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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 March 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 1-14344
__________________________
PATINA OIL & GAS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-2629477
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1625 Broadway
Denver, Colorado 80202
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (303) 389-3600
Title of class Name of exchange on which listed
---------------------------- ------------------------------------
Common Stock, $.01 par value New York Stock Exchange
Common Stock Warrants New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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 ___________.
-----------
There were 19,583,883 shares of common stock outstanding on April 30, 2001.
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PART I. FINANCIAL INFORMATION
Patina Oil & Gas Corporation (the "Company") was formed in 1996 to hold the
assets and operations of Snyder Oil Corporation ("SOCO") in the Wattenberg Field
and to facilitate the acquisition of Gerrity Oil & Gas Corporation. The
financial statements included herein have been prepared in conformity with
generally accepted accounting principles. The statements are unaudited but
reflect all adjustments, which, in the opinion of management, are necessary to
fairly present the Company's financial position and results of operations.
2
PATINA OIL & GAS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
December 31, March 31,
2000 2001
------------ -----------
(Unaudited)
ASSETS
Current assets
Cash and equivalents $ 2,653 $ 510
Accounts receivable 31,830 32,593
Inventory and other 4,885 4,335
Unrealized hedging gains - 3,503
--------- ---------
39,368 40,941
--------- ---------
Oil and gas properties, successful efforts method 709,248 717,352
Accumulated depletion, depreciation and amortization (353,344) (364,985)
--------- ---------
355,904 352,367
--------- ---------
Gas facilities and other 4,580 4,849
Accumulated depreciation (3,098) (3,337)
--------- ---------
1,482 1,512
--------- ---------
Other assets 24,500 6,051
Unrealized hedging gains - 8,154
--------- ---------
$ 421,254 $ 409,025
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 23,073 $ 33,257
Accrued liabilities 7,794 5,293
Unrealized hedging losses - 11,082
--------- ---------
30,867 49,632
--------- ---------
Senior debt 177,000 138,000
Deferred income taxes 15,776 16,354
Other noncurrent liabilities 21,165 19,466
Commitments and contingencies
Stockholders' equity
Preferred Stock, $.01 par, 5,000,000 shares
authorized, none issued - -
Common Stock, $.01 par, 100,000,000 shares
authorized, 20,043,859 and 19,498,777 shares
issued and outstanding 200 195
Capital in excess of par value 151,392 138,602
Retained earnings 24,854 46,432
Other comprehensive income - 344
--------- ---------
176,446 185,573
--------- ---------
$ 421,254 $ 409,025
========= =========
The accompanying notes are an integral part of these statements.
3
PATINA OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
Three Months Ended March 31,
----------------------------
2000 2001
------- -------
(Unaudited)
Revenues
Oil and gas sales $31,274 $63,566
Other 302 886
------- -------
31,576 64,452
------- -------
Expenses
Direct operating 5,583 11,902
Exploration 19 103
General and administrative 1,639 2,566
Interest and other 2,561 3,050
Depletion, depreciation and amortization 10,281 11,901
------- -------
20,083 29,522
------- -------
Pre-tax income 11,493 34,930
------- -------
Provision for income taxes
Current - 6,287
Deferred 2,299 6,288
------- -------
2,299 12,575
------- -------
Net income $ 9,194 $22,355
======= =======
Net income per share
Basic $ 0.47 $ 1.14
======= =======
Diluted $ 0.40 $ 1.00
======= =======
Weighted average shares outstanding
Basic 16,265 19,605
======= =======
Diluted 21,758 22,458
======= =======
The accompanying notes are integral part of these statements.
4
PATINA OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
(In thousands)
Other
Capital in Retained Comprehensive Total
Preferred Stock Common Stock Excess of Deferred Earnings Income Stockholders'
---------------- ----------------
Shares Amount Shares Amount Par Value Compensation (Deficit) (Loss) Equity
------- ------- ------- ------- --------- ------------- --------- -------------- --------------
Balance, December 31, 1999 2,383 $ 24 16,131 $161 $188,545 $(279) $(22,561) $ - $165,890
Repurchase of common and
preferred (514) (5) (1,638) (16) (41,575) - (549) - (42,145)
Conversion of preferred
into common (1,869) (19) 4,934 49 (31) - - - (1)
Issuance of common - - 617 6 4,453 - - - 4,459
Preferred and common
dividends - - - - - - (4,477) - (4,477)
Net income - - - - - 279 52,441 - 52,720
------ ---- ------ ---- -------- ----- -------- -------- --------
Balance, December 31, 2000 - - 20,044 200 151,392 - 24,854 - 176,446
Repurchase of common - - (808) (8) (16,917) - - - (16,925)
Issuance of common - - 198 2 3,316 - - - 3,318
Conversion of warrants - - 65 1 811 - - - 812
Common dividends - - - - - - (777) - (777)
Comprehensive income:
Net income - - - - - - 22,355 - 22,355
Cumulative effect of
accounting change, net of tax - - - - - - - (25,077) (25,077)
Reclassifications
adjustments - - - - - - - 9,587 9,587
Change in unrealized
hedging gains - - - - - - - 15,834 15,834
------ ---- ------ ---- -------- ----- -------- -------- --------
Total comprehensive income - - - - - - 22,355 344 22,699
------ ---- ------ ---- -------- ----- -------- -------- --------
Balance, March 31, 2001
(unaudited) - $ - 19,499 $195 $138,602 $ - $ 46,432 $ 344 $185,573
====== ==== ====== ==== ======== ===== ======== ======== ========
The accompanying notes are an integral part of these statements.
5
PATINA OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended March 31,
-------------------------------
2000 2001
-------- --------
(Unaudited)
Operating activities
Net income $ 9,194 $ 22,355
Adjustments to reconcile net income to net
cash provided by operations
Exploration expense 19 103
Depletion, depreciation and amortization 10,281 11,901
Deferred income taxes 2,299 6,288
Deferred compensation expense 70 -
Amortization of deferred credits (365) 15
Amortization of loan fees 76 -
Changes in current and other assets and liabilities
Decrease in
Accounts receivable 731 (763)
Inventory and other 428 453
Increase (decrease) in
Accounts payable 552 13,886
Accrued liabilities (1,268) (2,501)
Other assets and liabilities (270) 2,973
-------- --------
Net cash provided by operating activities 21,747 54,710
-------- --------
Investing activities
Acquisition, development and exploration (8,611) (23,209)
Disposition of oil and gas properties - 15,247
Other (105) (212)
-------- --------
Net cash used by investing activities (8,716) (8,174)
-------- --------
Financing activities
Increase (decrease) in indebtedness 2,000 (39,000)
Repayment from affiliate - 18,500
Deferred credits - (13,209)
Issuance of common stock 1,503 2,732
Repurchase of common stock (2,043) (16,925)
Repurchase of preferred stock (12,846) -
Preferred stock redemption premium (549) -
Preferred and common dividends (1,459) (777)
-------- --------
Net cash used by financing activities (13,394) (48,679)
-------- --------
Decrease in cash (363) (2,143)
Cash and equivalents, beginning of period 626 2,653
-------- --------
Cash and equivalents, end of period $ 263 $ 510
======== ========
The accompanying notes are an integral part of these statements.
6
PATINA OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND NATURE OF BUSINESS
Patina Oil & Gas Corporation (the "Company" or "Patina"), a Delaware
corporation, was formed in 1996 to hold the assets of Snyder Oil Corporation
("SOCO") in the Wattenberg Field and to facilitate the acquisition of Gerrity
Oil & Gas Corporation ("Gerrity"). In conjunction with the Gerrity acquisition,
SOCO received 14.0 million shares of Patina common stock. In 1997, a series of
transactions eliminated SOCO's ownership.
In November 2000, Patina acquired various property interests out of a
bankruptcy. The assets were acquired through Elysium Energy, L.L.C. ("Elysium"),
a New York limited liability company, in which Patina holds a 50% interest.
Patina invested $21.0 million of equity and provided a $60.0 million credit
facility to Elysium. See Note (9). The accompanying consolidated financial
statements were prepared on a proportionate consolidation basis, including
Patina's 50% interest in Elysium's assets, liabilities, revenues and expenses.
All significant intercompany balances and transactions have been eliminated in
consolidation.
The Company's operations currently consist of the acquisition, development,
exploitation and production of oil and natural gas properties. Historically,
Patina's properties were primarily located in the Wattenberg Field of Colorado's
D-J Basin. Through Elysium, the Company now has oil and natural gas properties
in central Kansas, the Illinois Basin, and the San Joaquin Field of California.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Producing Activities
The Company utilizes the successful efforts method of accounting for its
oil and gas properties. Leasehold costs are capitalized when incurred. Unproved
properties are assessed periodically within specific geographic areas and
impairments in value are charged to expense. Exploratory expenses, including
geological and geophysical expenses and delay rentals, are charged to expense as
incurred. Exploratory drilling costs are capitalized, but charged to expense if
the well is determined to be unsuccessful. Costs of productive wells,
unsuccessful developmental wells and productive leases are capitalized and
amortized on a unit-of-production basis over the life of the associated oil and
gas reserves. Oil is converted to natural gas equivalents (Mcfe) at the rate of
one barrel to six Mcf. Amortization of capitalized costs has generally been
provided on a field-by-field basis. An accrual of approximately $1.0 million has
been provided for estimated future abandonment costs on certain Elysium
properties as of March 31, 2001. No accrual has been provided for the Wattenberg
properties, as management believes the salvage value will approximate
abandonment costs.
The Company follows Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets," which requires
the Company to assess the need for an impairment of capitalized costs of oil and
gas properties on a field-by-field basis. While no impairments were recorded for
the three months ended March 31, 2000 and 2001, changes in underlying
assumptions or the amortization units could result in impairments in the future.
Gas facilities and other
Depreciation of gas gathering and transportation facilities is provided
using the straight-line method over an estimated useful life of five years.
Equipment is depreciated using the straight-line method with estimated useful
lives, generally ranging from three to five years.
7
Other Assets
At December 31, 2000 and March 31, 2001, Other Assets was comprised of
$24.5 million and $6.0 million advanced under a revolving credit facility to
Elysium by Patina. Patina provided Elysium a $60.0 million non-recourse
revolving credit facility, on which $12.0 million was outstanding at March 31,
2001. The facility provides for a borrowing base, which is subject to adjustment
semi-annually. The loan matures in July 2003. The interest rate is generally
based on the Eurodollar rate plus a margin, which fluctuates from 1.50% to
2.00%, depending upon the utilization of the borrowing base. See Note (9).
Section 29 Tax Credits
Between 1996 and 2000, the Company entered into certain arrangements to
monetize its Section 29 tax credits. These arrangements resulted in revenue
increases of approximately $0.40 per Mcf on production volumes from qualified
Section 29 properties. As a result, additional gas revenues of $898,000 and
$602,000 were recognized during the three months ended March 31, 2000 and 2001,
respectively. As the Company's profitability now allows it to utilize these
credits, they were reacquired in March 2001.
Gas Imbalances
The Company uses the sales method to account for gas imbalances. Under this
method, revenue is recognized based on the cash received rather than the
Company's proportionate share of gas produced. Gas imbalances at December 31,
2000 and March 31, 2001 were insignificant.
Comprehensive Income
The Company follows SFAS No. 130, "Reporting Comprehensive Income," which
establishes standards for reporting comprehensive income. In addition to net
income, comprehensive income includes all changes in equity during a period,
except those resulting from investments and distributions to the owners of the
Company. The Company had no such changes for the three months ended March 31,
2000. The components of other comprehensive income and related tax effects for
the three months ended March 31, 2001 are as follows (in thousands):
Tax Net of
Gross Effect Tax
--------- -------- ---------
Cumulative effect of accounting change $(39,183) $14,106 $(25,077)
Change in derivative fair value of hedge 24,740 (8,906) 15,834
Reclassifications adjustments - contract settlements 14,980 (5,393) 9,587
-------- ------- --------
$ 537 $ (193) $ 344
======== ======= ========
Financial Instruments
The book value and estimated fair value of cash and equivalents was $2.7
million and $510,000 at December 31, 2000 and March 31, 2001, respectively. The
book value and estimated fair value of the senior debt was $177.0 million and
$138.0 million at December 31, 2000 and March 31, 2001, respectively. The book
value of these assets and liabilities approximates fair value due to the short
maturity or floating rate structure of these instruments.
Derivative Instruments and Hedging Activities
From time to time, the Company enters into commodity derivative contracts
and fixed-price physical contracts to manage its exposure to oil and natural gas
price volatility. Commodity derivative contracts, which are generally placed
with major financial institutions or with counter parties of high credit quality
that the Company believes are minimal credit risks, may take the form of futures
contracts, swaps or options. The oil and gas reference prices of these commodity
derivative contracts are based upon oil and natural gas futures which have a
high degree of historical correlation with actual prices received by the
Company. Currently, the Company's oil and gas swap contracts are designated as
cash flow hedges and the remaining discussion will relate exclusively to this
type of derivative instrument.
8
The Company entered into various swap contracts for oil based on NYMEX
prices for the first quarter of 2000 and 2001, recognizing losses of $2.4
million and $276,000, respectively, related to these swap contracts. The Company
entered into various swap contracts for natural gas based on the Colorado
Interstate Gas ("CIG") index during the first quarter of 2000 and 2001,
recognizing a gain of $231,000 and a loss of $14.7 million, respectively,
related to these swap contracts.
At March 31, 2001, the Company had entered into swap contracts for oil
based on NYMEX prices covering approximately 4,600 barrels of oil per day for
the remainder of 2001 at fixed prices ranging from $23.05 to $30.75 per barrel
and 750 barrels of oil per day for January 2002 through April 2002 at fixed
prices ranging from $26.10 to $26.92 per barrel. Certain 2001 swap contracts for
oil contain "knock-out" provisions. If the average oil price falls below the
"knock-out" price for the contract month, the swaps will be considered "knocked-
out" and no payment will be made to the Company for the applicable month. These
swaps are summarized in the table below. The overall weighted average hedged
price for the swap contracts is $26.87 per barrel for the remainder of 2001 and
$26.51 per barrel for the first four months of 2002. The unrecognized gains on
these contracts totaled $1.0 million based on estimated market values at March
31, 2001.
At March 31, 2001, the Company had entered into swap contracts for natural
gas based on CIG index prices covering approximately 51,000 MMBtu's per day for
the remainder of 2001 at fixed prices ranging from $2.87 to $5.64 per MMBtu. The
Company also entered into natural gas swap contracts for 2002, 2003, 2004 and
2005 as of March 31, 2001, which are summarized in the table below. The
unrecognized losses on these contracts totaled $477,000 based on estimated
market values at March 31, 2001.
As of March 31, 2001, the Company was a party to the following fixed price
swap and physical arrangements summarized below:
Oil (NYMEX)
--------------------------------------------------------------------------------
Swaps Swaps with "Knock-out" Combined
-------------- -------------------------------- --------------
Daily Daily "Knock-out" Daily Unrealized
Volume Volume Price Volume Gain / (Loss)
Time Period Bbl $/Bbl Bbl $/Bbl $/Bbl Bbl $/Bbl ($/thousand)
----------- ---- ----- --- ----- ----- --- ----- -------------
04/01/01 - 06/30/01.. 3,750 28.77 1,250 23.29 17.00 5,000 27.40 418
07/01/01 - 09/30/01.. 3,750 27.57 750 23.13 17.00 4,500 26.83 228
10/01/01 - 12/31/01.. 3,650 26.98 750 23.13 17.00 4,400 26.32 238
01/01/02 - 04/30/02.. 750 26.51 - - - 750 26.51 129
Natural Gas
------------------------------------------------------------------------------------
CIG Swaps Physical Combined
--------------- ------------------ ----------------------------
Daily Daily Daily Unrealized
Volume Volume Volume Gain / (Loss)
Time Period MMBtu $/MMBtu MMBtu $/MMBtu MMBtu $/MMBtu ($/thousands)
----------- ------ ------- ------ ---------- ----------- ------- -------------
04/01/01 - 06/30/01.. 55,000 3.38 - - 55,000 3.38 (4,000)
07/01/01 - 09/30/01.. 50,000 3.63 - - 50,000 3.63 (2,298)
10/01/01 - 12/31/01.. 47,500 3.98 - - 47,500 3.98 (3,099)
2002................. 24,500 4.48 - - 24,500 4.48 1,981
2003................. 20,000 4.05 - - 20,000 4.05 1,534
2004................. 20,000 4.12 - - 20,000 4.12 2,585
2005................. 20,000 4.18 - - 20,000 4.18 2,821
The Company follows SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded on the balance sheet as
either an asset or liability measured at its fair value. It also requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. SFAS No. 133 became effective for the Company on
January 1, 2001.
9
The financial statement impact of adopting of SFAS No. 133 on January 1,
2001 was as follows (in millions):
Balance Sheet Amount
-------
Unrealized hedging losses......................................................... $(43.2)
Unrealized hedging gains.......................................................... 4.0
Deferred tax liability............................................................ (1.4)
Deferred tax asset................................................................ 15.5
Cumulative effect of a change in accounting principle (other comprehensive loss).. $(25.1)
During the first quarter of 2001, net hedging losses of $15.0 million ($9.6
million after tax) were transferred from other comprehensive income and the
change in the fair value of outstanding derivative net liabilities decreased by
$24.7 million ($15.8 million after tax). As of March 31, 2001, the Company had
net unrealized hedging gains of $537,000 ($343,000 after tax), including
derivative assets of $11.6 million and derivative liabilities of $11.1 million.
The Company expects to reclassify as reductions to earnings during the next
twelve months $7.6 million ($4.9 million after tax) of unrealized hedging losses
in other comprehensive income at March 31, 2001.
In October 1998, the Company entered into an interest rate swap contract
for a two-year period. The contract was for $30.0 million principal with a fixed
interest rate of 4.57% payable by the Company and the variable interest rate,
the three-month LIBOR, payable by the third party. The difference between the
fixed rate of 4.57% and the three-month LIBOR rate, which was reset every 90
days, was received or paid by the Company in arrears every 90 days. The Company
received $123,000 in the first quarter of 2000 pursuant to this contract, which
lapsed in October 2000.
Stock Options and Awards
The Company accounts for its stock-based compensation plans under
principles prescribed by the Accounting Principles Board's Opinion No. 25 ("APB
No. 25"), "Accounting for Stock Issued to Employees." Accordingly, stock options
awarded under the Employee Plan and the non-employee Directors Plan are
considered to be "noncompensatory" and do not result in recognition of
compensation expense. However, the restricted stock awarded under the Restricted
Stock Plan is considered to be "compensatory" and the Company recognized $70,000
of non-cash general and administrative expenses for the three months ended March
31, 2000. No costs were incurred in 2001 as these costs were fully amortized in
2000. See Note (6).
Per Share Data
The Company uses weighted average shares outstanding in calculating
earnings per share data. When dilutive, options and warrants are included as
share equivalents using the treasury stock method and are included in the
calculation of diluted per share data. Common stock issuable upon conversion of
convertible preferred securities was included in the calculation of diluted per
share data if their effect was dilutive.
Risks and Uncertainties
Historically, oil and natural gas prices have experienced significant
fluctuations and have been particularly volatile in recent years. Price
fluctuations can result from variations in weather, levels of regional or
national production and demand, availability of transportation capacity to other
regions of the country and various other factors. Increases or decreases in
prices received could have a significant impact on future results.
Other
All liquid investments with a maturity of three months or less are
considered to be cash equivalents. Certain amounts in the prior period-
consolidated financial statements have been reclassified to conform to the
current classifications. The consolidated financial statements include the
accounts of the Company, its wholly owned subsidiaries and 50% of the accounts
of Elysium.
10
All significant intercompany balances and transactions have been eliminated
in consolidation. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
In the opinion of management, those adjustments to the financial statements
(all of which are of a normal and recurring nature) necessary to present fairly
the financial position and results of operations have been made. These interim
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 2000.
(3) OIL AND GAS PROPERTIES
The cost of oil and gas properties at December 31, 2000 and March 31, 2001
included approximately $1.1 million and $6.2 million in net unevaluated
leasehold costs. Acreage that is generally held for exploration or resale and
its value is excluded from amortization. The following table sets forth costs
incurred related to oil and gas properties:
Three
Year Ended Months Ended
December 31, March 31,
2000 2001
------------ ------------
(In thousands)
Acquisition............................. $49,015 $ 5,381
Development............................. 39,996 17,725
Exploration and other................... 293 103
------- --------
$89,304 $ 23,209
======= ========
Disposition............................. $ - $(15,247)
======= ========
Elysium sold certain properties in the Lake Washington Field in Louisiana
for $30.5 million in March 2001 ($15.25 million net to the Company).
(4) INDEBTEDNESS
The following indebtedness was outstanding on the respective dates:
December 31, March 31,
2000 2001
------------ ------------
(In thousands)
Bank facilities $177,000 $138,000
Less current portion - -
-------- --------
Senior debt, net $177,000 $138,000
======== ========
In July 1999, the Company entered into a Second Amended and Restated Bank
Credit Agreement (the "Credit Agreement"). The Credit Agreement is a revolving
credit facility in an aggregate amount up to $200.0 million. The amount
available under the facility is adjusted semi-annually, each May 1 and November
1, and equaled $200.0 million at March 31, 2001.
11
The Company may elect that all or a portion of the credit facility bear
interest at a rate equal to: (i) the prime rate or (ii) the rate at which
Eurodollar deposits for one, two, three or six months are offered in the
interbank Eurodollar market plus a margin which fluctuates from 1.00% to 1.50%,
determined by a debt to EBITDA ratio. The average interest rate under the
facility approximated 7.0% during the first quarter of 2001 and was 6.3% at
March 31, 2001.
The Credit Agreement contains certain financial covenants, including but not
limited to a maximum total debt to EBITDA ratio and a minimum current ratio. The
Credit Agreement also contains certain negative covenants, including but not
limited to restrictions on indebtedness; certain liens; guaranties, speculative
derivatives and other similar obligations; asset dispositions; dividends, loans
and advances; creation of subsidiaries; investments; leases; acquisitions;
mergers; changes in fiscal year; transactions with affiliates; changes in
business conducted; sale and leaseback and operating lease transactions; sale of
receivables; prepayment of other indebtedness; amendments to principal
documents; negative pledge causes; issuance of securities; and non-speculative
commodity hedging. Borrowings under the Credit Agreement mature in July 2003,
but may be prepaid at anytime. The Company has periodically negotiated
extensions of the Credit Agreement; however, there is no assurance the Company
will be able to do so in the future. The Company had a restricted payment
basket, as defined in the Credit Agreement, of $9.8 million as of March 31,
2001, which may be used to repurchase equity securities, pay dividends or make
other restricted payments.
Scheduled maturities of indebtedness for the next five years are zero for
2001 and 2002, and $138.0 million in 2003. Management intends to extend the
maturity of its credit facility on a regular basis; however, there can be no
assurance it will be able to do so. Cash payments for interest totaled $2.5
million and $3.2 million for the first quarters of 2000 and 2001, respectively.
(5) STOCKHOLDERS' EQUITY
A total of 100,000,000 common shares, $0.01 par value, are authorized of
which 19,498,777 were issued and outstanding at March 31, 2001. The common stock
is listed on the New York Stock Exchange. A quarterly cash dividend of $0.01
per common share was initiated in December 1997. The dividend was increased to
$0.02 per common share in the fourth quarter of 1999 and to $0.04 per common
share in the fourth quarter of 2000. The following is a schedule of the changes
in outstanding shares of the Company's common stock:
Twelve Three
Months Ended Months Ended
December 31, 2000 March 31, 2001
------------------ ---------------
Beginning shares............................. 16,131,300 20,043,900
Exercise of stock options.................... 249,300 86,900
Shares issued under Stock Purchase Plan...... 52,400 -
Shares issued in lieu of salaries & bonuses.. 128,300 67,900
Shares issued for directors fees............. 2,800 400
Conversion of 7.125% preferred............... 148,000 -
Conversion of 8.50% preferred................ 4,785,600 -
Exercise of $12.50 warrants.................. 2,400 64,900
Shares issued to deferred compensation plan.. 13,700 10,000
Vesting of stock grant....................... 138,600 33,300
401(K) profit sharing contribution........... 29,600 -
Shares repurchased and retired............... (1,638,100) (808,500)
---------- ----------
Ending shares................................ 20,043,900 19,498,800
========== ==========
On January 29, 2001, the Company repurchased 758,500 shares of its common
stock from a major financial institution for $20.50 a share or $15.8 million and
received an option to repurchase an equal number of shares at the same price.
The additional 758,500 shares were repurchased on April 30, 2001.
At March 31, 2001, the Company had 2,827,146 common stock warrants
outstanding. The warrants are exercisable at $12.50 for one share of common
stock and expire on May 2, 2001. The warrants are listed on the New York Stock
Exchange.
A total of 5,000,000 preferred shares, $0.01 par value, are authorized of
which none were issued at March 31, 2001.
12
In January 2000, the Company redeemed all remaining 7.125% preferred stock.
Of the 564,800 preferred shares called, 51,000 were converted into 148,000
shares of common stock and the remaining 513,800 were redeemed for $13.4 million
in cash. The Company paid $600,000 in preferred dividends during in the first
quarter of 2000, including $549,000 of redemption premiums paid to shareholders
that elected to redeem their preferred stock for cash in the first quarter of
2000.
In August 2000, the Company called for redemption the 8.50% preferred stock.
The shares were converted into 4.8 million shares of common stock, including
more than 500,000 shares of common stock issued upon conversion in June 2000.
The Company paid $966,000 in preferred dividends in the first quarter of 2000.
The Company follows SFAS 128", "Earnings per Share," which specifies
computation, presentation and disclosure requirements for earnings per share for
entities with publicly held common stock or potential common stock.
Three Months Ended March 31,
----------------------------------------------------------------
2000 2001
-------------------------------- ------------------------------
Net Common Per Net Common Per
Income Shares Share Income Shares Share
------ ------ ------- ------- ------ -----
Basic net income $9,194 16,265 $22,355 19,605
7.125% preferred dividends (600) - - -
8.50% preferred dividends (966) - - -
------ ------ ------- -------
Basic net income attributable
to common stock 7,628 16,265 $ 0.47 22,355 19,605 $1.14
======= =====
Effect of dilutive securities:
8.50% preferred stock 966 4,786 - -
Stock options - 568 - 1,416
Stock grant - 139 - 27
$12.50 warrants - - - 1,410
------ ------ ------- -------
Diluted net income attributable
to common stock $8,594 21,758 $ 0.40 $22,355 22,458 $1.00
====== ====== ======= ======= ======= =====
(6) EMPLOYEE BENEFIT PLANS
401(k) Plan
The Company maintains a 401(k) profit sharing and savings plan (the "401(k)
Plan"). Eligible employees may make voluntary contributions to the 401(k) Plan.
The Company may, at its discretion, make additional matching or profit sharing
contributions to the 401(k) Plan. The Company made a profit sharing
contribution of $483,000 and $589,000 for 1999 and 2000, respectively. The
profit sharing contributions were made in common stock. A total of 61,300 and
29,600 common shares were contributed in 1999 and 2000, respectively.
Stock Purchase Plan
The Company maintains a shareholder approved stock purchase plan ("Stock
Purchase Plan"). Pursuant to the Stock Purchase Plan, officers, directors and
certain managers are eligible to purchase shares of common stock at prices
ranging from 50% to 85% of the closing price of the stock on the trading day
prior to the date of purchase ("Closing Price"). In addition, employee
participants may be granted the right to purchase shares with all or a part of
their salary and bonus. A total of 500,000 shares of common stock are reserved
for possible purchase under the Stock Purchase Plan. In May 1999, an amendment
to the Stock Purchase Plan was approved by the stockholders allowing for the
annual renewal of the 500,000 shares of common stock reserved for possible
purchase under the Plan. In 2000, the Board of Directors approved 116,300
common shares (exclusive of shares available for purchase with participants'
salaries and bonuses) for possible purchase by participants at 75% of the
Closing Price during the current Plan Year. As of March 31, 2000, participants
had purchased 85,800 shares of common stock with participant's 1999 bonuses, at
$9.19 per share ($6.89 net price per share). No other purchases were made
under the Stock Purchase Plan during the three months ended March 31, 2000 and
2001, respectively.
13
Stock Option and Award Plans
The Company maintains a shareholder approved stock option plan for employees
(the "Employee Plan") providing for the issuance of options at prices not less
than fair market value. Options to acquire the greater of three million shares
of common stock or 10% of outstanding diluted common shares may be outstanding
at any given time. The specific terms of grant and exercise are determinable by
a committee of independent members of the Board of Directors. The options vest
over a three-year period (30%, 60%, 100%) and expire five years from the date of
grant, except for 250,000 five-year options, which were fully vested at the date
of grant in October 1997. A summary by year of stock options granted under the
plan for employees is summarized below:
Weighted
Range Average
of Exercise Exercise
Options Prices Per Price Per
Year Granted Common Share Common Share
---- ------- -------------- ------------
1997........... 521,000 $ 8.75 - $ 9.88 $ 9.75
1998........... 614,000 $ 6.56 - $ 7.19 $ 7.03
1999........... 630,000 $ 2.94 - $ 9.13 $ 3.54
2000........... 505,000 $ 9.19 - $21.94 $ 9.34
2001........... 591,000 $22.61 $22.61
The Company also maintains a shareholder approved stock grant and option plan
(the "Directors' Plan") for non-employee Directors. The Directors' Plan provides
for each non-employee Director to receive common shares having a market value
equal to $2,500 quarterly in payment of one-half their retainer. A total of
8,600 were issued in 1999 and 2,800 were issued in 2000. It also provides for
5,000 options to be granted to each non-employee Director upon initial
appointment and annually, thereafter. The options vest over a three-year period
(30%, 60%, 100%) and expire five years from the date of grant. A summary by
year of stock options granted under the Directors' Plan is summarized below:
Weighted
Range Average
of Exercise Exercise
Options Prices Per Price Per
Year Granted Common Share Common Share
---- ------- ------------ ------------
1997........... 30,000 $ 8.63 - $10.31 $ 9.19
1998........... 35,000 $ 7.19 - $ 7.75 $ 7.59
1999........... 30,000 $ 2.94 - $ 5.13 $ 4.76
2000........... 25,000 $17.44 $17.44
In 1997, the shareholders approved a special stock grant and purchase plan
for certain officers and managers ("Management Investors") in conjunction with
the redistribution of SOCO's ownership in the Company. The plan provided for
the grant of certain restricted common shares to the Management Investors. The
granted shares vested at 25% per year on January 1, 1998, 1999, 2000 and 2001.
The non-vested granted common shares were recorded as Deferred Compensation in
the equity section. The Management Investors simultaneously purchased
additional common shares from the Company at $9.875 per share. A portion of the
purchase was financed by the Company, all of which was repaid in January 2001.
See Note (9). In conjunction with his appointment in March 1998, the Company's
President was granted 100,000 restricted common shares that vested at 33% per
year in March 1999, 2000 and 2001. The President simultaneously purchased
100,000 common shares from the Company for $6.875 per share. A portion of this
purchase ($584,000) was financed by the Company. As approved by the Board of
Directors, the President sold 50,000 common shares to the Company for $23.50 per
share in March 2001, utilizing a portion of the proceeds to repay his note. See
Note (9). The Company recognized $70,000 of non-cash general and administrative
expenses for the three months ended March 31, 2000 with respect to these stock
grants. No costs were incurred in the first quarter of 2001 as these costs were
fully amortized in 2000.
14
(7) FEDERAL INCOME TAXES
A reconciliation of the federal statutory rate to the Company's effective
rate as they apply to the provision for the three months ended March 31, 2000
and 2001 follows:
2000 2001
---- ----
Federal statutory rate......................... 35% 35%
State income tax rate, net of federal benefit.. 3% 3%
Utilization of net deferred tax asset.......... (15%) (2%)
Revision of prior estimate..................... (3%) -
---- ----
Effective income tax rate...................... 20% 36%
==== ====
For tax purposes, the Company had regular net operating loss carryforwards
of approximately $49.0 million and alternative minimum tax ("AMT") loss
carryforwards of approximately $7.5 million at December 31, 2000. Utilization of
$42.8 million of the regular net operating loss carryforwards will be limited to
approximately $12.5 million per year as a result of the redistribution of SOCO's
majority ownership in the Company in 1997. In addition, utilization of $25.9
million regular net operating loss carryforwards will be limited to $4.2 million
per year as a result of the Gerrity acquisition in 1996. These carryforwards
expire from 2008 through 2018. At December 31, 2000, the Company had AMT credit
carryforwards of $1.4 million that are available indefinitely. There were no
cash payments made by the Company for federal or state taxes during the first
quarter of 2000. The Company paid $150,000 of federal taxes during the first
quarter of 2001. Based on its current level of profitability, the Company
expects to begin paying a significant amount of cash income taxes starting in
June 2001.
(8) MAJOR CUSTOMERS
During the three months ended March 31, 2000 and 2001, Duke Energy Field
Services, Inc. accounted for 33% and 28%, BP Amoco Production Company accounted
for 26% and 11%, E-Prime accounted for 6% and 14%, and Reliant Energy accounted
for 1% and 12%, respectively. Management believes that the loss of any
individual purchaser would not have a long-term material adverse impact on the
financial position or results of operations of the Company.
(9) RELATED PARTY
In 1997, certain officers and managers purchased common shares at $9.875 per
share from the Company. A portion of this purchase was financed by the Company
through the issuance of 8.50% recourse promissory notes. The remaining notes
balance at December 31, 2000 of $106,000 was repaid in January 2001. These notes
have been reflected in the accompanying consolidated balance sheet at December
31, 2000 in Inventory and other. In conjunction with his appointment in 1998,
the President purchased 100,000 shares of common stock at $6.875 per share and
was granted 100,000 shares. The Company loaned him $584,000, or 85% of the
purchase price, represented by an 8.50% recourse promissory note. The note
matured in March 2001. As approved by the Board of Directors, the President sold
50,000 common shares to the Company for $23.50 per share in March 2001,
utilizing a portion of the proceeds to repay his note. The note has been
reflected in the accompanying consolidated balance sheet at December 31, 2000 in
Inventory and other.
Patina provided Elysium a $60.0 million non-recourse revolving credit
facility, on which $49.0 million was outstanding at December 31, 2000. The
facility provides for a borrowing base, which is subject to adjustment semi-
annually. At March 31, 2001 the borrowing base was $60.0 million of which $12.0
million was outstanding. The loan matures in July 2003. The interest rate is
generally based on the Eurodollar rate plus a margin, which fluctuates from
1.50% to 2.00%, depending upon the utilization of the borrowing base. In the
first quarter of 2001, Elysium paid $882,000 of interest to Patina under the
revolving credit facility.
Patina provides certain administrative services to Elysium under an
operating agreement. During the first quarter of 2001, the Company was paid
$117,000 for these services.
15
(10) COMMITMENTS AND CONTINGENCIES
The Company leases office space and certain equipment under non-cancelable
operating leases. Future minimum lease payments under such leases approximate
$750,000 per year from 2001 through 2005.
The Company is a party to various lawsuits incidental to its business,
none of which are expected to have a material adverse impact on its financial
position or results of operations.
16
PATINA OIL & GAS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three months ended March 31, 2001 compared to three months ended March 31, 2000.
Revenues for the first quarter of 2001 totaled $64.5 million, a 104%
increase from the prior year period. Net income for the first quarter of 2001
totaled $22.4 million, an increase of 143% compared to the first quarter of
2000. The increases were attributable to higher production quantities and higher
oil and gas prices.
Average daily oil and gas production for the first quarter totaled 7,421
barrels and 108.2 MMcf (152.7 MMcfe), an increase of 29% on an equivalent basis
from the same period in 2000. During the quarter, 19 wells were drilled or
deepened and 99 refracs and two recompletions were performed in Wattenberg,
compared to 18 new wells or deepenings, 34 refracs and one recompletion in the
same period in 2000. Current development activity, the benefits of the
acquisition of a 50% interest in Elysium Energy, L.L.C. in late 2000 and
continued success with the production enhancement program have resulted in
steadily increasing production. Based on a $60.0 million capital budget for
2001, the Company expects production to continue to increase for the remainder
of the year. The level of development activity is heavily dependent on the
prices being received for production.
Average oil prices increased 27% from $21.53 per barrel in the first quarter
of 2000 to $27.44 in 2001. Average natural gas prices increased 70% from $2.73
per Mcf for the first quarter of 2000 to $4.65 in 2001. The average oil price
included hedging losses of $2.4 million or $5.76 per barrel and $276,000 or
$0.41 per barrel for the first quarters of 2000 and 2001, respectively. The
average natural gas prices included hedging gains of $231,000 or $0.03 per Mcf
for the first quarter of 2000 and losses of $14.7 million or $1.51 per Mcf for
the first quarter of 2001. Direct operating expenses, consisting of lease
operating and production taxes, totaled $11.9 million or $0.87 per Mcfe for the
first quarter of 2001 compared to $5.6 million or $0.53 per Mcfe in the prior
year period. The increase in direct operating expenses was attributable to a
$3.2 million rise in production taxes due to higher average oil and gas prices
and a $2.5 million increase in lease operating costs relating to the acquisition
of a 50% interest in Elysium.
General and administrative expenses, net of third party reimbursements, for
the first quarter of 2001 totaled $2.6 million, a $927,000 or 57% increase from
the same period in 2000. The increase in expense was primarily due to the
acquisition of a 50% interest in Elysium.
Interest and other expenses totaled $3.1 million in the first quarter of
2001, an increase of $489,000 or 19% from the prior year period. Interest
expense increased as a result of higher average debt balances resulting from the
acquisition of Elysium and repurchases of equity securities. The Company's
average interest rate for the first quarter of 2001 was 7.0% compared to 7.4% in
the first quarter of 2000.
Depletion, depreciation and amortization expense for the first quarter of
2001 totaled $11.9 million, an increase of $1.6 million from the same period in
2000. Depletion expense totaled $11.6 million or $0.85 per Mcfe for the first
quarter of 2001 compared to $10.0 million or $0.94 per Mcfe in 2000. The lower
depletion rate was in response to the completion of the mid-year and year-end
2000 reserve reports reflecting additional oil and gas reserves due primarily to
the identification of additional refrac projects and drilling locations, upward
revisions due to over-performance and the increase in oil and gas prices.
Depreciation and amortization expense for the three months ended March 31, 2001
totaled $260,000 or $0.02 per Mcfe, the same per unit rate as in the first
quarter of 2000.
17
Development, Acquisition and Exploration
During the first quarter of 2001, the Company incurred $23.2 million of
capital expenditures. A total of $17.7 million of development costs was spent
in the Wattenberg Field to drill or deepen 19 J-Sand wells, perform 99 refracs
and two recompletions. This development activity, the benefits of the Elysium
acquisition and continued success with the production enhancement program
resulted in a 29% increase in production over the first quarter of 2000. The
Company anticipates spending approximately $60.0 million to further develop its
properties during 2001, with an additional $15.0 million to $20.0 million
budgeted for various grassroots projects. The decision to increase or decrease
development activity is heavily dependent on the oil and gas prices.
Financial Condition and Capital Resources
At March 31, 2001, the Company had $409.0 million of assets. Total
capitalization was $339.9 million, of which 55% was represented by stockholders'
equity, 40% by bank debt and 5% by deferred taxes. In the first quarter of
2001, net cash provided by operations totaled $54.7 million, as compared to
$21.7 million in same period in 2000 ($40.7 million and $21.6 million prior to
changes in working capital, respectively). At March 31, 2001, there were no
significant commitments for capital expenditures. Based on a $60.0 million
capital budget for 2001 and an additional $15.0 million to $20.0 million for
various grassroots projects, the Company expects production to continue to
increase through the remainder of the year. The level of these and other future
expenditures is largely discretionary, and the amount of funds devoted to any
particular activity may increase or decrease significantly, depending on
available opportunities and market conditions. The Company plans to finance its
ongoing development, acquisition and exploration expenditures and additional
equity repurchases using internal cash flow, proceeds from asset sales and bank
borrowings. In addition, joint ventures or future public and private offerings
of debt or equity securities may be utilized.
On January 29, 2001, the Company repurchased 758,500 shares of its common
stock from a major financial institution for $20.50 a share or $15.8 million.
As part of the transaction, the Company received an option to repurchase an
equal number of shares at the same price. The additional 758,500 shares were
repurchased on April 30, 2001. The Company anticipates receiving approximately
$35.5 million in proceeds from the exercise of the $12.50 common stock warrants,
which expire on May 2, 2001.
In July 1999, the Company entered into a Second Amended and Restated Bank Credit
Agreement (the "Credit Agreement"). The Credit Agreement is a revolving credit
facility in an aggregate amount up to $200.0 million. The amount available under
the facility is adjusted semi-annually, each May 1 and November 1, and equaled
$200.0 million at March 31, 2001.
The Company may elect that all or a portion of the credit facility bear
interest at a rate equal to: (i) the prime rate or (ii) the rate at which
Eurodollar deposits for one, two, three or six months are offered in the
interbank Eurodollar market plus a margin which fluctuates from 1.00% to 1.50%,
determined by a debt to EBITDA ratio. The average interest rate under the
facility approximated 7.0% during the first quarter of 2001 and was 6.3% at
March 31, 2001.
The Credit Agreement contains certain financial covenants, including but not
limited to a maximum total debt to EBITDA ratio and a minimum current ratio. The
Credit Agreement also contains certain negative covenants, including but not
limited to restrictions on indebtedness; certain liens; guaranties, speculative
derivatives and other similar obligations; asset dispositions; dividends, loans
and advances; creation of subsidiaries; investments; leases; acquisitions;
mergers; changes in fiscal year; transactions with affiliates; changes in
business conducted; sale and leaseback and operating lease transactions; sale of
receivables; prepayment of other indebtedness; amendments to principal
documents; negative pledge causes; issuance of securities; and non-speculative
commodity hedging. Borrowings under the Credit Agreement mature in July 2003,
but may be prepaid at anytime. The Company has periodically negotiated
extensions of the Credit Agreement; however, there is no assurance the Company
will be able to do so in the future. The Company had a restricted payment
basket, as defined in the Credit Agreement, of $9.8 million as of March 31,
2001, which may be used to repurchase equity securities, pay dividends or make
other restricted payments.
18
In October 1998, the Company entered into an interest rate swap contract for
a two-year period. The contract was for $30.0 million principal with a fixed
interest rate of 4.57% payable by the Company and the variable interest rate,
the three-month LIBOR, payable by the third party. The difference between the
fixed rate of 4.57% and the three-month LIBOR rate, which was reset every 90
days, was received or paid by the Company in arrears every 90 days. The Company
received $123,000 in the first quarter of 2000 pursuant to this contract, which
lapsed in October 2000.
In conjunction with his appointment in 1998, the Company's President
purchased 100,000 shares of common stock at $6.875 per share. The Company
loaned him $584,000, or 85% of the purchase price, represented by an 8.50%
recourse promissory note. The note matured in March 2001. As approved by the
Board of Directors, the President sold 50,000 common shares to the Company for
$23.50 per share in March 2001, utilizing a portion of the proceeds to repay his
note.
Between 1996 and 2000, the Company entered into certain arrangements to
monetize its Section 29 tax credits. These arrangements resulted in revenue
increases of approximately $0.40 per Mcf on production volumes from qualified
Section 29 properties. As a result, additional gas revenues of $898,000 and
$602,000 were recognized during the three months ended March 31, 2000 and 2001,
respectively. As the Company's profitability now allows it to utilize these
credits, they were reacquired in March 2001.
The Company's primary cash requirements will be to finance acquisitions, fund
development expenditures, repurchase equity securities, repay indebtedness, and
general working capital needs. However, future cash flows are subject to a
number of variables, including the level of production and oil and natural gas
prices, and there can be no assurance that operations and other capital
resources will provide cash in sufficient amounts to maintain planned levels of
capital expenditures or that increased capital expenditures will not be
undertaken.
The Company believes that borrowings available under its Credit Agreement,
projected operating cash flows and the cash on hand will be sufficient to cover
its working capital, capital expenditures, planned development activities and
debt service requirements for the next 12 months. In connection with
consummating any significant acquisition, additional debt or equity financing
will be required, which may or may not be available on acceptable terms.
Certain Factors That May Affect Future Results
Statements that are not historical facts contained in this report are
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ from projected results. Such statements address
activities, events or developments that the Company expects, believes, projects,
intends or anticipates will or may occur, including such matters as future
capital, development and exploration expenditures (including the amount and
nature thereof), drilling, deepening or refracing of wells, reserve estimates
(including estimates of future net revenues associated with such reserves and
the present value of such future net revenues), future production of oil and
natural gas, business strategies, expansion and growth of the Company's
operations, cash flow and anticipated liquidity, prospect development and
property acquisition, obtaining financial or industry partners for prospect or
program development, or marketing of oil and natural gas. Factors that could
cause actual results to differ materially ("Cautionary Disclosures") are
described, among other places, in the Marketing, Competition, and Regulation
sections in the 2000 Form 10-K and under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations." Without
limiting the Cautionary Disclosures so described, Cautionary Disclosures
include, among others: general economic conditions, the market price of oil and
natural gas, the risks associated with exploration, the Company's ability to
find, acquire, market, develop and produce new properties, operating hazards
attendant to the oil and natural gas business, uncertainties in the estimation
of proved reserves and in the projection of future rates of production and
timing of development expenditures, the strength and financial resources of the
Company's competitors, the Company's ability to find and retain skilled
personnel, climatic conditions, labor relations, availability and cost of
material and equipment, environmental risks, the results of financing efforts,
and regulatory developments. All written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the Cautionary Disclosures. The Company
disclaims any obligation to update or revise any forward-looking statement to
reflect events or circumstances occurring hereafter or to reflect the occurrence
of anticipated or unanticipated events.
19
Market Risk Disclosures
Commodity Price Risk
The Company's major market risk exposure is in the pricing applicable to its
oil and natural gas production. Realized pricing is primarily driven by the
prevailing domestic price for oil and spot prices applicable to the Rocky
Mountain and Mid-Continent regions for its natural gas production.
Historically, prices received for oil and gas production have been volatile and
unpredictable. Pricing volatility is expected to continue. Natural gas price
realizations during 2000 and the first quarter of 2001, exclusive of any hedges,
ranged from a monthly low of $2.41 per Mcf to a monthly high of $7.65 per Mcf.
Oil prices, exclusive of any hedges, ranged from a monthly low of $24.36 per
barrel to a monthly high of $33.85 per barrel during 2000 and the first quarter
of 2001. Oil and natural gas prices increased significantly during 2000. A
significant decline in prices of oil or natural gas could have a material
adverse effect on the Company's financial condition and results of operations.
From time to time, the Company enters into commodity derivative contracts and
fixed-price physical contracts to manage its exposure to oil and natural gas
price volatility. Commodity derivative contracts, which are generally placed
with major financial institutions or with counter parties of high credit quality
that the Company believes are minimal credit risks, may take the form of futures
contracts, swaps or options. The oil and gas reference prices of these
commodity derivative contracts are based upon oil and natural gas futures which
have a high degree of historical correlation with actual prices received by the
Company. Currently, the Company's oil and gas swap contracts are designated as
cash flow hedges.
The Company entered into various swap contracts for oil based on NYMEX prices
for the first quarters of 2000 and 2001, recognizing losses of $2.4 million and
$276,000, respectively, related to these swap contracts. The Company entered
into various swap contracts for natural gas based on the Colorado Interstate Gas
("CIG") index during the first quarter of 2000 and 2001, recognizing a gain of
$231,000 and a loss of $14.7 million, respectively, related to these swap
contracts.
At March 31, 2001, the Company had entered into swap contracts for oil based
on NYMEX prices covering approximately 4,600 barrels of oil per day for the
remainder of 2001 at fixed prices ranging from $23.05 to $30.75 per barrel and
750 barrels of oil per day for January 2002 through April 2002 at fixed prices
ranging from $26.10 to $26.92 per barrel. Certain 2001 swap contracts for oil
contain "knock-out" provisions. If the average oil price falls below the "knock-
out" price for the contract month, the swaps will be considered "knocked-out"
and no payment will be made to the Company for the applicable month. These
swaps are summarized in the table below. The overall weighted average hedged
price for the swap contracts is $26.87 per barrel for the remainder of 2001 and
$26.51 per barrel for the first four months of 2002. The unrecognized gains on
these contracts totaled $1.0 million based on estimated market values at March
31, 2001.
At March 31, 2001, the Company had entered into swap contracts for natural
gas based on CIG index prices covering approximately 51,000 MMBtu's per day for
the remainder of 2001 at fixed prices ranging from $2.87 to $5.64 per MMBtu. The
Company also entered into natural gas swap contracts for 2002, 2003, 2004 and
2005 as of March 31, 2001, which are summarized in the table below. The
unrecognized losses on these contracts totaled $477,000 based on estimated
market values at March 31, 2001.
As of March 31, 2001, the Company was a party to the following fixed price
swap and physical arrangements summarized below:
Oil (NYMEX)
---------------------------------------------------------------------------------
Swaps Swaps with "Knock-out" Combined
--------------- -------------------------------- --------------
Daily Daily "Knock-out" Daily Unrealized
Volume Volume Price Volume Gain / (Loss)
Time Period Bbl $/Bbl Bbl $/Bbl $/Bbl Bbl $/Bbl ($/thousand)
----------- --- ----- --- ----- ----- --- ----- -------------
04/01/01 - 06/30/01.. 3,750 28.77 1,250 23.29 17.00 5,000 27.40 418
07/01/01 - 09/30/01.. 3,750 27.57 750 23.13 17.00 4,500 26.83 228
10/01/01 - 12/31/01.. 3,650 26.98 750 23.13 17.00 4,400 26.32 238
01/01/02 - 04/30/02.. 750 26.51 - - - 750 26.51 129
20
Natural Gas
------------------------------------------------------------------
CIG Swaps Physical Combined
--------------- --------------- ---------------
Daily Daily Daily Unrealized
Volume Volume Volume Gain / (Loss)
Time Period MMBtu $/MMBtu MMBtu $/MMBtu MMBtu $/MMBtu ($/thousands)
----------- ------ ------- ------ ------- ------ ------- -------------
04/01/01 - 06/30/01........ 55,000 3.38 - - 55,000 3.38 (4,000)
07/01/01 - 09/30/01........ 50,000 3.63 - - 50,000 3.63 (2,298)
10/01/01 - 12/31/01........ 47,500 3.98 - - 47,500 3.98 (3,099)
2002....................... 24,500 4.48 - - 24,500 4.48 1,981
2003....................... 20,000 4.05 - - 20,000 4.05 1,534
2004....................... 20,000 4.12 - - 20,000 4.12 2,585
2005....................... 20,000 4.18 - - 20,000 4.18 2,821
Interest Rate Risk
At March 31, 2001, the Company had $138.0 million outstanding under its
credit facility with an average interest rate of 6.3%. The Company may elect
that all or a portion of the credit facility bear interest at a rate equal to:
(i) the prime rate or (ii) the rate at which Eurodollar deposits for one, two,
three or six months are offered in the interbank Eurodollar market plus a margin
which fluctuates from 1.00% to 1.50%, determined by a debt to EBITDA ratio. The
average interest rate under the facility approximated 7.0% during the first
quarter of 2001. Assuming no change in the amount outstanding during 2001, the
annual impact on interest expense of a ten percent change in the average
interest rate would be approximately $620,000 million, net of tax. As the
interest rate is variable and is reflective of current market conditions, the
carrying value approximates the fair value.
21
Inflation and Changes in Prices
While certain costs are affected by the general level of inflation, factors
unique to the oil and natural gas industry result in independent price
fluctuations. Over the past five years, significant fluctuations have occurred
in oil and natural gas prices. Although it is particularly difficult to estimate
future prices of oil and natural gas, price fluctuations have had, and will
continue to have, a material effect on the Company.
The following table indicates the average oil and natural gas prices
received over the last five years and highlights the price fluctuations by
quarter for 2000 and the first quarter of 2001. Average price computations
exclude hedging gains and losses and other nonrecurring items to provide
comparability. Average prices per Mcfe indicate the composite impact of changes
in oil and natural gas prices. Oil production is converted to natural gas
equivalents at the rate of one barrel per six Mcf.
Average Prices
--------------------------------
Natural Equivalent
Oil Gas Mcf
--- --- ---
Annual (Per Bbl) (Per Mcf) (Per Mcfe)
------
1996............... $20.47 $1.99 $2.41
1997............... 19.54 2.25 2.55
1998............... 13.13 1.87 1.96
1999............... 17.71 2.21 2.40
2000............... 29.16 3.69 3.96
Quarterly
---------
2000
----
First.............. $27.30 $2.70 $3.13
Second............. 27.75 3.23 3.55
Third.............. 30.85 3.63 3.96
Fourth............. 30.53 5.03 5.05
2001
----
First.............. $27.86 $6.16 $5.72
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information with respect to this item is incorporated by reference from
Notes to Consolidated Financial Statements in Part 1 of this report.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
None
(b) No reports on Form 8-K were filled by Registrant during the quarter ended
March 31, 2001.
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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.
PATINA OIL & GAS CORPORATION
BY /s/ David J. Kornder
--------------------
David J. Kornder, Executive Vice President and
Chief Financial Officer
May 3, 2001
24