 2005, was $33.99 per
barrel compared to $25.10 per barrel for the three months ended March 31, 2004,
and $31.11 per barrel for the three months ended December 31, 2004. Our average
natural gas price (after adjustments for hedging activities) for the three
months ended March 31, 2005, was $6.66 per Mcf compared to $5.70 per Mcf for the
three months ended March 31, 2004, and $6.87 per Mcf for the three months ended
December 31, 2004. Fluctuations in prevailing prices for oil and natural gas
have several important consequences to us, including affecting the level of cash
flow received from our producing properties, the timing of exploration of
certain prospects and our access to capital markets, which could impact our
revenues, profitability and ability to maintain or increase our exploration and
development program.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES. The Company's discussion and
analysis of its financial condition and results of operation are based upon
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted and adopted in the United States. The
preparation of these financial statements requires the Company to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses. See the Company's Annual Report on Form 10-K for the year ended
December 31, 2004, for further discussion.
18
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31, 2004
OPERATING REVENUES. First quarter 2005 oil and natural gas revenues, which
include oil and natural gas hedging activities (see Note 8 of Notes to
Consolidated Financial Statements), increased $4.0 million (9%) as compared to
first quarter 2004 revenues due to a 20% increase in average commodity prices on
a natural gas equivalent basis, partially offset by a 10% decrease in production
volumes primarily due to natural production declines. Our average daily
production decreased from 94 Mmcfe during the first quarter of 2004 to 86 Mmcfe
for the first quarter of 2005. Oil and natural gas production volume totaled
7,765 Mmcfe for the first quarter of 2005, compared to 8,596 Mmcfe for the
comparable period of 2004. The decrease in production between the quarters was
primarily a result of the Company's Thibodeaux #3 well on the Ramos prospect
being off of production for the entire three months ended March 31, 2005,
coupled with natural production declines. The Company has recently completed
operations on the Thibodeaux #3 well and has returned the well to production at
approximately 2.5 Mmcfe per day. The Company is monitoring the water production
from the well in an effort to determine the origin of the water production.
The following table summarizes the Company's operating revenues, production
volumes and average sales prices for the three months ended March 31, 2005 and
2004:
THREE MONTHS ENDED
MARCH 31, INCREASE
2005 2004 (DECREASE)
----------- ----------- ----------
Production Volumes:
Oil (Mbbl) 260 311 (16%)
Natural gas (MMcf) 6,203 6,729 (8%)
Mmcfe 7,765 8,596 (10%)
Average Sales Prices:
Oil (per Bbl) $ 33.99 $ 25.10 35%
Natural gas (per Mcf) $ 6.66 $ 5.70 17%
Mmcfe $ 6.46 $ 5.37 20%
Operating Revenues (000's):
Oil $ 8,846 $ 7,807 13%
Natural gas 41,286 38,333 8%
----------- -----------
Total Operating Revenues $ 50,132 $ 46,140 9%
=========== ===========
OPERATING EXPENSES. Oil and natural gas operating expenses on an aggregate basis
increased $1.7 million (56%) to $4.7 million during the first quarter of 2005,
compared to $3.0 million in 2004. On a unit basis, lease operating expenses
increased $0.25 per Mcfe to $0.60 per Mcfe for the first quarter of 2005 from
$0.35 per Mcfe for the first quarter of 2004. Oil and gas operating expenses
increased due to additional operating expenses associated with the increase in
wells and facilities in the Biloxi Marshlands project area, and to increased
workover related expenses, primarily at Weeks Island, Ramos and various offshore
fields.
SEVERANCE AND AD VALOREM TAXES. Severance and ad valorem taxes increased $0.3
million (14%) to $2.6 million for the first quarter of 2005, compared to $2.3
million during the same period in 2004 primarily because of an increase in oil
prices and a higher natural gas tax rate, partially offset by a decrease in
natural gas production. Meridian's oil and natural gas production is primarily
from Louisiana, and is therefore subject to
19
Louisiana severance tax. The severance tax rates for Louisiana are 12.5% of
gross oil revenues and $0.208 per Mcf for natural gas, an increase from $0.171
per Mcf for the first half of 2004. On an equivalent unit of production basis,
severance and ad valorem taxes increased to $0.34 per Mcfe from $0.27 per Mcfe
for the comparable three-month period.
DEPLETION AND DEPRECIATION. Depletion and depreciation expense increased $1.6
million (7%) during the first quarter of 2005 to $25.3 million, from $23.7
million for the same period of 2004. This was primarily the result of an
increase in the depletion rate as compared to the 2004 period, partially offset
by the decrease in oil and natural gas production. On a unit basis, depletion
and depreciation expense increased by $0.50 per Mcfe, to $3.26 per Mcfe for the
three months ended March 31, 2005, compared to $2.76 per Mcfe for the same
period in 2004.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense increased
$1.8 million to $5.0 million compared to $3.2 million for 2004. The increase was
primarily the result of increased professional services, accounting fees and
increased operating activities. On an equivalent unit of production basis,
general and administrative expenses increased $0.28 per Mcfe to $0.65 per Mcfe
for the first quarter of 2005 compared to $0.37 per Mcfe for the comparable 2004
period.
INTEREST EXPENSE. Interest expense decreased $1.2 million (55%), to $1.0 million
for the first quarter of 2005 in comparison to the first quarter of 2004. The
decrease is primarily a result of reduction in long-term debt.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL. During the first quarter of 2005, Meridian's capital
expenditures were internally financed with cash from operations. As of March 31,
2005, the Company had a cash balance of $17.4 million and a working capital
deficit of $6.8 million. This deficit was made up primarily of a $13.4 million
net current liability associated with price risk management activities which
will be offset by future revenues. Management's strategy is to grow the Company
prudently, taking advantage of the strong asset base built over the years and to
add reserves through the drill bit while maintaining a disciplined approach to
costs. Where appropriate, the Company will allocate excess cash above capital
expenditures to reduce leverage.
CASH FLOWS. Net cash provided by operating activities was $30.1 million for the
three months ended March 31, 2005, as compared to $37.0 million for the same
period in 2004. The decrease of $6.9 million was primarily due to a reduction in
payables in the first three months of 2005, over the first three months of 2004.
Net cash used in investing activities was $34.9 million during the three months
ended March 31, 2005, versus $25.4 million in the first three months of 2004.
The increase in capital expenditures of $9.4 million was primarily associated
with drilling and related activities in the Biloxi Marshlands project area.
Cash flows used in financing activities during the first three months of 2005
were $2.2 million, compared to cash used in financing activities of $8.5 million
during the first three months of 2004. This reduction in cash used in financing
activities was primarily due to reduced preferred stock dividends coupled with
the reduction in debt repayments. With the preferred stock conversions in April
2005, the Company will see an annual $2.6 million reduction of dividend
payments.
CREDIT FACILITY. On December 23, 2004, the Company amended its existing credit
facility to provide for a four-year $200 million senior secured credit facility
(the "Credit Facility") with Fortis Capital Corp., as administrative agent, sole
lead arranger and bookrunner; Comerica Bank as syndication agent; and Union Bank
of California as documentation agent. Bank of Nova Scotia and Allied Irish Banks
p.l.c. completed the syndication group. The initial borrowing base under the
Credit Facility is $130 million and it has been
20
reaffirmed by the syndication group effective April 30, 2005. As of March 31,
2005, outstanding borrowings under the Credit Facility totaled $75.1 million.
The Credit Facility is subject to semi-annual borrowing base redeterminations on
April 30 and October 31 of each year. In addition to the scheduled semi-annual
borrowing base redeterminations, the lenders or the Company, have the right to
redetermine the borrowing base at any time, provided that no party can request
more than one such redetermination between the regularly scheduled borrowing
base redeterminations.
Obligations under the Credit Facility are secured by pledges of outstanding
capital stock of the Company's subsidiaries and by a first priority lien on not
less than 75% (95% in the case of an event of default) of its present value of
proved oil and gas properties. In addition, the Company is required to deliver
to the lenders and maintain satisfactory title opinions covering not less than
70% of the present value of proved oil and gas properties. The Credit Facility
also contains other restrictive covenants, including, among other items,
maintenance of certain financial ratios, restrictions on cash dividends on
Common Stock and under certain circumstances Preferred Stock, limitations on the
redemption of Preferred Stock and an unqualified audit report on the Company's
consolidated financial statements, all of which the Company is in compliance.
Under the Credit Facility, the Company may secure either (i) (a) an alternative
base rate loan that bears interest at a rate per annum equal to the greater of
the administrative agent's prime rate; or (b) federal funds-based rate plus -1/2
of 1%, plus an additional 0.5% to 1.25% depending on the ratio of the aggregate
outstanding loans and letters of credit to the borrowing base or; (ii) a
Eurodollar base rate loan that bears interest, generally, at a rate per annum
equal to the London interbank offered rate ("LIBOR") plus 1.5% to 2.25%,
depending on the ratio of the aggregate outstanding loans and letters of credit
to the borrowing base. At March 31, 2005, the three-month LIBOR interest rate
was 3.12%. The Credit Facility also provides for commitment fees of 0.375%
calculated on the difference between the borrowing base and the aggregate
outstanding loans under the Credit Facility.
8.5% REDEEMABLE CONVERTIBLE PREFERRED STOCK. A private placement of $66.85
million of 8.5% redeemable convertible preferred stock was completed during May
2002. The preferred stock is convertible into shares of the Company's Common
Stock at a conversion price of $4.45 per share. Dividends are payable
semi-annually in cash or additional preferred stock. At the option of the
Company, one-third of the preferred shares can be forced to convert to Common
Stock if the closing price of the Company's Common Stock exceeds 150% of the
conversion price for 30 out of 40 consecutive trading days on the New York Stock
Exchange. The preferred stock is subject to redemption at the option of the
Company after March 2005, and mandatory redemption on March 31, 2009. The
holders of the preferred stock have been granted registration rights with
respect to the shares of Common Stock issued upon conversion of the preferred
stock. During March 2005, $0.7 million of preferred stock was converted into 0.2
million shares of Common Stock.
In April 2005, the Company completed the conversion of all of the remaining
outstanding shares of preferred stock to Common Stock, with $30.9 million of
stated value being converted into approximately 6.9 million shares of the
Company's Common Stock.
OIL AND NATURAL GAS HEDGING ACTIVITIES. The Company may address market risk by
selecting instruments whose value fluctuations correlate strongly with the
underlying commodity being hedged. The Company enters into swaps and other
derivative contracts to hedge the price risks associated with a portion of
anticipated future oil and gas production. These swaps allow the Company to
predict with greater certainty the effective oil and natural gas prices to be
received for our hedged production. While the use of hedging arrangements limits
the downside risk of adverse price movements, it may also limit future gains
from favorable movements. Under these agreements, payments are received or made
based on the differential between a fixed and a variable product price. These
agreements are settled in cash at or prior to expiration or exchanged for
physical
21
delivery contracts. The Company does not obtain collateral to support the
agreements, but monitors the financial viability of counter-parties and believes
its credit risk is minimal on these transactions. In the event of
nonperformance, the Company would be exposed to price risk. The Company has some
risk of accounting loss since the price received for the product at the actual
physical delivery point may differ from the prevailing price at the delivery
point required for settlement of the hedging transaction.
These swaps have been designated as cash flow hedges as provided by SFAS No. 133
and any changes in fair value of the cash flow hedge resulting from
ineffectiveness of the hedge is reported in the consolidated statement of
operations as revenues.
CAPITAL EXPENDITURES. Total capital expenditures for this period approximated
$34.8 million. Although the Company plans to continue additional drilling during
the remainder of 2005, such operations will depend primarily on achieving
anticipated cash flows, permitting of wells and the availability of suitable
drilling rigs. Meridian recently completed the final field work on its 3-D
seismic survey at its Biloxi Marshlands acreage and preliminary indications are
that a number of additional drilling locations are present in the area
encompassing the new survey which will form the basis for its future drilling
activities during 2005 and 2006.
Based on internal projections, using its internal risked analysis of production
based on an expected capital expenditures program for 2005 of $139 million, the
Company believes that it can further improve its balance sheet while, at the
same time, continuing its scheduled capital expenditure program, drilling 15 to
20 low-risk wells and acquiring and re-processing additional 3-D seismic data
over its Biloxi Marshlands project and other exploration areas targeted for
exploration growth.
DIVIDENDS. It is our policy to retain existing cash for reinvestment in our
business, and therefore, we do not anticipate that dividends will be paid with
respect to the Common Stock in the foreseeable future. During May 2002, the
Company completed the private placement of $67 million of 8.5% Redeemable
Convertible Preferred Stock and dividends are payable semi-annually. A
semi-annual cash dividend of $1.3 million was paid in January 2005.
In April 2005, the Company completed the conversion of all of the remaining
outstanding shares of the 8.5% Redeemable Convertible Preferred Stock to Common
Stock, with $30.9 million of stated value being converted into approximately 6.9
million shares of the Company's Common Stock. As a result of the conversions in
April 2005 the Company will realize an annual cash savings of approximately $2.6
million on the Preferred Stock dividends.
FORWARD-LOOKING INFORMATION
From time to time, we may make certain statements that contain "forward-looking"
information as defined in the Private Securities Litigation Reform Act of 1995
and that involve risk and uncertainty. These forward-looking statements may
include, but are not limited to exploration and seismic acquisition plans,
anticipated results from current and future exploration prospects, future
capital expenditure plans and plans to sell properties, anticipated results from
third party disputes and litigation, expectations regarding future financing and
compliance with our credit facility, the anticipated results of wells based on
logging data and production tests, future sales of production, earnings,
margins, production levels and costs, market trends in the oil and natural gas
industry and the exploration and development sector thereof, environmental and
other expenditures and various business trends. Forward-looking statements may
be made by management orally or in writing including, but not limited to, the
Management's Discussion and Analysis of Financial Condition and Results of
Operations section and other sections of our filings with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended.
22
Actual results and trends in the future may differ materially depending on a
variety of factors including, but not limited to the following:
CHANGES IN THE PRICE OF OIL AND NATURAL GAS. The prices we receive for our oil
and natural gas production and the level of such production are subject to wide
fluctuations and depend on numerous factors that we do not control, including
seasonality, worldwide economic conditions, the condition of the United States
economy (particularly the manufacturing sector), foreign imports, political
conditions in other oil-producing countries, the actions of the Organization of
Petroleum Exporting Countries and domestic government regulation, legislation
and policies. Material declines in the prices received for oil and natural gas
could make the actual results differ from those reflected in our forward-looking
statements.
OPERATING RISKS. The occurrence of a significant event against which we are not
fully insured could have a material adverse effect on our financial position and
results of operations. Our operations are subject to all of the risks normally
incident to the exploration for and the production of oil and natural gas,
including uncontrollable flows of oil, natural gas, brine or well fluids into
the environment (including groundwater and shoreline contamination), blowouts,
cratering, mechanical difficulties, fires, explosions, unusual or unexpected
formation pressures, pollution and environmental hazards, each of which could
result in damage to or destruction of oil and natural gas wells, production
facilities or other property, or injury to persons. In addition, we are subject
to other operating and production risks such as title problems, weather
conditions, compliance with government permitting requirements, shortages of or
delays in obtaining equipment, reductions in product prices, limitations in the
market for products, litigation and disputes in the ordinary course of business.
Although we maintain insurance coverage considered to be customary in the
industry, we are not fully insured against certain of these risks either because
such insurance is not available or because of high premium costs. We cannot
predict if or when any such risks could affect our operations. The occurrence of
a significant event for which we are not adequately insured could cause our
actual results to differ from those reflected in our forward-looking statements.
DRILLING RISKS. Our decision to purchase, explore, develop or otherwise exploit
a prospect or property will depend in part on the evaluation of data obtained
through geophysical and geological analysis, production data and engineering
studies, which are inherently imprecise. Therefore, we cannot assure you that
all of our drilling activities will be successful or that we will not drill
uneconomical wells. The occurrence of unexpected drilling results could cause
the actual results to differ from those reflected in our forward-looking
statements.
UNCERTAINTIES IN ESTIMATING RESERVES AND FUTURE NET CASH FLOWS. Reserve
engineering is a subjective process of estimating the recovery from underground
accumulations of oil and natural gas we cannot measure in an exact manner, and
the accuracy of any reserve estimate is a function of the quality of those
accumulations of data and of engineering and geological interpretation and
judgment. Reserve estimates are inherently imprecise and may be expected to
change as additional information becomes available. There are numerous
uncertainties inherent in estimating quantities and values of proved reserves
and in projecting future rates of production and timing of development
expenditures, including many factors beyond our control. Because all reserve
estimates are to some degree speculative, the quantities of oil and natural gas
that we ultimately recover, production and operating costs, the amount and
timing of future development expenditures and future oil and natural gas sales
prices may differ from those assumed in these estimates. Significant downward
revisions to our existing reserve estimates could cause the actual results to
differ from those reflected in our forward-looking statements.
23
BORROWING BASE FOR THE CREDIT FACILITY. The Credit Agreement with Fortis Capital
Corp. as administrative agent, is presently scheduled for borrowing base
redetermination dates on a semi-annual basis with the next such redetermination
scheduled for October 31, 2005. The borrowing base is redetermined on numerous
factors including current reserve estimates, reserves that have recently been
added, current commodity prices, current production rates and estimated future
net cash flows. These factors have associated risks with each of them.
Significant reductions or increases in the borrowing base will be determined by
these factors, which, to a significant extent, are not under the Company's
control.
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is currently exposed to market risk from hedging contracts changes
and changes in interest rates. A discussion of the market risk exposure in
financial instruments follows.
INTEREST RATES
We are subject to interest rate risk on our long-term fixed interest rate debt
and variable interest rate borrowings. Our long-term borrowings primarily
consist of borrowings under the Credit Facility. Since interest charged
borrowings under the Credit Facility floats with prevailing interest rates
(except for the applicable interest period for Eurodollar loans), the carrying
value of borrowings under the Credit Facility should approximate the fair market
value of such debt. Changes in interest rates, however, will change the cost of
borrowing. Assuming $75.1 million remains borrowed under the Credit Agreement,
we estimate our annual interest expense will change by $0.75 million for each
100 basis point change in the applicable interest rates utilized under the
Credit Agreement.
HEDGING CONTRACTS
Meridian may address market risk by selecting instruments whose value
fluctuations correlate strongly with the underlying commodity being hedged. From
time to time, we may enter into swaps and other derivative contracts to hedge
the price risks associated with a portion of anticipated future oil and natural
gas production. While the use of hedging arrangements limits the downside risk
of adverse price movements, it may also limit future gains from favorable
movements. Under these agreements, payments are received or made based on the
differential between a fixed and a variable product price. These agreements are
settled in cash at or prior to expiration or exchanged for physical delivery
contracts. Meridian does not obtain collateral to support the agreements, but
monitors the financial viability of counter-parties and believes its credit risk
is minimal on these transactions. In the event of nonperformance, the Company
would be exposed to price risk. Meridian has some risk of accounting loss since
the price received for the product at the actual physical delivery point may
differ from the prevailing price at the delivery point required for settlement
of the hedging transaction.
25
We have entered into certain swap agreements as summarized in the table below.
The Notional Amount is equal to the total net volumetric hedge position of the
Company during the periods presented. The positions effectively hedge
approximately 41% of our proved developed natural gas production and 37% of our
proved developed oil production during the respective terms of the swap
agreements. The fair values of the hedges are based on the difference between
the strike price and the New York Mercantile Exchange future prices for the
applicable trading months.
Swap / Floor Fair Value
Notional Price Ceiling Price March 31, 2005
Type Amount ($ per unit) ($ per unit) (in thousands)
------ --------- ------------- ----------------- --------------
NATURAL GAS (MMBTU)
Apr 2005 - Jun 2005 Swap 520,000 $ 3.74 N/A $ (2,022)
Apr 2005 - Oct 2005 Swap 2,610,000 $ 6.34 N/A (3,644)
Apr 2005 - Oct 2005 Collar 2,600,000 $ 6.50 $ 7.90 (900)
----------
Total Natural Gas (6,566)
----------
CRUDE OIL (BBLS)
Apr 2005 - Jul 2005 Swap 152,000 $ 23.00 N/A (5,024)
Aug 2005 - Jul 2006 Collar 209,000 $ 37.50 $ 47.50 (2,103)
Aug 2005 - Jul 2006 Collar 48,000 $ 40.00 $ 50.00 (392)
Total Crude Oil (7,519)
----------
$ (14,085)
==========
26
ITEM 4. CONTROLS AND PROCEDURES
We conducted an evaluation under the supervision and with the participation of
Meridian's management, including our Chief Executive Officer and Chief
Accounting Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934) as of the end of the first quarter of 2005.
Based upon that evaluation, our Chief Executive Officer and Chief Accounting
Officer concluded that the design and operation of our disclosure controls and
procedures are effective. There have been no significant changes in our internal
controls or in other factors during the first quarter of 2005 that could
significantly affect these controls.
27
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
H. L. HAWKINS LITIGATION. In December 2004, the estate of H.L. Hawkins filed a
claim against Meridian for damages "estimated to exceed several million dollars"
for Meridian's alleged gross negligence and willful misconduct under certain
agreements concerning certain wells and property in the S.W. Holmwood and E.
Lake Charles Prospects in Calcasieu Parish, as a result of Meridian's satisfying
a prior adverse judgment in favor of Amoco Production Company. Meridian will
file an answer denying Hawkins' claims and assert a counterclaim for attorney's
fees, court costs and other expenses, and for declaratory relief that Meridian
is entitled to retain the amounts that it had been paid by Hawkins. The Company
has not provided any amount for this matter in its financial statements at March
31, 2005.
ENVIRONMENTAL LITIGATION. Various landowners have sued Meridian (along with
numerous other oil companies) in various similar lawsuits concerning the Weeks
Island, Gibson, Bayou Pigeon, West Lake Verret and White Castle Fields. The
lawsuits seek injunctive relief and other relief, including unspecified amounts
in both actual and punitive damages for alleged breaches of mineral leases and
alleged failure to restore the plaintiffs' lands from alleged contamination and
otherwise from the defendants' oil and gas operations. The Company has not
provided any amount for these matters in its financial statements at March 31,
2005.
LITIGATION INVOLVING INSURABLE ISSUES. There are no other material legal
proceedings which exceed our insurance limits to which Meridian or any of its
subsidiaries is a party or to which any of its property is subject, other than
ordinary and routine litigation incidental to the business of producing and
exploring for crude oil and natural gas.
ITEM 6. EXHIBITS.
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a) under the Securities Exchange
Act of 1934, as amended.
31.2 Certification of President pursuant to Rule 13a-14(a) or
Rule 15d-14(a) under the Securities Exchange Act of 1934,
as amended.
31.3 Certification of Chief Accounting Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a) under the Securities Exchange
Act of 1934, as amended.
32.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(b) or Rule 15d-14(b) under the Securities Exchange
Act of 1934, as amended, and 18 U.S.C. Section 1350.
32.2 Certification of President pursuant to Rule 13a-14(b) or
Rule 15d-14(b) under the Securities Exchange Act of 1934,
as amended, and 18 U.S.C. Section 1350.
32.3 Certification of Chief Accounting Officer pursuant Rule
13a-14(b) or Rule 15d-14(b) under the Securities Exchange
Act of 1934, as amended, and 18 U.S.C. Section 1350.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
--------------------------------------------------
(Registrant)
Date: May 10, 2005 By: /s/ LLOYD V. DELANO
----------------------------------
Lloyd V. DeLano
Senior Vice President
Chief Accounting Officer
29
EXHIBIT INDEX
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a) under the Securities Exchange
Act of 1934, as amended.
31.2 Certification of President pursuant to Rule 13a-14(a) or
Rule 15d-14(a) under the Securities Exchange Act of 1934,
as amended.
31.3 Certification of Chief Accounting Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a) under the Securities Exchange
Act of 1934, as amended.
32.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(b) or Rule 15d-14(b) under the Securities Exchange
Act of 1934, as amended, and 18 U.S.C. Section 1350.
32.2 Certification of President pursuant to Rule 13a-14(b) or
Rule 15d-14(b) under the Securities Exchange Act of 1934,
as amended, and 18 U.S.C. Section 1350.
32.3 Certification of Chief Accounting Officer pursuant Rule
13a-14(b) or Rule 15d-14(b) under the Securities Exchange
Act of 1934, as amended, and 18 U.S.C. Section 1350.