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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2003 COMMISSION FILE NUMBER 001-14039
CALLON PETROLEUM COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 64-0844345
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 NORTH CANAL STREET
NATCHEZ, MISSISSIPPI 39120
(Address of principal executive offices)(Zip code)
(601) 442-1601
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
--- ---
As of May 7, 2003, there were 13,939,140 shares of the Registrant's Common
Stock, par value $0.01 per share, outstanding.
CALLON PETROLEUM COMPANY
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets as of March 31, 2003
and December 31, 2002 3
Consolidated Statements of Operations for Each of the
Three Months in the Periods Ended March 31, 2003
and March 31, 2002 4
Consolidated Statements of Cash Flows for Each of the
Three Months in the Periods Ended March 31, 2003 and
March 31, 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
CALLON PETROLEUM COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
ASSETS (UNAUDITED) (NOTE 1)
Current assets:
Cash and cash equivalents $ 2,713 $ 5,807
Accounts receivable 13,924 10,875
Other current assets 1,357 570
--------- ------------
Total current assets 17,994 17,252
--------- ------------
Oil and gas properties, full cost accounting method:
Evaluated properties 798,200 762,918
Less accumulated depreciation, depletion and amortization (426,182) (426,254)
--------- ------------
372,018 336,664
Unevaluated properties excluded from amortization 32,187 40,997
--------- ------------
Total oil and gas properties 404,205 377,661
--------- ------------
Pipeline and other facilities, net 828 853
Other property and equipment, net 1,821 1,890
Deferred tax asset 8,155 8,767
Long-term gas balancing receivable 639 761
Restricted investments 6,992 --
Other assets, net 3,099 3,429
--------- ------------
Total assets $ 443,733 $ 410,613
========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 12,821 $ 12,498
Undistributed oil and gas revenues 1,206 1,109
Accrued net profits interest payable 2,240 1,707
Asset retirement obligations-current 5,850 --
Current maturities of long-term debt 1,343 1,320
--------- ------------
Total current liabilities 23,460 16,634
--------- ------------
Long-term debt-excluding current maturities 249,049 248,269
Accounts payable and accrued liabilities to be refinanced 1,850 3,861
Asset retirement obligations-long-term 25,200 --
Other long-term liabilities 2,204 889
--------- ------------
Total liabilities 301,763 269,653
--------- ------------
Stockholders' equity:
Preferred Stock, $.01 par value, 2,500,000 shares authorized; 600,861 shares
of Convertible Exchangeable Preferred Stock, Series A, issued and
outstanding with a liquidation preference of $15,021,525 6 6
Common Stock, $.01 par value, 20,000,000 shares authorized; 13,919,457 and
13,900,466 shares outstanding at March 31, 2003 and at December 31, 2002, 139 139
respectively
Capital in excess of par value 158,451 158,370
Unearned compensation restricted stock (713) (826)
Accumulated other comprehensive income (loss) (716) (469)
Retained earnings (deficit) (15,197) (16,26)
--------- ------------
Total stockholders' equity 141,970 140,960
--------- ------------
Total liabilities and stockholders' equity $ 443,733 $ 410,613
========= ============
The accompanying notes are an integral part of
these financial statements.
CALLON PETROLEUM COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
----------------------
2003 2002
-------- --------
Operating revenues:
Oil and gas sales $ 21,268 $ 11,054
-------- --------
Total operating revenues 21,268 11,054
-------- --------
Operating expenses:
Lease operating expenses 2,832 2,564
Depreciation, depletion and amortization 7,402 5,588
Accretion expense 715 --
General and administrative 1,235 1,139
Loss on mark-to-market commodity derivative contracts 138 388
-------- --------
Total operating expenses 12,322 9,679
-------- --------
Income (loss) from operations 8,946 1,375
-------- --------
Other (income) expenses:
Interest 7,181 5,720
Other income (83) (570)
-------- --------
Total other expenses 7,098 5,150
-------- --------
Income (loss) before income taxes 1,848 (3,775)
Income tax expense (benefit) 647 (1,321)
-------- --------
Income (loss) before cumulative effect of
change in accounting principle 1,201 (2,454)
Cumulative effect of change in accounting principle, net of tax 181 --
-------- --------
Net income (loss) 1,382 (2,454)
Preferred stock dividends 319 319
-------- --------
Net income (loss) available to common shares $ 1,063 $ (2,773)
======== ========
Net income (loss) per common share:
Basic
Net income (loss) available to common before cumulative
effect of change in accounting principle $ 0.07 $ (0.21)
Cumulative effect of change in accounting principle, net of tax 0.01 --
-------- --------
Net income (loss) available to common $ 0.08 $ (0.21)
======== ========
Diluted
Net income (loss) available to common before cumulative
effect of change in accounting principle $ 0.07 $ (0.21)
Cumulative effect of change in accounting principle, net of tax 0.01 --
-------- --------
Net income (loss) available to common $ 0.08 $ (0.21)
======== ========
Shares used in computing net income (loss) per common share:
Basic 13,599 13,315
======== ========
Diluted 14,192 13,315
======== ========
The accompanying notes are an integral part
of these financial statements.
CALLON PETROLEUM COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
-----------------------
MARCH 31, MARCH 31,
2003 2002
-------- --------
Cash flows from operating activities:
Net income (loss) $ 1,382 $ (2,454)
Adjustments to reconcile net income (loss) to cash provided by operating
activities:
Depreciation, depletion and amortization 7,560 5,765
Accretion expense 715 --
Amortization of deferred costs 1,674 1,128
Amortization of deferred production payment revenue -- (1,192)
Non-cash derivative income -- (2,943)
Non-cash mark-to-market commodity derivative contracts 138 388
Deferred income tax expense 647 (1,321)
Cumulative effect of change in accounting principle (181) --
Non-cash charge related to compensation plans 218 242
Changes in current assets and liabilities:
Accounts receivable (3,824) 714
Other current assets (204) (836)
Current liabilities 3,285 (4,260)
Change in gas balancing receivable 122 (2)
Change in gas balancing payable (340) (138)
Change in other long-term liabilities (4) (1)
Change in other assets, net (216) (188)
-------- --------
Cash provided (used) by operating activities 10,972 (5,098)
-------- --------
Cash flows from investing activities:
Capital expenditures (11,474) (26,748)
-------- --------
Cash provided (used) by investing activities (11,474) (26,748)
-------- --------
Cash flows from financing activities:
Change in accounts payable and accrued liabilities to be refinanced (2,011) --
Increase in debt 4,000 29,000
Payments on debt (4,000) --
Equity issued related to employee stock plans 62 16
Capital leases (324) (159)
Cash dividends on preferred stock (319) (319)
-------- --------
Cash provided (used) by financing activities (2,592) 28,538
-------- --------
Net increase (decrease) in cash and cash equivalents (3,094) (3,308)
Cash and cash equivalents:
Balance, beginning of period 5,807 6,887
-------- --------
Balance, end of period $ 2,713 $ 3,579
======== ========
The accompanying notes are an integral part
of these financial statements.
CALLON PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
1. GENERAL
The financial information presented as of any date other than December
31, has been prepared from the books and records of Callon Petroleum
Company (The "Company" or "Callon")without audit. Financial information
as of December 31, has been derived from the audited financial
statements of the Company, but does not include all disclosures
required by generally accepted accounting principles. In the opinion of
management, all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial
information for the periods indicated, have been included. For further
information regarding the Company's accounting policies, refer to the
Consolidated Financial Statements and related notes for the year ended
December 31, 2002 included in the Company's Annual Report on Form 10-K
dated March 27, 2003. The results of operations for the three-month
period ended March 31, 2003 are not necessarily indicative of future
financial results.
LIQUIDITY AND CAPITAL RESOURCES
In 2002, the lenders under the Company's Credit Facility with First
Union National Bank as administrative agent ("Credit Facility") agreed
to increase availability under the revolving borrowing base from $50
million to $75 million. In addition, the holders of $22.9 million of
the $36.0 million of the Company's 10.125% Senior Subordinated Notes
("Notes") consented to an extension of such Notes until July 31, 2004.
The Company granted warrants, with a fair market value of approximately
$1.3 million, to purchase 274,980 shares of common stock of the Company
for $.01 per share and paid consent fees in the amount of $2.3 million
to the holders of the Notes that granted the extensions. The holders of
the Notes that did not consent to the extension were paid on the
maturity date of the Notes in September 2002. Subsequent to September
2002, the holders of the Notes exercised approximately 116,000 warrants
that were granted as a result of the extension of the Notes.
Non-discretionary capital expenditures include completion of the Medusa
deepwater discovery, currently scheduled to begin production in the
third quarter of 2003. The Company anticipates that cash flow generated
during 2003 and current availability under the Credit Facility will
provide necessary capital to enable the Company to continue its
operational activities until such time as production from the Medusa
discovery begins. The Company anticipates that the Medusa reserves and
production should provide additional borrowing capacity. This
additional borrowing capacity as well as significant additional cash
flow expected from the new production will provide funds for future
discretionary capital expenditures.
The Habanero deepwater discovery is also being developed and is
projected to begin initial production in the second half of 2003. Once
producing, this deepwater discovery is projected to have a similar
impact on borrowing capacity as Medusa. Habanero will be produced by
the existing delineation well and an additional well to be drilled in
the
summer of 2003. A sub sea completion will be routed into one of the
operator's existing facilities.
The completion of the Company's deepwater discoveries will require the
construction of expensive production facilities and pipelines,
including the transportation, installation and hookup of production
facilities and the use of sub sea completion techniques. The Company
cannot estimate the timing of the construction and hookup of these
facilities with certainty. The operators completing these discoveries
will possibly face inclement weather and other unfavorable
environmental conditions, delays in fabrication and delivery of
necessary equipment, and other unforeseen circumstances that may delay
completion of these properties. Long-term delays in the completion of
these deepwater projects that prevent the commencement of production
from such discoveries could have a material adverse effect on the
Company's financial position and result of operations. Such a delay may
require the Company to reduce future anticipated capital expenditures
or seek additional sources of liquidity to finance capital
expenditures, which may not be available.
Beginning in October 2002, we received a series of inquiries from the
SEC regarding our Annual Report on Form 10-K for the year ended
December 31, 2001 requesting supplemental information concerning our
operations in the Gulf of Mexico. The comment letters requested
information about the procedures we used to classify our deepwater
reserves as proved and requested that our financials be restated to
reflect the removal of the reserves attributable to our Boomslang
discovery as proved for all prior periods during which such reserves
were reported as proved. We have reviewed the SEC comments with our
independent petroleum reserve engineers, Huddleston & Co., Inc. of
Houston, Texas. Both Huddleston & Co. and Callon believe that such
deepwater reserves are properly classified as proved. If the SEC
requires us to retroactively classify Boomslang as an unproved property
through December, 2002, we would be required to restate our financial
position, results of operations, and supplemental oil and gas reserve
data from 1998 through 2002. Discussions with the SEC are ongoing at
this time.
ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 143, Accounting for
Asset Retirement Obligations, ("SFAS 143") effective for fiscal years
beginning after June 15, 2002. As more fully discussed in Note 2 to the
consolidated financial statements included in Callon's 2002 Annual
Report, SFAS 143 essentially requires entities to record the fair value
of a liability for legal obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs.
Callon adopted the statement on January 1, 2003 resulting in a
cumulative effect of accounting change of $181,000 net of tax. See Note
6.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure - an amendment of
FASB Statement No. 123 ("SFAS 148"). This statement provides
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation,
along with the requirement of disclosure in both annual and interim
financial
statements about the method of accounting for stock based compensation
and effect on reported results. See Note 7
2. PER SHARE AMOUNTS
Basic earnings or loss per common share were computed by dividing net
income or loss by the weighted average number of shares of common stock
outstanding during the quarter. Diluted earnings or loss per common
share were determined on a weighted average basis using common shares
issued and outstanding adjusted for the effect of common stock
equivalents computed using the treasury stock method and the effect of
the convertible preferred stock (if dilutive). The conversion of the
preferred stock was not included in the calculation for the quarter
ended March 31, 2003 and 2002 due to the antidilutive effect on diluted
income or loss per share.
A reconciliation of the basic and diluted earnings per share
computation is as follows (in thousands, except per share amounts):
THREE MONTHS ENDED
MARCH 31,
--------------------
2003 2002
------- --------
(a) Net income (loss) available
for common stock $ 1,063 $ (2,773)
Preferred dividends assuming conversion
of preferred stock (if dilutive) $ -- $ --
(b) Income (loss) available for common stock
assuming conversion of preferred ------- --------
stock (if dilutive) $ 1,063 $ (2,773)
======= ========
(c) Weighted average shares outstanding 13,599 13,315
Dilutive impact of stock options 5 --
Dilutive impact of warrants 423 --
Dilutive impact of restricted stock 165 --
Convertible preferred stock (if dilutive) -- --
------- --------
(d) Total diluted shares 14,192 13,315
======= ========
Stock options and warrants excluded due to
antidilutive impact 2,396 2,598
Basic income (loss) per share (a/c) $ 0.08 $ (0.21)
Diluted income (loss) per share (b/d) $ 0.08 $ (0.21)
3. DERIVATIVES
The Company periodically uses derivative financial instruments to
manage oil and gas price risk. Settlements of gains and losses on
commodity price contracts are generally based upon the difference
between the contract price or prices specified in the derivative
instrument and a NYMEX price or other cash or futures index price.
In 2003 and 2002, the Company purchased and sold various derivatives
including put options and call options and elected not to designate
these derivative financial instruments as accounting hedges and
accordingly, accounted for these contracts under mark-to-market
accounting. In the first quarter of 2003 and 2002, the Company
recognized charges to
expense of $308,000 and $388,000, respectively to record changes in
fair value of these contracts. The fair value of these types of
derivatives remaining at March 31, 2003 was an asset of $63,000.
During 2002, the Company entered into no-cost natural gas collar
contracts in effect for February 2003 through October 2003. Remaining
open collar contracts at March 31, 2003 are for volumes of 350,000 Mcf
per month for April through June and 250,000 Mcf per month from July
through October, all with an average ceiling price of $4.76 and a floor
price of $3.50. These contracts are accounted for as cash flow hedges
under SFAS 133. The Company recognized a loss of $1,842,350 in oil and
gas sales related to the maturity of such collars in the first quarter
of 2003. The fair value of remaining collar contracts at March 31,
2003, is recorded in the balance sheet as a liability of $1,101,800,
with an offset of $716,170 (net of tax) recorded as total other
comprehensive loss.
During 2003, the Company entered into additional no-cost natural gas
collar contracts in effect for May 2003 through October 2003. These
agreements were for volumes of 200,000 Mcf per month with a ceiling
price of $5.80 and a floor price of $5.00. The company elected not to
designate these derivative financial instruments as accounting hedges
and accordingly, accounted for these contracts under mark-to-market
accounting. In the first quarter of 2003, the Company recognized income
of approximately $170,000 to record the change in the fair value of
these contracts. The fair value of these collar contracts at March 31,
2003 was an asset of $170,000.
In April 2001, the Company entered into derivative contracts for 2002
production with Enron North America Corp. These agreements are for
average gas volumes of approximately 600,000 Mcf per month in 2002 with
a weighted average ceiling price of $6.09 and floor price of $4.11.
Enron North America Corp. filed for protection under the bankruptcy
laws in late 2001. As a result of the credit risk associated with the
derivatives with Enron North America Corp., hedge accounting was not
available due to ineffectiveness as of September 30, 2001 and the
contracts at December 31, 2001 were marked to the market. In the fourth
quarter of 2001, the Company charged to expense (non-cash) $9.2 million
related to these Enron North America Corp. derivatives. The Company has
no other contracts with Enron or its subsidiaries.
As these contracts matured, the Company recorded non-cash revenue each
month, offsetting the amounts in other comprehensive income related to
the derivatives. The Company recorded approximately $2.9 million
related to these Enron derivatives in the first quarter of 2002 as oil
and gas revenue and amortized approximately $1.9 million (net of tax)
from other comprehensive income.
4. LONG-TERM DEBT
Approximately $1.9 million at March 31, 2003 related to long-term
assets, primarily oil and gas properties, were financed subsequent to
quarter-end with long-term debt and have been reclassified as
long-term. Current availability from the Credit Facility at March 31,
2003 was $10.0 million.
5. COMPREHENSIVE INCOME
A recap of the Company's comprehensive income (loss) is detailed below
(in thousands):
THREE MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2002
--------------------- --------------------
Net income (loss) $ 1,382 $(2,454)
Other comprehensive income (loss):
Change in unrealized derivatives'
fair value (247) --
Amortization of Enron derivatives -- (1,913)
------- -------
(247) (1,913)
------- -------
Total comprehensive income (loss) $ 1,135 $(4,367)
======= =======
6. ASSET RETIREMENT OBLIGATIONS
As discussed in Note 1, the Company adopted SFAS 143 on January 1,
2003. The impact of adopting the statement resulted in a gain of
$181,000, which is reported as a cumulative effect of change in
accounting principle.
Approximately $ 30.3 million was recorded as the present value of asset
retirement obligation on January 1, 2003 with the adoption of SFAS 143
related to the Company's oil and gas properties. An asset of
approximately $ 6.9 million was recorded as restricted investments
(primarily U.S. Government securities) which represent investments held
in abandonment trusts dedicated to pay future abandonment costs of oil
and gas properties in which the Company had sold a net profits
interest. Any excess of trust assets over future abandonment costs
($1.7 million at March 31, 2003) is recorded as payables to the net
profits interest owners. Changes to the present value of the asset
retirement obligations due to the passage of time are recorded as
accretion expense in the statement of operations. There were no other
changes in the asset retirement obligations in the first quarter of
2003.
Pro forma net income and earnings per share are not presented for the
three months ended March 31, 2002 because the pro forma application of
SFAS 143 to the prior period would not result in pro forma net income
and earnings per share materially different from the actual amounts
reported for the period in the accompanying Consolidated Statements of
Operations.
7. STOCK BASED COMPENSATION
The Company has various stock plans ("the Plans") under which employees
and non-employee members of the Board of Directors of the Company and
its subsidiaries have been or may be granted certain equity
compensation. The Company has in place compensatory stock option plans
whereby participants have been or may be granted rights to purchase
shares of common stock of Callon. The Company accounts for stock based
compensation in accordance with APB Opinion No. 25.
The Company's pro forma net income (loss) and net income (loss) per
share of common stock for the three-month periods ended March 31, 2003
and 2002, had compensation costs been recorded using the fair value
method in accordance with SFAS 123 - "Accounting for Stock-Based
Compensation," as amended by SFAS 148 - "Accounting for Stock-Based
Compensation-Transition and Disclosure - an amendment of FASB Statement
No. 123," are presented below pursuant to the disclosure requirement of
SFAS 148 (in millions except per share data):
THREE MONTHS ENDED
MARCH 31,
------------------------
2003 2002
--------- ---------
Net income (loss) available to common-as reported $ 1,063 $ (2,773)
Add: Stock-based compensation expense
included in net income as reported, net of tax 10 96
Deduct: Total stock-based compensation expense
under fair value based method, net of tax (70) (272)
--------- ---------
Net income (loss) available to common-pro forma $ 1,003 $ (2,949)
========= =========
Net income (loss) per share available to common:
Basic-as reported $ 0.08 $ (0.21)
Basic-pro forma $ 0.07 $ (0.22)
Diluted-as reported $ 0.08 $ (0.21)
Diluted-pro forma $ 0.07 $ (0.22)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. All statements other than statements of historical facts included in
this report, including statements regarding the Company's financial position,
adequacy of resources, estimated reserve quantities, business strategies, plans,
objectives and expectations for future operations and covenant compliance, are
forward-looking statements. The Company can give no assurances that the
assumptions upon which such forward-looking statements are based will prove to
have been correct. Important factors that could cause actual results to differ
materially from the Company's expectations ("Cautionary Statements") are
disclosed below, in the section entitled "Risk Factors" included in the
Company's Annual Report on Form 10-K for the Company's most recent fiscal year,
elsewhere in this report and from time to time in other filings made by the
Company with the Securities and Exchange Commission. All subsequent written and
oral forward-looking statements attributable to the Company or persons acting on
its behalf are expressly qualified by the Cautionary Statements.
GENERAL
The Company's revenues, profitability, future growth and the carrying value of
its oil and gas properties are substantially dependent on prevailing prices of
oil and gas and its ability to find, develop and acquire additional oil and gas
reserves that are economically recoverable and its ability to develop existing
proved undeveloped reserves. The Company's ability to maintain or increase its
borrowing capacity and to obtain additional capital on attractive terms is also
influenced by oil and gas prices. Prices for oil and gas are subject to large
fluctuations in response to relatively minor changes in the supply of and demand
for oil and gas, market uncertainty and a variety of additional factors beyond
the control of the Company. These factors include weather conditions in the
United States, the condition of the United States economy, the actions of the
Organization of Petroleum Exporting Countries, governmental regulations,
political stability in the Middle East and elsewhere, the foreign supply of oil
and gas, the price of foreign imports and the availability of alternate fuel
sources. Any substantial and extended decline in the price of oil or gas would
have an adverse effect on the Company's carrying value of its proved reserves,
borrowing capacity, revenues, profitability and cash flows from operations. The
Company uses derivative financial instruments for price protection purposes on a
limited amount of its future production but does not use derivative financial
instruments for trading purposes.
The following discussion is intended to assist in an understanding of the
Company's historical financial positions and results of operations. The
Company's historical financial statements and notes thereto included elsewhere
in this quarterly report contain detailed information that should be referred to
in conjunction with the following discussion.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital are its cash flows from operations,
borrowings from financial institutions and the sale of debt and equity
securities. At March 31, 2003, the Company had $10.0 million of availability
under the Credit Facility. Net cash and cash equivalents during the three months
ended March 31, 2003 decreased by $3.1 million and cash provided by operating
activities totaled $10.9 million. Net capital expenditures from the cash flow
statement for the period totaled $11.5 million.
In 2002, the lenders under the Company's Credit Facility agreed to increase
availability under the revolving borrowing base from $50 million to $75 million.
In addition, the holders of $22.9 million of the $36.0 million of the Company's
10.125% Senior Subordinated Notes ("Notes") consented to an extension of such
Notes until July 31, 2004. The Company granted warrants with a fair market value
of approximately $1.3 million to purchase 274,980 shares of common stock of the
Company for $.01 per share and paid consent fees in the amount of $2.3 million
to the holders of the Notes that granted the extensions. The holders of the
Notes that did not consent to the extension were paid on the maturity date of
the Notes in September 2002. Subsequent to September 2002, the holders of the
Notes exercised approximately 116,000 warrants that were granted as a result of
the extension of the Notes.
Non-discretionary capital expenditures include completion of the Medusa
deepwater discovery, currently scheduled to begin production in the third
quarter of 2003. The Company anticipates that cash flow generated during 2003
and current availability under the Credit Facility will provide necessary
capital to enable the Company to continue its operational activities until such
time as production from the Medusa discovery begins. The Company anticipates
that the Medusa reserves and production should provide additional available
borrowing capacity. This additional borrowing capacity as well as significant
additional cash flow expected from the new production will provide funds for
future discretionary capital expenditures.
The Habanero deepwater discovery is also being developed and is projected to
begin initial production in the second half of 2003. Once producing, this
deepwater discovery is projected to have a similar impact on borrowing capacity
as Medusa. Habanero will be produced by the existing delineation well and an
additional well to be drilled in the summer of 2003. A sub sea completion will
be routed into one of the operator's existing facilities.
The completion of the Company's deepwater discoveries will require the
construction of expensive production facilities and pipelines, including the
transportation, installation and hookup of production facilities and the use of
sub sea completion techniques. The Company cannot estimate the timing of the
construction and hookup of these facilities with certainty. The operators
completing these discoveries will possibly face inclement weather and other
unfavorable environmental conditions, delays in fabrication and delivery of
necessary equipment, and other unforeseen circumstances that may delay
completion of these properties. Long-term delays in the completion of these
deepwater projects that prevent the commencement of production from such
discoveries could have a material adverse effect on the Company's financial
position and result of operations. Such a delay may require the Company to
reduce future anticipated capital expenditures or seek additional sources of
liquidity to finance capital expenditures, which may not be available.
Beginning in October 2002, we received a series of inquiries from the SEC
regarding our Annual Report on Form 10-K for the year ended December 31, 2001
requesting supplemental information concerning our operations in the Gulf of
Mexico. The comment letters requested information about the procedures we used
to classify our deepwater reserves as proved and requested that our financials
be restated to reflect the removal of the reserves attributable to our Boomslang
discovery as proved for all prior periods during which such reserves were
reported as
proved. We have reviewed the SEC comments with our independent petroleum reserve
engineers, Huddleston & Co., Inc. of Houston, Texas. Both Huddleston & Co. and
Callon believe that such deepwater reserves are properly classified as proved.
If the SEC requires us to retroactively classify Boomslang as an unproved
property through December, 2002, we would be required to restate our financial
position, results of operations, and supplemental oil and gas reserve data from
1998 through 2002. Discussions with the SEC are ongoing at this time.
The following table describes our outstanding contractual obligations (in
thousands) as of March 31, 2003:
CONTRACTUAL LESS THAN ONE-THREE FOUR-FIVE AFTER-FIVE
OBLIGATIONS TOTAL ONE YEAR YEARS YEARS YEARS
----------- ----- -------- ----- ----- -----
Credit Facility $ 65,000 $ -- $ 65,000 $ -- $ --
Senior Notes 95,000 -- 95,000 -- --
10.125% Senior
Subordinated Debt 22,915 -- 22,915 -- --
10.25% Senior
Subordinated Debt 40,000 -- 40,000 -- --
11% Senior Subordinated Debt 33,000 -- 33,000 -- --
Capital lease (future minimum payments) 5,908 1,965 2,362 723 858
-------- -------- -------- ---- ----
$261,823 $ 1,965 $258,277 $723 $858
======== ======== ======== ==== ====
CAPITAL EXPENDITURES
Capital expenditures for exploration and development costs related to oil and
gas properties totaled approximately $11.5 million in the first three months of
2003. The Company incurred approximately $4.0 million in the Gulf of Mexico
Deepwater Area primarily for development costs at the Company's Habanero
discovery. Interest of approximately $1.4 million and general and administrative
costs allocable directly to exploration and development projects of
approximately $2.3 million were capitalized for the first three months of 2003.
The Gulf of Mexico Shelf Area expenditures account for the remainder of the
total capital expended and was primarily associated with the Ship Shoal 28/35
development.
For the remainder of the year, the Company will continue evaluating property
acquisitions and drilling opportunities. The Company has forecasted up to $42
million in capital expenditures, including capitalized interest and capitalized
general and administrative expenses, for the remainder of 2003. The major
portion of the capital expenditure budget will be used for development of the
Company's Medusa and Habanero discoveries.
RESULTS OF OPERATIONS
The following table sets forth certain unaudited operating information with
respect to the Company's oil and gas operations for the periods indicated.
THREE MONTHS ENDED
MARCH 31,
-------------------------
2003(a) 2002(a)(b)
--------- ---------
Production volumes:
Oil (MBbls) 45 54
Gas (MMcf) 3,427 3,029
Total production (MMcfe) 3,697 3,353
Average daily production (MMcfe) 41.1 37.3
Average sales price: (a)
Oil (Bbls) $ 31.32 $ 18.65
Gas (Mcf) 5.79 2.34
Total (Mcfe) 5.75 2.42
Average costs (per Mcfe):
Lease operating $ 0.77 $ 0.73
Depletion 2.00 1.64
General and administrative (net of management fees) 0.33 0.34
(a) Includes hedging gains and losses.
(b) Includes volumes of 574 MMcf for the three-month period ended March 31,
2002 at an average price of $2.08 per Mcf associated with a volumetric
production payment.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2003
AND THE THREE MONTHS ENDED MARCH 31, 2002.
Oil and Gas Production and Revenues
Total oil and gas revenues increased 92% from $11.1 million in the first quarter
of 2002 to $21.3 million in the first quarter of 2003. Both oil and gas prices
were substantially higher when compared to the same period in 2002 which
accounted for the primary increase in revenue. Oil and gas revenues for the
first quarter of 2002 included $2.9 million related to the Enron derivatives as
discussed in Note 3 to the consolidated financial statements.
Total production for the first quarter of 2003 increased by 10% versus the first
quarter of 2002.
Gas production during the first quarter of 2003 totaled 3.4 Bcf and generated
$19.8 million in revenues compared to 3.0 Bcf and $6.9 million in revenues
during the same period in 2002. The average sales price for the first quarter of
2003 averaged $5.79 per Mcf compared to $2.34 per Mcf at this time last year.
The increase in production in the first quarter of 2003 compared to the first
quarter of 2002 was due primarily to the acceleration program at the Mobile
952/953/955 area offset by decreases due to older properties normal and expected
declines in production.
Oil production during the first quarter of 2003 totaled 45,000 barrels and
generated $1.4 million in revenues compared to 54,000 barrels and $1.0 million
in revenues for the same period in 2002. Average oil prices received in the
first quarter of 2003 were $31.32 compared to $18.65 in 2002.
Lease Operating Expenses
Lease operating expenses, for the three-month period ending March 31, 2003
increased to $2.9 million compared to $2.6 million for the same period in 2002
due primarily to increased activity in the Mobile 952/953/955 and Mobile 864
areas.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization for the three months ending March 31,
2003 and 2002 were $7.4 million and $5.6 million, respectively. The 32% increase
was due primarily to the downward reserve revisions at Boomslang at the end of
2002. This decrease in estimated proved reserves, over which depletable costs
are amortized, increased the per unit depletion rate. Production increases in
the quarter also contributed to the higher costs in this category.
Accretion Expense
Accretion expense represents the change in the liability due to the passage of
time for asset retirement obligations as recorded from the adoption of SFAS 143
at January 1, 2003 through the end of the current quarter.
General and Administrative
General and administrative expense, net of amounts capitalized, remained
constant at $1.2 million and $1.1 million for the three month periods ended
March 31, 2003 and March 31, 2002, respectively.
Interest Expense
Interest expense increased to $7.2 million during the three months ended March
31, 2003 from $5.7 million during the three months ended March 31, 2002. An
increase in the Company's long-term debt contributed to the greater interest
expense as well as higher interest rates associated with the additional debt
incurred in 2002 and a decrease in capitalized interest due to a decrease in
unevaluated properties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's revenues are derived from the sale of its crude oil and natural
gas production. The prices for oil and gas remain extremely volatile and
sometimes experience large fluctuations as a result of relatively small changes
in supplies, weather conditions, economic conditions and government actions.
From time to time, the Company enters into derivative financial instruments
(forward sales or swaps) to hedge oil and gas price risks for the production
volumes to which the hedge relates. The hedges reduce the Company's exposure on
the hedged volumes to decreases in commodity prices and limit the benefit the
Company might otherwise have received from any increases in commodity prices on
the hedged volumes. The Company from time to time has acquired puts which reduce
the Company's exposure to decreases in commodity prices while allowing
realization of the full benefit from any increases in commodity prices.
The Company also enters into price "collars" to reduce the risk of changes in
oil and gas prices. Under these arrangements, no payments are due by either
party so long as the market price is above the floor price set in the collar and
below the ceiling. If the price falls below the floor, the counter-party to the
collar pays the difference to the Company and if the price is above the ceiling,
the counter-party receives the difference from the Company.
The Company enters into these various agreements from time to time to reduce the
effects of volatile oil and gas prices and does not enter into hedge
transactions for speculative purposes. However, certain of the Company's
positions may not be designated as hedges for accounting purposes.
See Note 3 to the Consolidated Financial Statements for a description of the
Company's hedged position at March 31, 2003. There have been no significant
changes in market risks faced by the Company since the end of 2002.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Based on their
evaluation as of a date within 90 days of the filing date of this Quarterly
Report on Form 10-Q, the Company's principal executive officer and principal
financial officer have concluded that the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the "Exchange Act")) are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission.
(b) Changes in Internal Controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
CALLON PETROLEUM COMPANY
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits
2. Plan of acquisition, reorganization, arrangement,
liquidation or succession*
3. Articles of Incorporation and By-Laws
3.1 Certificate of Incorporation of the Company, as
amended (incorporated by reference from Exhibit
3.1 of the Company's Registration Statement on
Form S-4, filed August 4, 1994, Reg. No.
33-82408)
3.2 Certificate of Merger of Callon Consolidated
Partners, L. P. with and into the Company dated
September 16, 1994 (incorporated by reference
from Exhibit 3.2 of the Company's Report on Form
10-K for the fiscal year ended December 31,
1994, File No. 000-25192)
3.3 Bylaws of the Company (incorporated by reference
from Exhibit 3.2 of the Company's Registration
Statement on Form S-4, filed August 4, 1994,
Reg. No. 33-82408)
4. Instruments defining the rights of security holders,
including indentures
4.1 Specimen Common Stock Certificate (incorporated
by reference from Exhibit 4.1 of the Company's
Registration Statement on Form S-4, filed August
4, 1994, Reg. No. 33-82408)
4.2 Specimen Preferred Stock Certificate
(incorporated by reference from Exhibit 4.2 of
the Company's Registration Statement on Form
S-1, filed November 13, 1995, Reg. No. 33-96700)
4.3 Designation for Convertible, Exchangeable
Preferred Stock, Series A (incorporated by
reference from Exhibit 4.3 of the Company's
Registration Statement on Form S-1, filed
November 13, 1995, Reg. No. 33-96700)
4.4 Indenture for Convertible Debentures
(incorporated by reference from Exhibit 4.4 of
the Company's Registration
Statement on Form S-1, filed November 13, 1995,
Reg. No. 33-96700)
4.5 Certificate of Correction on Designation of
Series A Preferred Stock (incorporated by
reference from Exhibit 4.4 of the Company's
Registration Statement on Form S-1, filed
November 22, 1996, Reg. No. 333-15501)
4.6 Indenture for the Company's 10.125% Senior
Subordinated Notes due 2002 dated as of July 31,
1997 (incorporated by reference from Exhibit 4.1
of the Company's Registration Statement on Form
S-4, filed September 25, 1997, Reg. No.
333-36395)
4.7 Form of Note Indenture for the Company's 10.25%
Senior Subordinated Notes due 2004 (incorporated
by reference from Exhibit 4.10 of the Company's
Registration Statement on Form S-2, filed June
14, 1999, Reg. No. 333-80579)
4.8 Rights Agreement between Callon Petroleum
Company and American Stock Transfer & Trust
Company, Rights Agent, dated March 30, 2000
(incorporated by reference from Exhibit 99.1 of
the Company's Registration Statement on Form
8-A, filed April 6, 2000, File No. 001- 14039)
4.9 Subordinated Indenture for the Company dated
October 26, 2000 (incorporated by reference from
Exhibit 4.1 of the Company's Current Report on
Form 8-K dated October 24, 2000, File
No.001-14039)
4.10 Supplemental Indenture for the Company's 11%
Senior Subordinated Notes due 2005 (incorporated
by reference from Exhibit 4.2 of the Company's
Current Report on Form 8-K dated October 24,
2000, File No. 001-14039)
4.11 Warrant dated as of June 29, 2001 entitling Duke
Capital Partners, LLC to purchase common stock
from the Company. (incorporated by reference to
Exhibit 4.11 of the Company's Quarterly Report
on Form 10-Q for the period ended June 30, 2001,
File No. 001-14039)
4.12 First Supplemental Indenture, dated June 26,
2002, to Indenture between Callon Petroleum
Company and American Stock Transfer & Trust
Company dated July 31, 1997. (incorporated by
reference to Exhibit 4.1 of the Company's
Current Report on Form 8-K dated June 26, 2002,
File No. 001-14039)
4.13 Form of Warrant entitling certain holders of the
Company's 10.125% Senior Subordinated Notes due
2002 to purchase common stock from the Company
(incorporated by reference to Exhibit 4.13 of
the Company's Form 10-Q for the period ended
June 30, 2002, File No. 001-14039)
4.14 Second Supplemental Indenture, dated September
16, 2002, to Indenture between Callon Petroleum
Company and American Stock Transfer & Trust
Company dated July 31, 1997. (incorporated by
reference to Exhibit 4.1 of the Company's
Current Report on Form 8-K dated September 16,
2002, File No. 001-14039)
10. Material contracts*
11. Statement re computation of per share earnings*
15. Letter re unaudited interim financial information*
18. Letter re change in accounting principles*
19. Report furnished to security holders*
22. Published report regarding matters submitted to vote of
security holders*
23. Consents of experts and counsel*
24. Power of attorney*
99. Additional exhibits
99.1 Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
99.2 Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K
None
*Inapplicable to this filing
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.
CALLON PETROLEUM COMPANY
Date: May 15, 2003 By: /s/ John S. Weatherly
--------------------------------
John S. Weatherly, Senior Vice
President and Chief Financial
Officer (on behalf of the
registrant and as the principal
financial officer)
CERTIFICATIONS
I, Fred L. Callon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Callon
Petroleum Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
By: /s/ Fred L. Callon
------------------------------------
Fred L. Callon, President and Chief
Executive Officer (Principal Executive
Officer)
CERTIFICATIONS
I, John S. Weatherly, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Callon
Petroleum Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
By: /s/ John S. Weatherly
-------------------------------------
John S. Weatherly, Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
EXHIBIT INDEX
EXHIBIT NUMBER TITLE OF DOCUMENT
- -------------- -----------------
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002