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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 001-16179
-----------------------------------------------
ENERGY PARTNERS, LTD.
(Exact name of registrant as specified in its charter)
Delaware 72-1409562
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification number)
201 St. Charles Avenue, Suite 3400
New Orleans, Louisiana 70170
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (504) 569-1875
---------------------------------------------
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 by Rule 12b-2 of the Acts). Yes [X] No [ ]
As of July 31, 2003, there were 32,056,912 shares of the Registrant's
Common Stock, par value $0.01 per share, outstanding.
================================================================================
-1-
TABLE OF CONTENTS
Page
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PART I FINANCIAL STATEMENTS
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 2003 and
December 31, 2002............................................................................3
Consolidated Statements of Operations for the three and six months ended
June 30, 2003 and 2002.......................................................................4
Consolidated Statements of Cash Flows for the six months ended
June 30, 2003 and 2002.......................................................................5
Notes to Consolidated Financial Statements .......................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................................13
Item 3. Quantitative and Qualitative Disclosures about Market Risk......................................18
Item 4. Controls and Procedures.........................................................................19
PART II OTHER INFORMATION
Item 4. Submission of Matters to the Vote of Security Holders...........................................20
Item 6. Exhibits and Reports on Form 8-K................................................................20
-2-
ITEM 1. FINANCIAL STATEMENTS
ENERGY PARTNERS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30, December 31,
2003 2002
--------- ---------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 8,796 $ 116
Trade accounts receivable -- net of allowance for
doubtful accounts of $1,351 in 2003 and 2002 34,674 25,824
Deferred tax asset 1,530 1,221
Prepaid expenses 2,506 1,868
--------- ---------
Total current assets 47,506 29,029
Property and equipment, at cost under the successful efforts
method of accounting for oil and natural gas properties 552,283 471,840
Less accumulated depreciation, depletion and amortization (165,177) (121,034)
--------- ---------
Net property and equipment 387,106 350,806
Other assets 4,817 3,463
Deferred financing costs -- net of accumulated amortization
of $2,570 in 2003 and $2,365 in 2002 728 922
--------- ---------
$ 440,157 $ 384,220
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,057 $ 8,869
Accrued expenses 32,372 43,533
Fair value of commodity derivative instruments 4,250 3,392
Current maturities of long-term debt 96 92
--------- ---------
Total current liabilities 50,775 55,886
Long-term debt 78,638 103,687
Deferred income taxes 21,501 9,033
Other 39,037 23,692
--------- ---------
189,951 192,298
Stockholders' equity:
Preferred stock, $1 par value, authorized 1,700,000 shares;
372,654 issued and outstanding; aggregate liquidation
value $37,265,382 34,902 35,359
Common stock, par value $0.01 per share. Authorized
50,000,000 shares; issued and outstanding:
2003 - 32,034,811 shares; 2002 - 27,550,466
shares 320 276
Additional paid-in capital 227,273 187,965
Accumulated other comprehensive loss (2,720) (2,171)
Accumulated deficit (9,569) (29,507)
--------- ---------
Total stockholders' equity 250,206 191,922
--------- ---------
Commitments and contingencies $ 440,157 $ 384,220
========= =========
See accompanying notes to consolidated financial statements.
-3-
ENERGY PARTNERS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2003 2002 2003 2002
-------- --------- --------- --------
Revenue:
Oil and natural gas $ 54,146 $ 36,725 $ 111,100 $ 66,266
Other 73 138 356 (278)
-------- --------- --------- --------
54,219 36,863 111,456 65,988
-------- --------- --------- --------
Costs and expenses:
Lease operating 9,427 8,544 17,444 17,344
Taxes, other than on earnings 1,780 1,615 4,151 3,165
Exploration expenditures and dry hole costs 3,929 1,118 5,236 3,440
Depreciation, depletion and amortization 19,532 17,875 37,104 34,258
General and administrative:
Stock-based compensation 353 77 479 204
Severance costs -- -- -- 1,211
Other general and administrative 5,551 5,008 12,990 11,261
-------- --------- --------- --------
Total costs and expenses 40,572 34,237 77,404 70,883
-------- --------- --------- --------
Income (loss) from operations 13,647 2,626 34,052 (4,895)
-------- --------- --------- --------
Other income (expense):
Interest income 25 50 46 72
Interest expense (1,608) (1,837) (3,429) (3,438)
-------- --------- --------- --------
(1,583) (1,787) (3,383) (3,366)
-------- --------- --------- --------
Income (loss) before income taxes and cumulative
effect of change in accounting principle 12,064 839 30,669 (8,261)
Income taxes (4,500) (393) (11,191) 2,893
-------- --------- --------- --------
Income (loss) before cumulative effect of change
in accounting principle 7,564 446 19,478 (5,368)
Cumulative effect of change in accounting principle,
net of income taxes of $1,276 -- -- 2,268 --
-------- --------- --------- --------
Net income (loss) 7,564 446 21,746 (5,368)
Less dividends earned on preferred stock and accretion of
discount and issuance costs (953) (867) (1,808) (1,591)
-------- --------- --------- --------
Net income (loss) available to common
stockholders $ 6,611 $ (421) $ 19,938 $ (6,959)
======== ========= ========= ========
Earnings per share:
Basic:
Before cumulative effect of change in accounting principle $ 0.21 $ (0.02) $ 0.60 $ (0.25)
Cumulative effect of change in accounting principle $ -- $ -- $ 0.08 $ --
-------- --------- --------- --------
Basic earnings (loss) per share $ 0.21 $ (0.02) $ 0.68 $ (0.25)
======== ========= ========= ========
Diluted:
Before cumulative effect of change in accounting principle $ 0.21 $ (0.02) $ 0.57 $ (0.25)
Cumulative effect of change in accounting principle $ -- $ -- $ 0.06 $ --
-------- --------- --------- --------
Diluted earnings (loss) per share $ 0.21 $ (0.02) $ 0.63 $ (0.25)
======== ========= ========= ========
Weighted average common shares used in Computing income (loss) per share:
Basic 31,291 27,456 29,481 27,414
Incremental common shares 4,838 -- 4,837 --
-------- --------- --------- --------
Diluted 36,129 27,456 34,318 27,414
======== ========= ========= ========
See accompanying notes to consolidated financial statements.
-4-
ENERGY PARTNERS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
June 30,
-------------------------
2003 2002
-------- --------
Cash flows from operating activities:
Net income (loss) $ 21,746 $ (5,368)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Cumulative effect of change in accounting principle, net of tax (2,268) --
Depreciation, depletion and amortization 37,104 34,258
Gain on sale of oil and natural gas assets (207) --
Amortization of deferred revenue -- (1,935)
Stock-based compensation 479 204
Deferred income taxes 11,192 (2,893)
Exploration expenditures 3,008 1,840
Non-cash effect of derivative instruments -- 514
Amortization of deferred financing costs 205 159
Other 189 --
-------- --------
71,448 26,779
Changes in operating assets and liabilities, net of
acquisition in 2002:
Trade accounts receivable (8,850) (1,584)
Prepaid expenses (638) (604)
Other assets (1,354) (1,308)
Accounts payable and accrued expenses 438 (24,609)
Other liabilities (118) (1,048)
-------- --------
Net cash provided by (used in) operating activities 60,926 (2,374)
-------- --------
Cash flows used in investing activities:
Acquisition of business, net of cash acquired (850) (10,661)
Property acquisitions (4,081) (1,142)
Exploration and development expenditures (59,114) (10,488)
Other property and equipment additions (273) (195)
Proceeds from sale of oil and natural gas assets 579 647
-------- --------
Net cash used in investing activities (63,739) (21,839)
-------- --------
Cash flows provided by financing activities:
Bank overdraft -- (808)
Repayments of long-term debt (40,045) (12,498)
Equity offering costs (422) --
Proceeds from public offering, net of commissions 38,000 --
Proceeds from long-term debt 15,000 40,000
Dividends Paid (1,304) (1,229)
Exercise of stock options and warrants 264 --
-------- --------
Net cash provided by financing activities 11,493 25,465
-------- --------
Net increase in cash and cash equivalents 8,680 1,252
Cash and cash equivalents at beginning of period 116 --
-------- --------
Cash and cash equivalents at end of period $ 8,796 $ 1,252
======== ========
See accompanying notes to consolidated financial statements.
-5-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
Certain information and footnote disclosures normally in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to rules and regulations of the
Securities and Exchange Commission; however, management believes the disclosures
which are made are adequate to make the information presented not misleading.
These financial statements and footnotes should be read in conjunction with the
financial statements and notes thereto included in Energy Partners, Ltd.'s (the
Company) Annual Report on Form 10-K for the year ended December 31, 2002 and
Management's Discussion and Analysis of Financial Condition and Results of
Operations. The Company maintains a website at www.eplweb.com which contains
information about the Company including links to the Company's Annual Report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all
related amendments. The Company's website and the information contained in it
and connected to it shall not be deemed incorporated by reference into this
Report on Form 10-Q.
The financial information as of June 30, 2003 and for the three and six
month periods ended June 30, 2003 and 2002 has not been audited. However, in the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the results of operations for the
periods presented have been included therein. The results of operations for the
first six months of the year are not necessarily indicative of the results of
operations which might be expected for the entire year.
(2) STOCK-BASED COMPENSATION
The Company has two stock award plans, the Amended and Restated 2000 Long
Term Stock Incentive Plan and the 2000 Stock Option Plan for Non-Employee
Directors (the Plans). The Company accounts for its stock-based compensation in
accordance with Accounting Principles Board's Opinion No. 25, "Accounting For
Stock Issued to Employees" (Opinion No. 25). Statement of Financial Accounting
Standards No. 123 (Statement 123), "Accounting For Stock-Based Compensation" and
Statement of Financial Accounting Standards No. 148, "Accounting For Stock-Based
Compensation - Transition and Disclosure," (Statement 148) permit the continued
use of the intrinsic value-based method prescribed by Opinion No. 25, but
require additional disclosures, including pro-forma calculations of earnings and
net earnings per share as if the fair value method of accounting prescribed by
Statement 123 had been applied. If compensation expense for the Plans had been
determined using the fair-value method in Statement 123, the Company's net
income (loss) and earnings (loss) per share would have been as follows (in
thousands, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income (loss) available to common stockholders:
As reported........................................ $ 6,611 $ (421) $ 19,938 $ (6,959)
Pro forma.......................................... $ 6,311 $ (1,105) $ 19,364 $ (8,228)
Basic earnings (loss) per share:
As reported........................................ $ 0.21 $ (0.02) $ 0.68 $ (0.25)
Pro forma.......................................... $ 0.20 $ (0.04) $ 0.66 $ (0.30)
Diluted earnings (loss) per share:
As reported........................................ $ 0.21 $ (0.02) $ 0.63 $ (0.25)
Pro forma.......................................... $ 0.20 $ (0.04) $ 0.62 $ (0.30)
Stock-option based employee compensation
cost, net of tax, included in net income
(loss) as reported.................................. $ -- $ 28 $ 28 $ 153
-6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(3) BUSINESS COMBINATION
On January 15, 2002, the Company closed the acquisition of Hall-Houston
Oil Company (HHOC). The results of HHOC's operations have been included in the
Company's consolidated financial statements since that date. HHOC was an oil and
natural gas exploration and production company with operations focused in the
shallow waters of the Gulf of Mexico. As a result of the acquisition, the
Company has a strengthened management team, expanded exploration opportunities
as well as a reserve portfolio and production that are more balanced between oil
and natural gas.
The acquisition was completed for $38.4 million liquidation preference of
newly authorized and issued Series D Exchangeable Convertible Preferred Stock
(the Series D Preferred Stock), with an issue date fair value of $34.7 million
discounted to give effect to the increasing dividend rate, $38.4 million of 11%
Senior Subordinated Notes (the Notes) due 2009 (immediately callable at par),
574,931 shares of common stock with a fair value of approximately $3.0 million
determined based on the average market price of the Company's common stock over
the period of two days before and after the terms of the acquisition were agreed
to and announced, $9.0 million of cash including $3.9 million of accrued
interest and prepayment fees paid to former debt holders, and warrants to
purchase four million shares of the Company's common stock. Of the warrants, one
million have a strike price of $9.00 and three million have a strike price of
$11.00 per share. The warrants had a fair value of approximately $3.0 million
based on a third party valuation. In addition, the Company incurred
approximately $3.6 million of expenses in connection with the acquisition and
assumed HHOC's working capital deficit.
In addition, former preferred stockholders of HHOC have the right to
receive contingent consideration based upon a percentage of the amount by which
the before tax net present value of proved reserves related, in general, to
exploratory prospect acreage held by HHOC as of the closing date of the
acquisition (the Ring-Fenced Properties) exceeds the net present value
discounted at 30%. The potential consideration is determined annually beginning
March 3, 2003 and ending March 1, 2007. The cumulative percentage remitted to
the participants is 20% for March 3, 2003, 30% for March 1, 2004, 35% for March
1, 2005, 40% for March 1, 2006 and 50% for March 1, 2007. The contingent
consideration, if any, may be paid in the Company's common stock or cash at the
Company's option (with a minimum of 20% in cash) and in no event will exceed a
value of $50 million. On March 17, 2003, the Company capitalized, as additional
purchase price, and paid additional consideration of $0.9 million related to the
March 3, 2003 contingent consideration payment date. Due to the uncertainty
inherent in estimating the value of future contingent consideration which
includes annual revaluations based upon, among other things, drilling results
from the date of the prior revaluation, and development, operating and
abandonment costs and production revenues (actual historical and future
projected, as contractually defined, as of each revaluation date) for the
Ring-Fenced Properties, total final consideration will not be determined until
March 1, 2007. All additional contingent consideration will be capitalized as
additional purchase price.
Following the completion of the acquisition, management of the Company
assessed the technical and administrative needs of the combined organization. As
a result, 14 redundant positions were eliminated including finance,
administrative, geophysical and engineering positions in New Orleans and
Houston. All terminated employees were informed of their termination date and
severance benefits prior to March 31, 2002. Total severance costs under the plan
was $1.2 million.
(4) EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share reflects the potential dilution
that could occur if the Company's convertible preferred stock, options and
warrants were converted to common stock.
The following table reconciles the net earnings and common shares
outstanding used in the calculations of basic and diluted earnings per share for
the three and six month periods ended June 30,
-7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2003. The diluted loss per share calculation for the three and six months ended
June 30, 2002 produces results that are anti-dilutive, therefore, the diluted
loss per share amount as reported for those periods in the accompanying
consolidated statements of operations is the same as the basic loss per share
amount.
WEIGHTED
NET INCOME AVERAGE
AVAILABLE COMMON
TO COMMON SHARES EARNINGS
STOCKHOLDERS OUTSTANDING PER SHARE
------------ ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three months ended June 30, 2003:
Basic........................... $ 6,611 31,291 $ 0.21
Effect of dilutive securities:
Preferred stock........... 953 4,364
Stock options............. -- 317
Warrants.................. -- 157
--------- ------ --------
Diluted......................... $ 7,564 36,129 $ 0.21
WEIGHTED
NET INCOME AVERAGE
AVAILABLE COMMON
TO COMMON SHARES EARNINGS
STOCKHOLDERS OUTSTANDING PER SHARE
------------ ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Six months ended June 30, 2003:
Basic........................... $ 19,938 29,481 $ 0.68
Effect of dilutive securities:
Preferred stock........... 1,808 4,364
Stock options............. -- 318
Warrants.................. -- 155
--------- ------ ---------
Diluted......................... $ 21,746 34,318 $ 0.63
(5) HEDGING ACTIVITIES
The Company enters into hedging transactions with major financial
institutions or counterparties with a credit rating of A or better to reduce
exposure to fluctuations in the price of oil and natural gas. Crude oil hedges
are settled based on the average of the reported settlement prices for West
Texas Intermediate crude on the New York Mercantile Exchange (NYMEX) for each
month. Natural gas hedges are settled based on the average of the last three
days of trading of the NYMEX Henry Hub natural gas contract for each month. The
Company also uses financially-settled crude oil and natural gas swaps, zero-cost
collars and options that provide floor prices with varying upside price
participation.
With a financially-settled swap, the counterparty is required to make a
payment to the Company if the settlement price for any settlement period is
below the hedged price for the transaction, and the Company is required to make
a payment to the counterparty if the settlement price for any settlement period
is above the hedged price for the transaction. With a zero-cost collar, the
counterparty is required to make a payment to the Company if the settlement
price for any settlement period is below the floor price of the collar, and the
Company is required to make a payment to the counterparty if the settlement
price for any settlement period is above the cap price for the collar. In some
hedges, we have modified our collar to provide full upside participation after a
limited non-participation range.
-8-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company had the following hedging contracts as of June 30, 2003:
NATURAL GAS POSITIONS
- ------------------------------------------------------------------------------------------------
VOLUME (MMBTU)
------------------
REMAINING CONTRACT TERM CONTRACT TYPE STRIKE PRICE ($/MMBTU) DAILY TOTAL
- --------------------------- ---------------------- ---------------------- ------ ---------
07/03 - 01/04............ Collar $3.50/$5.25 10,000 2,150,000
07/03 - 01/04............ Collar $3.50/$5.40 10,000 2,150,000
02/04 - 12/04............ Collar $3.50/$8.00 10,000 3,350,000
07/03 - 12/03............ Combination options $4.19/$6.12/$6.27 20,000 3,680,000
07/03 - 12/03............ Combination options $4.17/$6.12/$6.27 10,000 1,840,000
CRUDE OIL POSITIONS
- ------------------------------------------------------------------------------------------------
VOLUME (BBLS)
------------------
REMAINING CONTRACT TERM CONTRACT TYPE STRIKE PRICE ($/BBL) DAILY TOTAL
- --------------------------- ---------------------- ---------------------- ------ ---------
07/03 - 12/03............ Swap $ 26.36 2,000 368,000
07/03 - 12/03............ Swap $ 25.30 1,000 184,000
Subsequent to June 30, 2003 the Company entered into the following
contracts:
CRUDE OIL POSITIONS
- ------------------------------------------------------------------------------------------------
VOLUME (BBLS)
------------------
REMAINING CONTRACT TERM CONTRACT TYPE STRIKE PRICE ($/BBL) DAILY TOTAL
- --------------------------- ---------------------- ---------------------- ------ ---------
01/04 - 12/04............ Swap $ 27.35 1,500 549,000
Hedging activities reduced natural gas and crude oil revenues by $1.3
million and $8.8 million in the three and six month periods ended June 30, 2003
and reduced natural gas and crude oil revenues by $1.4 million and $0.1 million
in the three and six month periods ended June 30, 2002.
The following table reconciles the change in accumulated other
comprehensive income for the six month periods ending June 30, 2003 and 2002:
SIX MONTHS ENDED
JUNE 30, 2003
(IN THOUSANDS)
---------------------
Accumulated other comprehensive loss as of December 31, 2002.......... $ (2,171)
Net income............................................................ $ 21,746
Other comprehensive loss - net of tax
Hedging activities
Reclassification adjustments for settled contracts.......... 5,577
Changes in fair value of outstanding hedging positions...... (6,126)
----------
Total other comprehensive loss.......................... (549) (549)
---------- ---------
Comprehensive income.................................................. $ 21,197
==========
Accumulated other comprehensive loss as of June 30, 2003.............. $ (2,720)
=========
SIX MONTHS ENDED
JUNE 30, 2002
(IN THOUSANDS)
---------------------
Accumulated other comprehensive income as of December 31, 2001........ $ 981
Net loss.............................................................. $ (5,368)
Other comprehensive loss - net of tax
Hedging activities
Reclassification adjustments for settled contracts.......... 88
Changes in fair value of outstanding hedging positions...... (3,516)
----------
Total other comprehensive loss.......................... (3,428) (3,428)
---------- ---------
Comprehensive loss.................................................... $ (8,796)
==========
Accumulated other comprehensive loss as of June 30, 2002.............. $ (2,447)
=========
-9-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Based upon current prices, the Company expects to transfer approximately
$4.3 million of net deferred losses in accumulated other comprehensive loss as
of June 30, 2003 to earnings during the next twelve months when the forecasted
transactions actually occur.
(6) ASSET RETIREMENT OBLIGATION
In 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (Statement 143). Statement 143 requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred, a corresponding increase in the carrying amount of the related
long-lived asset and is effective for fiscal years beginning after June 15,
2002. The Company adopted Statement 143 effective January 1, 2003, using the
cumulative effect approach to recognize transition amounts for asset retirement
obligations, asset retirement costs and accumulated depreciation. The Company
previously recorded estimated costs of dismantlement, removal, site restoration
and similar activities as part of its depreciation, depletion and amortization
for oil and natural gas properties and recorded a separate liability for such
amounts in other liabilities. The effect of adopting Statement 143 on the
Company's results of operations and financial condition included a net increase
in long-term liabilities of $14.2 million; an increase in net property, plant
and equipment of $17.8 million; a cumulative effect of adoption income of $2.3
million, net of deferred income taxes of $1.3 million.
The following pro forma data summarizes the Company's net loss and net
loss per share as if the Company had adopted the provisions of Statement 143 on
January 1, 2002, including an associated pro forma asset retirement obligation
on that date of $ 33.3 million (in thousands, except per share amounts):
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2002 JUNE 30, 2002
------------- -------------
Net loss available to common stockholders, as reported.................... $ (421) $ (6,959)
Pro forma adjustments to reflect retroactive adoption of Statement 143.... (107) 42
----------- -----------
Pro forma net loss........................................................ $ (528) $ (6,917)
=========== ===========
Net loss per share:
Basic - as reported..................................................... $ (0.02) $ (0.25)
=========== ===========
Basic - pro forma....................................................... $ (0.02) $ (0.25)
=========== ===========
Diluted - as reported................................................... $ (0.02) $ (0.25)
=========== ===========
Diluted - pro forma..................................................... $ (0.02) $ (0.25)
=========== ===========
The following table reconciles the beginning and ending aggregate recorded
amount of the asset retirement obligation for the three months ended June 30,
2003 (in thousands):
ASSET
RETIREMENT
OBLIGATION
----------
December 31, 2002..................................... $ 22,669
Net impact of initial adoption..................... 14,211
Accretion expense.................................. 951
Liabilities incurred............................... 387
Liabilities settled................................ (269)
----------
June 30, 2003......................................... $ 37,949
==========
(7) ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure" (Statement 148). Statement 148 provides alternative methods of
transition for a voluntary change to the fair value based method of
-10-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
accounting for stock-based employee compensation. In addition, Statement 148
amends the disclosure requirements of Statement 123, "Accounting for Stock-Based
Compensation," to require more prominent and frequent disclosures in financial
statements about the effects of stock-based compensation. The transition
guidance and annual disclosure provisions of Statement 148 are effective for
fiscal years ending after December 15, 2002, while the interim disclosure
provisions are effective for periods beginning after December 15, 2002. The
Company is currently assessing the impact of the transition options presented in
Statement 148 and adoption of the disclosure provisions required by Statement
148 are included in note 2.
On April 30, 2003, the FASB issued Statement of Financial Accounting
Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" (Statement 149). Statement 149 amends and clarifies the
accounting guidance on (1) derivative instruments (including certain derivative
instruments embedded in other contracts) and (2) hedging activities that fall
within the scope of FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities statement 133). Statement 149 also amends
certain other existing pronouncements, which will result in more consistent
reporting of contracts that are derivatives in their entirety or that contain
embedded derivatives that warrant separate accounting. Statement 149 is
effective (1) for contracts entered into or modified after June 30, 2003, with
certain exceptions, and (2) for hedging relationships designated after June 30,
2003. The guidance is to be applied prospectively. The Company does not expect
the adoption of Statement 149 to have a material impact on its financial
position or results of operations or cash flows.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" (Statement 150). Statement 150 establishes
standards for how an issuer classifies and measures in its statement of
financial position certain financial instruments with characteristics of both
liabilities and equity. In accordance with the standard, financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. Statement 150 is effective for financial instruments entered into
or modified after May 31, 2003, and otherwise shall be effective at the
beginning of the first interim period beginning after June 15, 2003. The Company
does not expect the adoption of Statement 149 to have a material impact on its
financial position or results of operations or cash flows.
Statement of Financial Accounting Standards No. 141, "Business
Combinations," and No. 142, "Goodwill and Intangible Assets," became effective
for us on July 1, 2001 and January 1, 2002, respectively. On adoption, the
Company did not believe that these statements changed the existing authoritative
literature specific to accounting for oil and natural gas producing properties.
The Company believes the SEC and other accounting standards setters are
currently reviewing the application of the accounting prescribed by these
statements to the oil and natural gas industry. The result may be to require
that mineral use rights, such as leasehold interests, be separately classified
in the balance sheets of oil and natural gas companies. Specifically these
standards may require that mineral use rights, including proved leaseholds
acquired subsequent to June 30, 2001, be classified on the balance sheet as
intangible assets. Accordingly, in a future filing the Company may be required
to reclassify, on the balance sheets presented, mineral use rights, including
leasehold interests, acquired subsequent to July 1, 2001. The reclassification
would result in amounts being reclassified from "property and equipment" to
"intangible acquired proved leaseholds" and "unproved intangible oil and natural
gas properties." The amounts reclassified from "net property and equipment"
would have no effect on depreciation, depletion and amortization, net income
(loss) available to common stockholders, total assets or total accumulated
depreciation, depletion and amortization for the periods presented.
(8) PUBLIC OFFERING
On April 16, 2003, the Company completed the public offering of
approximately 6.8 million shares of its common stock (the Equity Offering),
which was priced at $9.50 per share. The Equity Offering included 4.2 million
shares offered by the Company, 1.7 million shares offered by Evercore Capital
Partners L.P. and certain of its affiliates, and 0.9 million shares offered by
Energy Income Fund, L.P. In addition, the underwriters exercised their option to
purchase 1.0 million additional shares to cover over-allotments, the proceeds
from which went to
-11-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
selling shareholders and not to the Company. After payment of underwriting
discounts and commissions, the offering generated net proceeds to the Company of
approximately $38.0 million. After expenses of approximately $0.4 million, the
proceeds were used to repay a portion of outstanding borrowings under the
Company's $100 million revolving credit facility.
(9) SUBSEQUENT EVENT
On August 5, 2003, the Company issued $150 million of 8.75% Senior Notes
Due 2010 (the Senior Notes) in a Rule 144A private offering (the Debt Offering)
at 100% of principal amount. After discounts and commissions and estimated
offering expenses, the Company received $145.3 million, which is being used to
redeem all of the outstanding 11% Senior Subordinated Notes Due 2009 (see note
3) and to repay substantially all of the borrowings outstanding under the
Company's bank credit facility. The remainder of the net proceeds will be used
for general corporate purposes, including acquisitions.
The Senior Notes mature on August 1, 2010 with interest payable each
February 1 and August 1, commencing February 1, 2004. The indenture relating to
the Senior Notes contains certain restrictions on the Company's ability to incur
additional debt, pay dividends on its common stock, make investments, create
liens on its assets, engage in transactions with its affiliates, transfer or
sell assets and consolidate or merge substantially all of its assets. The Senior
Notes are not subject to any sinking fund requirements.
On July 28, 2003 the Company amended its bank credit facility in
connection with the Debt Offering. The amendment reduced the borrowing base
under the bank credit facility to $60 million upon consummation of the Debt
Offering. The borrowing base will remain subject to redetermination based on the
proved reserves of the oil and natural gas properties.
(10) CONTINGENCIES
In the ordinary course of business, the Company is a defendant in various
legal proceedings. The Company does not expect its exposure in these
proceedings, individually or in the aggregate, to have a material adverse effect
on the financial position, results of operations or liquidity of the Company.
(11) RECLASSIFICATIONS
Certain reclassifications have been made to the prior period financial
statements in order to conform to the classification adopted for reporting in
fiscal 2003.
-12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are an independent oil and natural gas exploration and production
company, incorporated in January 1998, with operations concentrated in the
shallow to moderate depth waters of the Gulf of Mexico Shelf.
We use the successful efforts method of accounting for our investment in
oil and natural gas properties. Under this method, we capitalize lease
acquisition costs, costs to drill and complete exploration wells in which proven
reserves are discovered and costs to drill and complete development wells.
Seismic, geological and geophysical and delay rental expenditures are expensed
as incurred. We conduct many of our exploration and development activities
jointly with others and, accordingly, recorded amounts for our oil and natural
gas properties reflect only our proportionate interest in such activities. Our
annual report on Form 10-K includes a discussion of our critical accounting
policies, which have not significantly changed.
On January 15, 2002, we closed the acquisition of Hall-Houston Oil Company
("HHOC") and certain affiliated interests. At closing, we issued $38.4 million
liquidation preference of newly authorized Series D Exchangeable Convertible
Preferred Stock, with an issue date fair value of $34.7 million, discounted to
effect the increasing dividend rate, $38.4 million of 11% Senior Subordinated
Notes ("the Notes") due 2009 (immediately callable at par) and 574,931 shares of
common stock. We also paid $9.0 million of cash including $3.9 million of
accrued interest and prepayment fees paid to former debt holders, assumed HHOC's
working capital deficit and issued warrants, with a fair market value of
approximately $3.0 million, to purchase four million shares of common stock.
Former preferred stockholders of HHOC also received the right to receive
contingent consideration related to future proved reserve additions generally to
come from certain exploratory prospect acreage held by HHOC as of the closing
date. We have included the results of operations from the HHOC acquisition with
ours from the closing date of January 15, 2002.
On August 5, 2003, we issued $150 million of 8.75% Senior Notes Due 2010
("the Senior Notes") in a Rule 144A private offering ("the Debt Offering") at
100% of principal amount. After discounts and commissions and estimated offering
expenses, we received $145.3, which is being used to redeem all of our
outstanding 11% Senior Subordinated Notes Due 2009 and to repay substantially
all of the borrowings outstanding under our bank credit facility. The remainder
of the net proceeds will be used for general corporate purposes, including
acquisitions.
We amended our bank credit facility in connection with the Debt Offering.
The amendment reduced the borrowing base under our bank credit facility to $60
million upon consummation of the Debt Offering. The borrowing base will remain
subject to redetermination based on the proved reserves of the oil and natural
gas properties.
Our revenue, profitability and future growth rate depend substantially on
factors beyond our control, such as economic, political and regulatory
developments and competition from other sources of energy. Oil and natural gas
prices historically have been volatile and may fluctuate widely in the future.
Sustained periods of low prices for oil and natural gas could materially and
adversely affect our financial position, our results of operations, the
quantities of oil and natural gas reserves that we can economically produce and
our access to capital.
-13-
RESULTS OF OPERATIONS
The following table presents information about our oil and natural gas
operations.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net Production (per day):
Oil (Bbls) 7,483 9,067 7,746 8,972
Natural gas (Mcf) 73,607 56,550 71,817 54,956
Total barrels of oil equivalent (Boe) 19,751 18,492 19,716 18,131
Oil and Natural Gas Revenues (in thousands):
Oil $ 18,274 $ 19,717 $ 40,077 $ 35,955
Natural gas 35,872 17,008 71,023 30,311
Total oil & natural gas revenues 54,146 36,725 111,100 66,266
Average Sales Prices (1):
Oil (per Bbl) $ 26.84 $ 23.90 $ 28.59 $ 22.14
Natural gas (per Mcf) 5.36 3.31 5.46 3.05
Average sales price (per Boe) 30.13 21.82 31.13 20.19
Average Costs (per Boe):
Lease operating expense $ 5.24 $ 5.08 $ 4.89 $ 5.29
Taxes, other than on earnings 0.99 0.96 1.16 0.96
Depreciation, depletion and amortization 10.87 10.62 10.40 10.44
(1) Net of the effect of hedging transactions
PRODUCTION
CRUDE OIL AND CONDENSATE. Our net oil production for the second quarter of
2003 decreased to 7,483 Bbls per day from 9,067 Bbls per day in the second
quarter of 2002. Our net oil production for the first six months of 2003
decreased to 7,746 Bbls per day from 8,972 Bbls per day in the same period of
2002. The decrease was the result of less well-work performed on oil wells in
the second quarter and first half of 2003 combined with natural reservoir
declines.
NATURAL GAS. Our net natural gas production for the second quarter of 2003
increased to 73,607 Mcf per day from 56,550 Mcf per day in the second quarter of
2002. Our net natural gas production for the first six months of 2003 increased
to 71,817 Mcf per day from 54,956 Mcf per day in the same period of 2002. The
increase was the result of new production from workovers/recompletions on
natural gas wells combined with ten natural gas wells completed and brought on
production subsequent to the second quarter 2002, partially offset by natural
reservoir declines.
REALIZED PRICES
CRUDE OIL AND CONDENSATE. Our average realized oil price in the second
quarter of 2003 was $26.84 per Bbl, an increase of 12% from an average
realized price of $23.90 per Bbl in the second quarter of 2002. Hedging
activities reduced oil price realizations by $0.73 per Bbl or 3% from the $27.57
per Bbl that would have otherwise been received in the second quarter of 2003.
In the second quarter of 2002, hedging activities reduced oil price realizations
by $0.36 per Bbl or 1% from the $24.26 per Bbl that would have otherwise been
received.
Our average realized oil price in the first half of 2003 was $28.59 per
Bbl, an increase of 29% from an average realized price of $22.14 per Bbl in the
first half of 2002. Hedging activities reduced oil price realizations by $1.61
per Bbl from the $30.20 per Bbl that would have otherwise been received in the
first half of 2003. In the first half of 2002, hedging activities reduced oil
price realizations by $0.18 per Bbl or 1% from the $22.32 per Bbl that would
have otherwise been received.
-14-
NATURAL GAS. Our average realized natural gas price in the second quarter
of 2003 was $5.36 per Mcf, an increase of 62% from an average realized price of
$3.31 per Mcf in the second quarter of 2002. Hedging activities reduced natural
gas price realizations by $0.12 per Mcf or 2% from the $5.48 per Mcf that would
have otherwise been received in the second quarter of 2003. Hedging activities
reduced natural gas price realizations by $0.22 per Mcf or 6% from the $3.53 per
Mcf that would have otherwise been received in the second quarter of 2002.
Our average realized natural gas price in the first half of 2003 was $5.46
per Mcf, an increase of 79% over an average realized price of $3.05 per Mcf in
the first half of 2002. In the first half of 2003, hedging activities decreased
natural gas price realizations by $0.50 per Mcf from the $5.96 per Mcf that
would have otherwise been received. In the first half of 2002, hedging
activities increased natural gas price realizations by $0.02 per Mcf from $3.03
per Mcf that would have otherwise been received.
NET INCOME AND REVENUES
Our oil and natural gas revenues increased to $54.1 million in the second
quarter of 2003 from $36.7 million in the second quarter of 2002. The
significant increase is the result of a Boe production volume increase of 7%,
combined with the sharp increase in oil and natural gas prices.
Our oil and natural gas revenues increased to $111.1 million in the first
half of 2003 from $66.3 million in the first half of 2002. The significant
increase is a result of a Boe production volume increase of 9%, combined with
the sharp increase in oil and natural gas prices.
We recognized net income of $7.6 million in the second quarter of 2003
compared to net income of $0.4 million in the second quarter of 2002. We
recognized net income of $21.7 million in the first half of 2003 compared to a
net loss of $5.4 million in the first half of 2002. The increase in net income
was primarily due to the increase in oil and natural gas revenues previously
discussed and partially offset by higher operating costs. In addition, the
following items had a significant impact on our net income or loss in these
periods and affect the comparability of the results of operations for the
periods:
- - In January 2003, we adopted the Financial Accounting Standards Boards'
Statement 143, Accounting for Asset Retirement Obligations, using the
cumulative effect approach to recognize transition amounts for asset
retirement obligations, asset retirement costs and accumulated
depreciation. We previously recorded estimated costs of dismantlement,
removal, site restoration and similar activities as part of its
depreciation, depletion and amortization for oil and natural gas
properties and recorded a separate liability for such amounts in other
liabilities. The effect of adopting Statement 143 on the results of
operations for the six months ended June 30, 2003 included a cumulative
effect of adoption income of $2.3 million net of deferred income taxes.
- - In March 2002, in connection with management's plan to reduce costs and
effectively combine the operations of HHOC with ours, we executed a
severance plan and recorded an expense of $1.2 million.
OPERATING EXPENSES
Operating expenses during the three and six month periods ended June 30, 2003
and 2002 were impacted by the following:
- - Lease operating expense increased to $9.4 million in the second quarter of
2003 from $8.5 million in the second quarter of 2002. This is a result of
the addition of production from new fields, with the timing and nature
of workovers performed and higher than expected costs on non-operated
fields.
Lease operating expense increased slightly to $17.4 million in the first
half of 2003 from $17.3 million in the first half of 2002. The slight
increase is due to the reasons discussed above.
- - Taxes, other than on earnings increased to $1.8 million in the second
quarter of 2003 from $1.6 million in the second quarter of 2002. Taxes,
other than on earnings increased to $4.2 million in the first half of 2003
from $3.2 million in the first half of 2002. The increases were due to
increases in
-15-
the production volumes and prices received for our oil and natural gas
production on state leases, primarily at East Bay and Bay Marchand,
subject to Louisiana severance taxes.
- - Depreciation, depletion and amortization increased to $19.5 million in the
second quarter of 2003 from $17.9 million in the second quarter of 2002.
Depreciation, depletion and amortization increased to $37.1 million in the
first half of 2003 from $34.3 million in the first half of 2002. The
increases were due to the increased depreciable asset base combined with a
shift in the production contribution from our various fields.
- - Other general and administrative expenses increased to $5.6 million in the
second quarter of 2003 from $5.0 million in the second quarter of 2002.
The increase was primarily due to increased compensation expense ($0.3
million) as well as increases in various other costs.
Other general and administrative expenses increased to $13.0 million in
the first half of 2003 from $11.3 million in the first half of 2002. The
increase was primarily due to additional personnel costs ($2.6 million),
offset by eliminating redundant costs in the Houston and New Orleans
offices and decreases in various other costs.
- - As previously discussed, $1.2 million of severance costs were incurred in
the first half of 2002 in connection with the HHOC acquisition. Management
assessed the personnel needs of the combined companies and implemented a
plan to terminate 14 employees.
- - Non-cash stock-based compensation expense of $0.4 million was recognized
in the second quarter of 2003 compared to $0.1 million in the second
quarter of 2002. Non-cash stock-based compensation expense of $0.5 million
was recognized in the first half of 2003 compared to $0.2 million
recognized in the first half of 2002. The expense relates to restricted
stock and stock option grants made to employees.
OTHER INCOME AND EXPENSE
INTEREST. Interest expense decreased to $1.6 million in the second quarter
of 2003 from $1.8 million in the second quarter of 2002. The decrease was a
result of decreased borrowings under our bank facility. Interest expense for the
year to date period remained constant at $3.4 million in 2003 and 2002.
LIQUIDITY AND CAPITAL RESOURCES
We intend to use cash flows from operations before changes in working
capital to fund our future capital expenditure program. Our future cash flows
from operations before changes in working capital will depend on our ability to
maintain and increase production through our development and exploratory
drilling program, as well as the prices we receive for oil and natural gas. We
may, from time to time, use the availability of our bank credit facility for
working capital needs.
Our bank credit facility, as amended on July 28, 2003, consists of a
revolving line of credit with a group of banks available through March 30, 2005
(the "bank facility"). The bank facility currently has a borrowing base of $60
million that is subject to redetermination based on the proved reserves of the
oil and natural gas properties that serve as collateral for the bank facility as
set out in the reserve report delivered to the banks each April 1 and October 1.
The bank facility permits both prime rate based borrowings and LIBOR based
borrowings plus a floating spread. The spread will float up or down based on our
utilization of the bank facility. The spread can range from 1.50% to 2.25% above
LIBOR and 0% to 0.75% above prime. The borrowing base under the bank facility is
secured by substantially all of our oil and natural gas assets. The bank
facility contains customary events of default and requires that we satisfy
various financial covenants. Giving effect to use of proceeds from the Debt
Offering, we have $0.1 million outstanding and $59.9 million of credit capacity
available under the bank facility. Also included in long-term debt in the
consolidated balance sheet is $38.4 million of the Notes, due in January 2009,
which were redeemed on August 5, 2003 as a result of the Debt Offering. As a
result of the Debt Offering, the Company now has outstanding $150 million in
8.75% Senior Notes due August 2010.
Net cash of $63.7 million used in investing activities in the first six
months of 2003 consisted primarily of oil and natural gas property capital and
exploration expenditures. Dry hole costs resulting from exploration expenditures
are excluded from operating cash flows and included in investing activities.
-16-
During the first half of 2003, we completed 9 drilling projects, 7 of which were
successful and 19 recompletion/workover projects, 17 of which were successful.
During the first half of 2002, we completed 3 drilling projects, all of which
were successful and 11 recompletion/workover projects, 9 of which were
successful.
Our 2003 capital expenditure budget is focused on exploration,
exploitation and development activities on our proved properties combined with
moderate risk and higher risk exploratory activities on undeveloped leases. We
currently intend to allocate approximately 65% of our budget on an annual basis
to low risk development and exploitation activities, approximately 25% to
moderate risk exploration opportunities and approximately 10% to higher risk,
higher potential exploration opportunities. Our capital expenditure budget for
2003 is currently approximately $110 million. During the first six months of
2003, capital expenditures were approximately $56.7 million. The level of our
capital expenditure budget is based on many factors, including results of our
drilling program, oil and natural gas prices, industry conditions, participation
by other working interest owners and the costs of drilling rigs and other
oilfield goods and services. Should actual conditions differ materially from
expectations, some projects may be accelerated or deferred and, consequently,
may increase or decrease total 2003 capital expenditures.
We have experienced and expect to continue to experience substantial
working capital requirements, primarily due to our active capital expenditure
program. We believe that cash flows from operations before changes in working
capital will be sufficient to meet our capital requirements for at least the
next twelve months. Availability under the bank facility will be used to balance
short-term fluctuations in working capital requirements. However, additional
financing may be required in the future to fund our growth.
Our annual report on Form 10-K for the year ended December 31, 2002
included a discussion of our contractual obligations; the only change to that
disclosure during the six months ended June 30, 2003 is the decrease in
borrowings under our bank facility discussed herein. Subsequent to June 30, 2003
as discussed above, we issued the Senior Notes in a Rule 144A private offering.
We used $38.4 million of the net proceeds from the Debt Offering to redeem all
of our outstanding 11% Senior Subordinated Notes Due 2009.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure" ("Statement 148"). Statement 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, Statement 148 amends the
disclosure requirements of Statement 123, "Accounting for Stock-Based
Compensation," to require more prominent and frequent disclosures in financial
statements about the effects of stock-based compensation. The transition
guidance and annual disclosure provisions of Statement 148 are effective for
fiscal years ending after December 15, 2002, while the interim disclosure
provisions are effective for periods beginning after December 15, 2002. We are
currently assessing the impact of the transition options presented in Statement
148 and adoption of the disclosure provisions required by Statement 148 are
included in note 2 of the financial statements.
On April 30, 2003, the FASB issued Statement of Financial Accounting
Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" ("Statement 149"). Statement 149 amends and clarifies the
accounting guidance on (1) derivative instruments (including certain derivative
instruments embedded in other contracts) and (2) hedging activities that fall
within the scope of FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities ("Statement 133"). Statement 149 also amends
certain other existing pronouncements, which will result in more consistent
reporting of contracts that are derivatives in their entirety or that contain
embedded derivatives that warrant separate accounting. Statement 149 is
effective (1) for contracts entered into or modified after June 30, 2003, with
certain exceptions, and (2) for hedging relationships designated after June 30,
2003. The guidance is to be applied prospectively. We do not expect the adoption
of Statement 149 to have a material impact on our financial position or results
of operations or cash flows.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" ("Statement 150"). Statement 150 establishes
standards for how an issuer classifies and measures in its statement of
-17-
financial position certain financial instruments with characteristics of both
liabilities and equity. In accordance with the standard, financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. Statement 150 is effective for financial instruments entered into
or modified after May 31, 2003, and otherwise shall be effective at the
beginning of the first interim period beginning after June 15, 2003. We do not
expect the adoption of Statement 149 to have a material impact on our financial
position or results of operations or cash flows.
Statement of Financial Accounting Standards No. 141, "Business
Combinations," and No. 142, "Goodwill and Intangible Assets," became effective
for us on July 1, 2001 and January 1, 2002, respectively. On adoption, we did
not believe that these statements changed the existing authoritative literature
specific to accounting for oil and natural gas producing properties. We believe
the SEC and other accounting standards setters are currently reviewing the
application of the accounting prescribed by these statements to the oil and
natural gas industry. The result may be to require that mineral use rights, such
as leasehold interests, be separately classified in the balance sheets of oil
and natural gas companies. Specifically these standards may require that mineral
use rights, including proved leaseholds acquired subsequent to June 30, 2001, be
classified on the balance sheet as intangible assets. Accordingly, in a future
filing we may be required to reclassify, on the balance sheets presented,
mineral use rights, including leasehold interests, acquired subsequent to July
1, 2001. The reclassification would result in amounts being reclassified from
"property and equipment" to "intangible acquired proved leaseholds" and
"unproved intangible oil and natural gas properties." The amounts reclassified
from "net property and equipment" would have no effect on depreciation,
depletion and amortization, net income (loss) available to common stockholders,
total assets or total accumulated depreciation, depletion and amortization for
the periods presented.
FORWARD LOOKING INFORMATION
All statements other than statements of historical fact contained in this
Report and other periodic reports filed by us under the Securities Exchange Act
of 1934 and other written or oral statements made by us or on our behalf, are
forward-looking statements. When used herein, the words "anticipates",
"expects", "believes", "goals", "intends", "plans", or "projects" and similar
expressions are intended to identify forward-looking statements. It is important
to note that forward-looking statements are based on a number of assumptions
about future events and are subject to various risks, uncertainties and other
factors that may cause our actual results to differ materially from the views,
beliefs and estimates expressed or implied in such forward-looking statements.
We refer you specifically to the section "Additional Factors Affecting Business"
in Items 1 and 2 of our Annual Report on Form 10-K for the year ended December
31, 2002. Although we believe that the assumptions on which any forward-looking
statements in this Report and other periodic reports filed by us are reasonable,
no assurance can be given that such assumptions will prove correct. All
forward-looking statements in this document are expressly qualified in their
entirety by the cautionary statements in this paragraph.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
We are exposed to changes in interest rates. Changes in interest rates
affect the interest earned on our cash and cash equivalents and the interest
rate paid on borrowings under the bank facility. Under our current policies, we
do not use interest rate derivative instruments to manage exposure to interest
rate changes. At June 30, 2003, $40 million of our long-term debt had variable
interest rates, while the remaining long-term debt had fixed interest rates. If
market interest rates had averaged 1% higher in the first half 2003, interest
expense for the period on variable rate debt would have increased, and net
income before income taxes would have decreased by approximately $0.3 based on
total variable rate debt outstanding during the period. If market interest rates
had averaged 1% lower in the first half of 2004 than in 2003, interest expense
for the period on variable rate debt would have decreased, and net income before
income taxes would have increased by approximately $0.3 million. After closing
the Debt Offering and applying the proceeds there from, we will only have
$100,000 outstanding on our variable rate debt.
-18-
COMMODITY PRICE RISK
Our revenues, profitability and future growth depend substantially on
prevailing prices for oil and natural gas. Prices also affect the amount of cash
flow available for capital expenditures and our ability to borrow and raise
additional capital. The amount we can borrow under the bank facility is subject
to periodic redetermination based in part on changing expectations of future
prices. Lower prices may also reduce the amount of oil and natural gas that we
can economically produce. We currently sell all of our oil and natural gas
production under price sensitive or market price contracts.
We use derivative commodity instruments to manage commodity price risks
associated with future oil and natural gas production. As of June 30, 2003, we
had the following contracts in place:
NATURAL GAS POSITIONS
- ------------------------------------------------------------------------------------------------------
VOLUME (MMBTU)
--------------------
REMAINING CONTRACT TERM CONTRACT TYPE STRIKE PRICE ($/MMBTU) DAILY TOTAL
- ------------------------- ------------------- ----------------------- ------ ---------
07/03 - 01/04 ........... Collar $3.50/$5.25 10,000 2,150,000
07/03 - 01/04 ........... Collar $3.50/$5.40 10,000 2,150,000
02/04 - 12/04 ........... Collar $3.50/$8.00 10,000 3,350,000
07/03 - 12/03 ........... Combination options $4.19/$6.12/$6.27 20,000 3,680,000
07/03 - 12/03 ........... Combination options $4.17/$6.12/$6.27 10,000 1,840,000
CRUDE OIL POSITIONS
- ------------------------------------------------------------------------------------------------------
VOLUME (BBLS)
--------------------
REMAINING CONTRACT TERM CONTRACT TYPE STRIKE PRICE ($/BBL) DAILY TOTAL
- ------------------------- ------------------- ----------------------- ------ ---------
07/03 - 12/03 ......... Swap $ 26.36 2,000 368,000
07/03 - 12/03 ......... Swap $ 25.30 1,000 184,000
Subsequent to June 30, 2003 we entered into the following contracts:
CRUDE OIL POSITIONS
- ------------------------------------------------------------------------------------------------------
VOLUME (BBLS)
--------------------
REMAINING CONTRACT TERM CONTRACT TYPE STRIKE PRICE ($/BBL) DAILY TOTAL
- ------------------------- ------------------- ----------------------- ------ ---------
01/04 - 12/04 ......... Swap $ 27.35 1,500 549,000
Our hedged volume as of June 30, 2003 approximated 27% of our estimated
production from proved reserves for the balance of the terms of the contracts.
We use a sensitivity analysis technique to evaluate the hypothetical
effect that changes in the market value of crude oil and natural gas may have on
the fair value of our derivative instruments. At June 30, 2003, the potential
change in the fair value of commodity derivative instruments assuming a 10%
adverse movement in the underlying commodity price was a $3.7 million increase
in the combined estimated loss.
For purposes of calculating the hypothetical change in fair value, the
relevant variables are the type of commodity (crude oil or natural gas), the
commodities futures prices and volatility of commodity prices. The hypothetical
fair value is calculated by multiplying the difference between the hypothetical
price and the contractual price by the contractual volumes.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of certain members of the
Company's management, including the Chief Executive Officer and Chief Financial
Officer, the Company completed an evaluation of the effectiveness of its
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
to the Securities Exchange Act of 1934, as amended). Based on this evaluation,
the Company's Chief Executive Officer and Chief Financial Officer believe that
the disclosure controls and procedures were effective as of the end of the
period covered by this report with respect to timely communication to them and
other members of management responsible for preparing periodic reports and all
material information required to be disclosed in this report as it relates to
the Company and its consolidated subsidiaries. There was no change in the
Company's internal control over financial reporting during the Company's last
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, does not expect that our disclosure controls and procedures
or our internal controls will prevent all errors and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be
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considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons or by collusion of two or more people. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected. Accordingly,
our disclosure controls and procedures are designed to provide reasonable, not
absolute, assurance that the objectives of our disclosure control system are
met and, as set forth above, our chief executive officer and chief financial
officer have concluded, based on their evaluation as of the end of the period,
that our disclosure controls and procedures were sufficiently effective to
provide reasonable assurance that the objectives of our disclosure control
system were met.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO THE VOTE OF SECURITY HOLDERS
a) At the Annual Meeting of Stockholders of the Company held on May 6, 2003, the
stockholders elected certain directors to serve until the 2004 Annual Meeting of
Stockholders.
The voting tabulation is as follows:
FOR AGAINST WITHHELD
--- ------- --------
Election as a Directors of the Company of:
Richard A. Bachmann 24,094,192 -- 72,275
Austin M. Beutner 22,000,421 -- 2,166,046
John C. Bumgarner, Jr 22,089,826 -- 2,076,641
Jerry D. Carlisle 24,104,886 -- 61,581
Harold D. Carter 24,069,410 -- 97,057
Robert D. Gershen 23,840,912 -- 325,555
Gary L. Hall 24,102,336 -- 64,131
William O. Hiltz 22,271,645 -- 1,894,822
Dr. Eamon M. Kelly 24,069,210 -- 97,257
John G. Phillips 23,838,912 -- 327,555
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 First Amendment to the Third Amended and Restated Revolving Credit
Agreement, among Energy Partners, Ltd., EPL of Louisiana, L.L.C. and Delaware
EPL of Texas, LLC, the undersigned banks and financial institutions that are
parties to the Credit Agreement and Bank One, N.A. dated as of July 28, 2003.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chairman, President, and Chief
Executive Officer of Energy Partners, Ltd.
31.2 Rule 13a-14(c)/15d-14(a) Certification of Executive Vice President and
Chief Financial Officer of Energy Partners, Ltd.
32.0 Section 1350 Certifications.
(b) Reports on Form 8-K:
On April 3, 2003 the Company filed a current report on Form 8-K,
reporting, under Items 5 and 7, the issuance of a press release regarding
the preliminary results of a lease auction by the U.S.
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Department of the Interior, Minerals Management Service (the "MMS") where
the Company was the high bidder for six lease blocks, an amended and
restated stockholder agreement between the Company and certain of its
stockholders, the issuance of a press release regarding the increase of
the size of the Board of Directors and the issuance of a press release
regarding recent exploration results.
On May 5, 2003 the Company furnished a current report on Form 8-K,
reporting, under Items 9 and 7, the issuance of a press release regarding
2003 first quarter earnings.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENERGY PARTNERS, LTD.
Date: August 8, 2003 By: /s/ SUZANNE V. BAER
---------------------------------
Suzanne V. Baer
Executive Vice President and
Chief Financial Officer
(Authorized Officer and Principal
Financial Officer)
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EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------ ----------------------
10.1 First Amendment to the Third Amended and Restated Revolving
Credit Agreement, among Energy Partners, Ltd., EPL of
Louisiana, L.L.C. and Delaware EPL of Texas, LLC, the
undersigned banks and financial institutions that are parties
to the Credit Agreement and Bank One, N.A. dated as of July
28, 2003.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chairman, President,
and Chief Executive Officer of Energy Partners, Ltd.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Executive Vice
President and Chief Financial Officer of Energy Partners, Ltd.
32.0 Section 1350 Certifications.
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