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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 March 31, 2002
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
Securities registered pursuant to Section 12(b) of the Act:
Title of class Name of exchange on which listed
________________________________ ___________________________________
Common Stock, $.01 par value 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 21,736,087 shares of common stock outstanding on May 1, 2002.
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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,
2001 2002
-------- ---------
(Unaudited)
ASSETS
Current assets
Cash and equivalents $ 250 $ 175
Accounts receivable 16,407 16,878
Inventory and other 3,880 4,069
Unrealized hedging gains 20,134 6,978
--------- ---------
40,671 28,100
--------- ---------
Unrealized hedging gains 31,872 18,800
Oil and gas properties, successful efforts method 780,224 797,207
Accumulated depletion, depreciation and amortization (402,213) (416,699)
--------- ---------
378,011 380,508
--------- ---------
Field equipment and other 6,605 7,317
Accumulated depreciation (3,844) (4,019)
--------- ---------
2,761 3,298
--------- ---------
Other assets 258 201
--------- ---------
$ 453,573 $ 430,907
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 27,380 $ 29,808
Income taxes payable 6,918 -
Accrued liabilities 10,767 4,642
Unrealized hedging losses - 8,039
--------- ---------
45,065 42,489
--------- ---------
Senior debt 77,000 62,500
Deferred income taxes 43,473 44,080
Other noncurrent liabilities 18,891 14,096
Unrealized hedging losses - 1,469
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, 21,241,958 and 21,701,925 shares
issued and outstanding 212 217
Capital in excess of par value 145,715 153,232
Retained earnings 85,856 100,617
Other comprehensive income 37,361 12,207
--------- ---------
269,144 266,273
--------- ---------
$ 453,573 $ 430,907
========= =========
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,
------------------------------
2001 2002
------------ ------------
(Unaudited)
Revenues
Oil and gas sales $ 63,566 $ 48,008
Other 886 3,820
---------- -----------
64,452 51,828
---------- -----------
Expenses
Lease operating 6,535 7,154
Production taxes 5,367 2,056
Exploration 103 164
General and administrative 2,566 2,593
Interest and other 3,050 634
Depletion, depreciation and amortization 11,901 14,795
---------- -----------
29,522 27,396
---------- -----------
Pre-tax income 34,930 24,432
---------- -----------
Provision for income taxes
Current 6,287 2,745
Deferred 6,288 5,842
---------- -----------
12,575 8,587
---------- -----------
Net income $ 22,355 $ 15,845
========== ===========
Net income per share
Basic $ 1.14 $ 0.74
========== ===========
Diluted $ 1.00 $ 0.70
========== ===========
Weighted average shares outstanding
Basic 19,605 21,550
========== ===========
Diluted 22,458 22,578
========== ===========
The accompanying notes are an integral part of these statements.
4
PATINA OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY AND OTHER COMPREHENSIVE INCOME
(In thousands)
Other
Capital in Comprehensive Total
Preferred Stock Common Stock Excess of Retained Income Stockholders'
------------------- --------------------------
Shares Amount Shares Amount Par Value Earnings (Loss) Equity
-------- --------- --------- ----------- ------------ ---------- ------------- -------------
Balance, December 31, 2000 - $ - 20,044 $ 200 $151,392 $ 24,854 $ - $ 176,446
Repurchase of common and
warrants - - (2,353) (23) (51,451) - - (51,474)
Issuance of common - - 673 6 7,663 - - 7,669
Conversion of warrants - - 2,878 29 35,946 - - 35,975
Tax benefit from stock
options - - - - 2,165 - - 2,165
Dividends - - - - - (3,568) - (3,568)
Comprehensive income:
Net income - - - - - 64,570 - 64,570
Cumulative effect of accounting
change, net of tax - - - - - - (25,077) (25,077)
Contract settlements
reclassed to income - - - - - - 822 822
Impairment of oil and gas hedges,
net of tax - - - - - - 4,077 4,077
Change in unrealized hedging
gains - - - - - - 57,539 57,539
------- --------- --------- ---------- -------- -------- -------- ---------
Total comprehensive income - - - - - 64,570 37,361 101,931
------- --------- --------- ---------- -------- -------- -------- ---------
Balance, December 31, 2001 - - 21,242 212 145,715 85,856 37,361 269,144
Issuance of common - - 460 5 5,103 - - 5,108
Tax benefit from stock
options - - - - 2,414 - - 2,414
Dividends - - - - - (1,084) - (1,084)
Comprehensive income:
Net income - - - - - 15,845 - 15,845
Contract settlements
reclassed to income - - - - - - (8,046) (8,046)
Change in unrealized hedging
gains - - - - - - (17,108) (17,108)
------- --------- --------- ---------- -------- -------- -------- ---------
Total comprehensive loss - - - - - 15,845 (25,154) (9,309)
------- --------- --------- ---------- -------- -------- -------- ---------
Balance, March 31, 2002
(unaudited) - $ - 21,702 $ 217 $153,232 $100,617 $ 12,207 $ 266,273
======= ========= ========= ========== ======== ======== ======== ==========
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,
---------------------------
2001 2002
--------- ---------
(Unaudited)
Operating activities
Net income $ 22,355 $ 15,845
Adjustments to reconcile net income to net
cash provided by operations
Exploration expense 103 164
Depletion, depreciation and amortization 11,901 14,795
Deferred income taxes 6,288 5,842
Tax benefit from stock options - 2,414
Reversal of hedging impairment, net - (2,283)
Amortization of deferred credits and other 15 42
Changes in current and other assets and liabilities
Decrease (increase) in
Accounts receivable (763) (472)
Inventory and other 453 (95)
Increase (decrease) in
Accounts payable 13,886 2,428
Accrued liabilities (2,501) (4,459)
Other assets and liabilities 2,973 (5,506)
-------- --------
Net cash provided by operations 54,710 28,715
-------- --------
Investing activities
Acquisition, development and exploration (23,209) (18,668)
Disposition of oil and gas properties 15,247 1,429
Other (212) (849)
-------- --------
Net cash used by investing (8,174) (18,088)
-------- --------
Financing activities
Decrease in indebtedness (39,000) (14,500)
Repayment from affiliate 18,500 -
Deferred credits (13,209) -
Issuance of common stock 2,732 4,882
Repurchase of common stock (16,925) -
Common dividends (777) (1,084)
-------- --------
Net cash used by financing (48,679) (10,702)
-------- --------
Decrease in cash (2,143) (75)
Cash and equivalents, beginning of period 2,653 250
-------- --------
Cash and equivalents, end of period $ 510 $ 175
======== ========
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 common shares of Patina. In 1997, a series of
transactions eliminated SOCO's ownership in the Company.
In November 2000, Patina acquired various property interests out of
bankruptcy 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 and provided a $60.0 million credit facility to Elysium, which was
subsequently refinanced. 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 consist of the acquisition, development,
exploitation and production of oil and gas properties. Historically, Patina's
properties have been almost exclusively located in the Wattenberg Field of
Colorado's D-J Basin. Over the past year, the Company accumulated significant
acreage positions in three Rocky Mountain basins and a leasehold position with
production in West Texas in an effort to expand and diversify its asset base.
Through Elysium and these recently initiated exploration and development
projects, the Company now has oil and gas properties in central Kansas, the
Illinois Basin, Utah, Wyoming, Texas and the San Joaquin Basin in 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
had been provided for estimated future abandonment costs on certain Elysium
properties as of March 31, 2002. No accrual has been provided for the
Wattenberg properties, as management believes that salvage value will
approximate abandonment costs.
The Company follows the provisions of Statement of Financial Accounting
Standards No. 121 ("SFAS 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. When the
net book value of properties exceeds their undiscounted future cash flows, the
cost of the property is written down to "fair value," which is determined using
discounted future cash flows on a field-by field basis. In 1997, the Company
recorded an impairment of $26.0 million to oil and gas properties, primarily due
to low oil and gas prices at that time. While no impairments have been
necessary since 1997, changes in oil and gas prices, underlying assumptions or
amortization units could result in impairments in the future.
Field equipment and other
Depreciation of field equipment and other is provided using the straight-line
method generally ranging from three to five years.
7
Other Assets
At December 31, 2001 and March 31, 2002, Other Assets was comprised of loan
origination fees related to the Elysium credit facility entered into in May
2001. See Note (9).
Section 29 Tax Credits
Between 1996 and 2000, the Company entered into various 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
properties. The Company recorded additional gas revenues of $600,000 for the
three months ended March 31, 2001. As the Company's profitability now allows it
to utilize tax 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 cash received rather than the Company's
proportionate share of gas produced. Gas imbalances at December 31, 2001 and
March 31, 2002 were insignificant.
Comprehensive Income
The Company follows the provisions of SFAS No. 130, "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
prior to 2001. The components of other comprehensive income and related tax
effects for the three months ended March 31, 2002 were as follows (in
thousands):
Tax Net of
Gross Effect Tax
-------- -------- --------
Other comprehensive income, 12/31/01................. $ 58,376 $(21,015) $ 37,361
Change in fair value of hedges....................... (26,731) 9,623 (17,108)
Reversal of impairment of oil and gas hedges......... (3,568) 1,285 (2,283)
Contract settlements................................. (9,004) 3,241 (5,763)
-------- -------- --------
Other comprehensive income, 03/31/02................. $ 19,073 $ (6,866) $ 12,207
======== ======== ========
The reversal of impairment related to a fourth quarter 2001 non-cash
provision of $6.4 million ($4.1 million net of taxes) to write-off of all
outstanding oil and gas hedges with Enron North America ("Enron"). The write-off
reduced earnings per share in the quarter and year by $0.18 (fully diluted). In
accordance with generally accepted accounting principles, the Company recorded
non-cash revenues of $3.6 million in the first quarter of 2002. An additional
$2.8 million will be recorded in the course of 2002, as the Enron hedges would
have expired.
The Company received a written offer of $0.25 on the dollar (approximately
$1.7 million) to sell its Enron claims to a third party. While the Company has
no immediate plans to accept this offer, should management determine that
acceptance of this or a similar offer provides the Company with the best
opportunity to monetize its Enron bankruptcy claims, the Company will recognize
additional earnings at that time or upon any other resolution of the claims.
The following table schedules out the reversal of the impairment related to
the Enron hedges recorded in other comprehensive income at March 31, 2002 and
how it will impact earnings for the remainder of 2002 (in thousands):
Reported Tax Reported
2002 Revenues Impact Earnings
------------ -------- ------- --------
Second quarter.......................... $ 88 $ (32) $ 56
Third quarter........................... 1,749 (630) 1,119
Fourth quarter.......................... 965 (347) 618
-------- ------- --------
$ 2,802 $(1,009) $ 1,793
======== ======= ========
8
The write-off of the Enron hedges in the fourth quarter of 2001 and the
subsequent reversal into income in 2002 have no ultimate economic impact on the
financial statements or the Company's financial position.
Financial Instruments
The book value and estimated fair value of cash and equivalents was $250,000
and $175,000 at December 31, 2001 and March 31, 2002, respectively. The book
value and estimated fair value of the senior debt was $77.0 million and $62.5
million at December 31, 2001 and March 31, 2002, respectively. The book value
of these assets and liabilities approximates fair value due to their short
maturity or floating rate structure of these instruments.
Derivative Instruments and Hedging Activities
The Company regularly enters into commodity derivative contracts and fixed-
price physical contracts to manage its exposure to oil and gas price volatility.
The contracts, which are generally placed with major financial institutions or
counter parties which management believes to be of high credit quality, may take
the form of futures contracts, swaps or options. The oil and gas reference
prices of these 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.
The Company entered into various swap contracts for oil based on NYMEX prices
for the first quarter of 2001 and 2002, recognizing a loss of $276,000 and a
gain of $1.6 million, respectively, related to these contracts. The Company
entered into various swap contracts for natural gas based on the Colorado
Interstate Gas ("CIG") index during the first quarter of 2001 and 2002,
recognizing a loss of $14.7 million and a gain of $7.4 million, respectively,
related to these contracts.
At March 31, 2002, the Company was a party to swap contracts for oil based on
NYMEX prices covering approximately 4,750 barrels of oil per day for the
remainder of 2002 at fixed prices ranging from $21.50 to $26.43 per barrel and
1,625 barrels of oil per day for 2003 at fixed prices ranging from $22.31 to
$23.37 per barrel. These swaps are summarized in the table below. The overall
weighted average hedged price for the swap contracts is $23.54 per barrel for
the remainder of 2002 and $22.84 per barrel for 2003. The unrecognized losses on
these contracts totaled $3.6 million based on NYMEX futures prices at March 31,
2002.
At March 31, 2002, the Company was a party to swap contracts for natural gas
based on CIG index prices covering approximately 71,650 MMBtu's per day for the
remainder of 2002 at fixed prices ranging from $1.95 to $4.43 per MMBtu. The
overall weighted average hedged price for the swap contracts is $2.81 per MMBtu
for the remainder 2002. The Company also entered into natural gas swap contracts
for 2003, 2004 and 2005 as of March 31, 2002, which are summarized in the table
below. The unrecognized gains on these contracts totaled $19.9 million based on
CIG futures prices at March 31, 2002.
At March 31, 2002, the Company was a party to the fixed price swaps summarized
below:
Oil Swaps (NYMEX)
------------------------------------------
Daily Unrealized
Volume Gain (Loss)
Time Period Bbl $/Bbl ($/thousands)
----------- --- ----- -------------
04/01/02 - 06/30/02................ 4,750 24.76 $ (673)
07/01/02 - 09/30/02................ 4,750 23.02 (1,232)
10/01/02 - 12/31/02................ 4,750 22.85 (1,008)
2003............................... 1,625 22.84 (667)
9
Natural Gas Swaps (CIG Index)
----------------------------------------
Daily Unrealized
Volume Gain (Loss)
Time Period MMBtu $/MMBtu ($/thousands)
----------- ----- ------- -------------
04/01/02 - 06/30/02.......... 75,000 2.90 $ 2,033
07/01/02 - 09/30/02.......... 75,000 2.56 (36)
10/01/02 - 12/31/02.......... 65,000 2.99 (942)
2003......................... 55,000 3.42 5,248
2004......................... 30,000 3.85 6,978
2005......................... 30,000 3.90 6,569
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 derivatives' 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. The Company adopted SFAS No. 133 on January 1,
2001.
The balance sheet impact of adopting of SFAS No. 133 on January 1, 2001 was as
follows (in millions):
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 2002 (excluding the impairment related to the
Enron hedges), net hedging gains of $9.0 million ($5.8 million after tax) were
transferred from other comprehensive income to earnings and the change in the
fair value of outstanding derivative net assets decreased by $26.7 million
($17.1 million after tax). As the underlying prices in the Company's hedge
contracts were consistent with the indices used to sell their oil and gas, no
ineffectiveness was recognized related to its hedge contracts in the first
quarter of 2002. As of March 31, 2002 (excluding the impaired Enron hedges), the
Company had net unrealized hedging gains of $16.3 million ($10.4 million after
tax), comprised of $7.0 million of current assets, $18.8 million of non-current
assets, $8.0 million of current liabilities and $1.5 million of non-current
liabilities. Based on futures prices as of March 31, 2002, the Company would
reclassify $1.1 million ($679,000 after tax) of net unrealized hedging losses as
a decrease to earnings and other comprehensive income in the next twelve months.
Stock Options and Awards
The Company accounts for its stock-based compensation plans under the
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.
Per Share Data
The Company uses weighted average shares outstanding to calculate earnings
per share. When dilutive, options, warrants and common stock issuable on
conversion of convertible securities are included as share equivalents using the
treasury stock method and included in the calculation of diluted earnings per
share. See Note (5).
10
Risks and Uncertainties
Historically, oil and 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 prior period consolidated financial
statements have been reclassified to conform with the current classifications.
The consolidated financial statements include the accounts of the Company, its
wholly owned subsidiaries and 50% of the Elysium accounts. 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 Company's 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, 2001.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," which addresses accounting and reporting for
business combinations. SFAS No. 141 is effective for all business combinations
initiated after June 30, 2001. The adoption of SFAS No. 141 did not have a
material impact on the Company's financial position or results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which addresses the accounting and reporting for goodwill subsequent to
an acquisition. The new standard eliminates the requirement to amortize
acquired goodwill; instead, such goodwill shall be reviewed at least annually
for impairment. SFAS No. 142 was effective for the Company in 2002. The
adoption of SFAS No. 142 did not have a material impact on the Company's
financial position or results of operations.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which requires that the fair value of a liability for asset
retirement obligations be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset. The asset
retirement liability will be allocated to operating expense by using a
systematic and rational method. The statement is effective for the Company in
2003. The Company has not yet determined the impact of adoption of this
statement. Given the Company's large number of wells and that the salvage value
has historically been assumed to offset the plugging liability, adoption could
lead to a material increase in the Company's assets and liabilities.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which provides a single accounting model for
long-lived assets to be disposed of and changes the criteria that would have to
be met to classify an asset as held-for-sale. The statement also requires
expected future operating losses from discontinued operations to be recognized
in the periods in which the losses are incurred, which is a change from the
current requirement of recognizing such operating losses as of the measurement
date. The statement is effective for the Company in 2002. The adoption of SFAS
No. 144 did not have material effect on the Company's financial position or
results of operations.
11
(3) OIL AND GAS PROPERTIES
The cost of oil and gas properties at December 31, 2001 and March 31, 2002
included approximately $4.8 million and $4.7 million, respectively, in net
unevaluated leasehold costs for acreage that is generally held for exploration
or development to which proved reserves have not been assigned. These amounts
have been excluded from amortization during the respective period. The following
table sets forth costs incurred related to oil and gas properties:
Three
Year Ended Months Ended
December 31, March 31,
2001 2002
------------ ------------
(In thousands)
Development....................... $ 77,343 $18,452
Acquisition - evaluated........... 6,603 26
Acquisition - unevaluated......... 3,627 25
Exploration and other............. 513 163
-------- -------
$ 88,086 $18,666
======== =======
Disposition....................... $(16,468) $(1,429)
======== =======
Depletion rate (per Mcfe)......... $ 0.86 $ 0.91
======== =======
The disposition of properties for the year ended December 31, 2001 related
primarily to the sale of Elysium properties in the Lake Washington Field in
Louisiana for $30.5 million in March 2001 ($15.25 million net to the Company).
12
(4) INDEBTEDNESS
The following indebtedness was outstanding on the respective dates:
December 31, March 31,
2001 2002
------- -------
(In thousands)
Bank facility - Patina.............. $71,000 $57,000
Bank facility - Elysium, net........ 6,000 5,500
Less current portion................ - -
------- -------
Senior debt, net.................... $77,000 $62,500
======= =======
In July 1999, the Company entered into an Amended Bank Credit Agreement (the
"Credit Agreement") providing for a $200.0 million revolving credit facility.
The amount available under the facility is re-determined each May 1 and November
1, and equaled $125.0 million at March 31, 2002. Patina had $68.0 million
available under the Credit Agreement at March 31, 2002.
The Company may elect that all or a portion of the credit facility bear
interest at a rate equal to: (i) the Eurodollar rate for one, two, three or six
months plus a margin which fluctuates from 1.00% to 1.50%, or (ii) the prime
rate plus a margin which fluctuates from 0.00% to 0.50%. The margins are
determined by a debt to EBITDA ratio. The weighted average interest rate under
the facility was 3.0% during the first quarter of 2002 and 3.1% at March 31,
2002.
The Credit Agreement contains financial covenants, including but not limited
to a maximum total debt to EBITDA ratio and a minimum current ratio. It also
contains 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 extended the Credit Agreement; however, there is no
assurance it will be able to do so in the future. The Company had a restricted
payment basket under the Credit Agreement of $51.1 million as of March 31, 2002,
which may be used to repurchase equity securities, pay dividends or make other
restricted payments.
The Company loaned Elysium $53.0 million at the closing of the Elysium
transaction in November 2000. In May 2001, Elysium refinanced this loan with
outside banks and entered into a Bank Credit Agreement (the "Elysium Credit
Agreement") providing for a $60.0 million revolving credit facility. The amount
available under the facility is re-determined each May 1 and November 1, and
equaled $20.0 million ($10.0 million net to Patina) at March 31, 2002. Elysium
had $9.0 million ($4.5 million net to Patina) available under the Elysium Credit
Agreement at March 31, 2002.
The Elysium facility is non-recourse to Patina and contains financial
covenants, including but not limited to a maximum total debt to EBITDA ratio, a
minimum current ratio and minimum tangible net worth. Borrowings under the
Elysium Credit Agreement mature in May 2004, but may be prepaid at anytime.
Elysium may elect that all or a portion of the credit facility bear interest at
a rate equal to: (i) the Eurodollar rate for one, two, three or six months plus
a margin which fluctuates from 1.50% to 2.00%, or (ii) the prime rate plus a
margin which fluctuates from 0.25% to 0.75%. The margin is determined by a
utilization of borrowing base percentage. The weighted average interest rate
under the facility was 3.8% during the first quarter of 2002 and 3.8% at March
31, 2002.
Scheduled maturities of indebtedness for the next five years are zero in
2002, $57.0 million in 2003 and $5.5 million in 2004. 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 $3.2 million and $507,000 during the first quarters of 2001 and 2002,
respectively.
13
(5) STOCKHOLDERS' EQUITY
A total of 100.0 million common shares, $0.01 par value, are authorized of
which 21.7 million were issued and outstanding at March 31, 2002. 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, increased to $0.02 per
share in the fourth quarter of 1999, to $0.04 per share in the fourth quarter of
2000 and to $0.05 per share in the fourth quarter of 2001. The Company has a
stockholders' rights plan designed to insure that stockholders receive fair
value for their shares in the event of certain takeover attempts. The following
is a schedule of the changes in the Company's shares of common stock since
January 1, 2001:
Three
Year Ended Months Ended
December 31, 2001 March 31, 2002
----------------- --------------
Beginning shares...................... 20,043,900 21,242,000
Exercise of stock options............. 436,300 371,400
Issued under Stock Purchase Plan...... 98,000 -
Issued in lieu of salaries & bonuses.. 67,900 78,800
Issued for directors fees............. 1,500 300
Exercise of $12.50 warrants........... 2,878,000 -
Issued to deferred compensation plan.. 11,900 9,500
Stock grant vesting................... 33,300 -
401(K) plan contribution.............. 24,200 -
---------- ----------
Total shares issued................... 3,551,100 460,000
Repurchases........................... (2,353,000) -
---------- ----------
Ending shares......................... 21,242,000 21,702,000
========== ==========
During 2001, the Company repurchased and retired shares of its common stock
for $51.5 million and 2,878,000 $12.50 warrants were converted into common stock
with the Company receiving cash proceeds of $36.0 million. The remaining
warrants expired on May 2, 2001.
A total of 5,000,000 preferred shares, $0.01 par value, are authorized with
no shares issued and outstanding at March 31, 2002.
The following is the calculation of basic and diluted earnings per share:
Three Months Ended March 31,
-----------------------------------------------
2001 2002
----------------------- ----------------------
Net Common Per Net Common Per
Income Shares Share Income Shares Share
------- ------ ------ ------- ------ -----
Basic net income attributable
to common stock $22,355 19,605 $ 1.14 $15,845 21,550 $0.74
====== =====
Effect of dilutive securities:
Stock options - 1,416 - 1,028
Stock grant - 27 - -
$12.50 warrants - 1,410 - -
------- ------ ------- ------
Diluted net income attributable
to common stock $22,355 22,458 $ 1.00 $15,845 22,578 $0.70
======= ====== ====== ======= ====== =====
14
(6) EMPLOYEE BENEFIT PLANS
401(k) Savings
The Company maintains a 401(k) profit sharing and savings plan ("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 profit sharing contributions
of $589,000 and $647,000 for 2000 and 2001, respectively. The contributions were
made in common stock at its market value. A total of 29,600 and 24,200 common
shares were contributed in 2000 and 2001, 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 ("Market Price"). To date, all purchase prices
have been set at 75% of Market Price. In addition, employee participants may be
granted the right to purchase shares pursuant to the Stock Purchase Plan 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 Stock Purchase Plan. Plan years run from the
date of the Annual Meeting through the next Annual Meeting. 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 during the plan year. As of March 31, 2001, participants had
purchased 138,200 shares of common stock, including 85,800 shares purchased with
participants' 1999 bonuses, at an average price of $12.12 per share ($9.09 net
price per share), resulting in cash proceeds to the Company of $665,000. In
2001, the Board of Directors approved 121,300 common shares (exclusive of shares
available for purchase with participants' salaries and bonuses) for possible
purchase by participants during the plan year. As of March 31, 2002,
participants had purchased 176,700 shares of common stock, including 78,700
shares purchased with participants' 2001 bonuses, at an average price of $26.26
per share ($19.70 net price per share), resulting in cash proceeds to the
Company of $2.0 million. No other purchases were made under the Stock Purchase
Plan during the three months ended March 31, 2001 and 2002.
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 time. The specific terms of grant and exercise are
determinable by the Compensation Committee 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. The following is a summary of stock options granted
under the Employee Plan:
Weighted
Range Average
Options of Exercise Exercise
Year Granted Prices Price
---- ------- ------ -----
2000................. 505,000 $ 9.19 - $21.94 $ 9.34
2001................. 634,000 $22.61 - $33.03 $22.91
2002................. 708,000 $25.77 - $29.67 $25.87
The Company also maintains a shareholder approved stock grant and option
plan for non-employee Directors (the "Directors' Plan"). 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 of their retainer. In
April 2002, the cash portion of the quarterly Director payments was increased to
$5,000. A total of 1,500 shares were issued in 2001 and 300 in the first quarter
of 2002. It also provides for 5,000 options to be granted to each non-employee
Director upon appointment and upon annual re-election, thereafter. The options
vest over a three-year period (30%, 60%, 100%) and expire five years from the
date of grant. The following is a summary of stock options granted under the
Directors' Plan:
15
Weighted
Range Average
Options of Exercise Exercise
Year Granted Prices Price
---- ------- ------ -----
2000.......... 25,000 $ 17.44 $17.44
2001.......... 25,000 $24.59 - $32.85 $31.20
(7) FEDERAL INCOME TAXES
A reconciliation of the federal statutory rate to the Company's effective
rate as it applies to the tax provision for the three months ended March 31,
2001 and 2002 follows:
2001 2002
---- ----
Federal statutory rate...................................... 35% 35%
State income tax rate, net of federal benefit............... 3% 3%
Decrease in valuation allowance against deferred tax asset.. (2%) -
Section 29 tax credits...................................... - (3%)
---- ----
Effective income tax rate................................... 36% 35%
==== ====
At March 31, 2002, $5.9 million of tax benefits related to unrealized
hedging losses were included as a reduction to deferred income taxes payable.
For tax purposes, the Company had regular net operating loss carryforwards
of approximately $41.0 million and alternative minimum tax ("AMT") loss
carryforwards of approximately $26.6 million at December 31, 2001. Utilization
of $30.3 million of the regular net operating loss carryforwards will be limited
to approximately $4.7 million per year as a result of the Gerrity acquisition in
1996. These carryforwards expire between 2010 and 2018. At December 31, 2001,
the Company had AMT credit carryforwards of $4.1 million that are available
indefinitely. No cash payments were made for federal taxes during 2000. The
Company paid $11.1 million in federal taxes in 2001.
Operating cash flows in the first quarter of 2002 were benefited by $2.4
million related to the tax deduction generated from the exercise and same day
sale of stock options. Generally accepted accounting principles don't allow for
this deduction to be offset against the tax provision on the income statement.
This deduction is recorded as an addition to additional paid in capital and as a
reduction to the tax liability on the balance sheet.
(8) MAJOR CUSTOMERS
During the three months ended March 31, 2001 and 2002, Duke Energy Field
Services, Inc. accounted for 28%, and 28%, BP Amoco Production Company accounted
for 11% and 8%, E-Prime accounted for 14% and 12%, and Reliant Energy accounted
for 12% and 0% of revenues, 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 March 2001, the Company loaned an officer $50,000, represented by a
7.00% recourse promissory note. The note is scheduled for annual principal
reductions each March, with payment in full due in 2004. The scheduled principal
reduction of $15,000 and the associated interest payment were received in March
2002. In May 2001, a director purchased 10,000 common shares from the Company
under the Stock Purchase Plan. The Company loaned the director $136,000 to
finance a portion of this purchase. The loan is due May 2004 and is represented
by a 7.50% recourse promissory note.
16
In conjunction with the acquisition of Elysium in November 2000, Patina
agreed to loan Elysium up to $60.0 million. In May 2001, Elysium entered into a
credit facility with a third party bank. The proceeds from this facility were
used to repay Patina. Elysium paid interest of $882,000 in the first quarter of
2001 to Patina under the revolving credit facility.
Patina provides certain administrative services to Elysium under an
operating agreement. The Company was paid $117,000 and $729,000 for these
services for the three months ended March 31, 2001 and 2002, respectively. In
December 2001, Elysium's office in The Woodlands, Texas was closed and all
administrative functions were moved to Denver, Colorado. As such, the Company
entered into a management agreement with Elysium providing for an indirect
monthly reimbursement of $243,000 and any direct charges for providing this
service.
(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
$900,000 per year through 2005.
The Company is a party to various lawsuits incidental to its business, none
of which are anticipated to have a material adverse impact on its financial
position or results of operations.
A recent ruling by the Colorado Supreme Court on the deductibility of
gathering and transportation costs as to royalty interests has resulted in
uncertainty of these deductions. The Company has not been named as a party to
any related lawsuit and no determination has been made as to the financial
impact to the Company, if any, in the event this decision stands.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results
of operation are based on consolidated financial statements which have been
prepared in accordance with generally accepted accounting principles in the
United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses. The Company analyzes its estimates,
including those related to oil and gas revenues, bad debts, oil and gas
properties, marketable securities, income taxes, contingencies and litigation.
The Company bases its estimates on historical experience and various other
assumptions that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates under different assumptions or
conditions. The Company believes the following critical accounting policies
affect its more significant judgments and estimates used in the preparation of
its consolidated financial statements. The Company recognizes revenues from the
sale of oil and gas in the period delivered. We provide an allowance for
doubtful accounts for specific receivables we judge unlikely to be collected.
Oil and gas properties are accounted for under the successful efforts method of
accounting and are periodically evaluated for possible impairment. Impairments
are recorded when management believes that a property's net book value is not
recoverable based on current estimates of estimated future cash flows.
Factors Affecting Financial Condition and Liquidity
Liquidity and Capital Resources
During the three months ended March 31, 2002, the Company spent $18.5 million
on the further development of properties. The development expenditures included
$17.2 million in Wattenberg for the drilling or deepening of five J-Sand wells,
107 Codell refracs, and three recompletions, $683,000 on drilling two wells on
the Adams Baggett project in West Texas and $264,000 on performing four minor
recompletions and a deepening on the Elysium properties. These projects and the
continued success in production enhancement allowed production to increase 16%
over the prior year. The Company had announced that it anticipated incurring
approximately $77.0 million on the further development of its properties during
2002. A proposal to the Board of Directors to increase that level expenditures
to $88.0 million given recent results is under consideration. The decision to
increase or decrease development activity is heavily dependent on oil and gas
prices.
At March 31, 2002, the Company had $430.9 million of assets. Total
capitalization was $372.9 million, of which 71% was represented by stockholders'
equity, 17% by bank debt and 12% by deferred income taxes. During the first
quarter of 2002, net cash provided by operations totaled $28.7 million, as
compared to $54.7 million in 2001 ($36.8 million and $40.7 million prior to
changes in working capital, respectively). At March 31, 2002, there were no
significant commitments for capital expenditures. Based upon an $88.0 million
capital budget for 2002, the Company expects production to continue to increase
in the coming 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.
During 2001, the Company repurchased 2,353,000 shares of its common stock for
$51.5 million. The Company received proceeds totaling approximately $36.0
million from the exercise of the $12.50 common stock warrants in May 2001. The
warrants expired on May 2, 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 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.
18
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 terms that are acceptable
to the Company.
The following summarizes the Company's contractual obligations at March 31,
2002 and the effect such obligations are expected to have on its liquidity and
cash flow in future periods (in thousands):
Less than 1-3 After
One Year Years 3 Years Total
--------- ------- ------- --------
Long term debt...................... $ - $ 62,500* $ - $ 62,500
Non-cancelable operating leases..... 907 1,909 652 3,468
------- -------- ------- --------
Total contractual cash obligations.. $ 907 $ 64,409 $ 652 $ 65,968
======= ======== ======= ========
* Due at termination dates in each of the Company's credit facilities, which
the Company expects to renew.
Indebtedness
The following summarizes the Company's borrowings and availability under
Patina's and Elysium's revolving credit facilities (in thousands):
March 31, 2002
-----------------------------------
Borrowing
Revolving Credit Facilities Base Outstanding Available
--------------------------- --------- ------------- ---------
Patina.................... $ 125,000 $ 57,000 $ 68,000
Elysium (net to Patina)... 10,000 5,500 4,500
--------- ---------- ---------
Total..................... $ 135,000 $ 62,500 $ 72,500
========= ========== =========
In 1999, the Company entered into an Amended Bank Credit Agreement (the
"Credit Agreement") providing for a $200.0 million revolving credit facility.
The amount available under the facility is re-determined each May 1 and November
1, and equaled $125.0 million at March 31, 2002. The borrowing base was reduced
in November 2001, at Patina's election, to minimize commitment fees on the
facility. Patina had $68.0 million available under the Credit Agreement at March
31, 2002.
The Company may elect that all or a portion of the credit facility bear
interest at a rate equal to: (i) the Eurodollar rate for one, two, three or six
months plus a margin which fluctuates from 1.00% to 1.50%, or (ii) the prime
rate plus a margin which fluctuates from 0.00% to 0.50%. The margins are
determined by a debt to EBITDA ratio. The weighted average interest rate under
the facility was 3.0% during the first quarter of 2002 and 3.1% at March 31,
2002.
The Credit Agreement contains financial covenants, including but not limited
to a maximum total debt to EBITDA ratio and a minimum current ratio. It also
contains 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 extended the Credit Agreement; however, there is no
assurance it will be able to do so in the future. The Company had a restricted
payment basket under the Credit Agreement of $51.1 million as of March 31, 2002,
which may be used to repurchase equity securities, pay dividends or make other
restricted payments.
19
The Company loaned Elysium $53.0 million at the closing of the Elysium
transaction in November 2000. In May 2001, Elysium refinanced this loan with
outside banks and entered into a Bank Credit Agreement (the "Elysium Credit
Agreement") providing for a $60.0 million revolving credit facility. The amount
available under the facility is re-determined each May 1 and November 1, and
equaled $20.0 million ($10.0 million net to Patina) at March 31, 2002. Elysium
had $9.0 million ($4.5 million net to Patina) available under the Elysium Credit
Agreement at March 31, 2002.
The Elysium facility is non-recourse to Patina and contains financial
covenants, including but not limited to a maximum total debt to EBITDA ratio, a
minimum current ratio and minimum tangible net worth. Borrowings under the
Elysium Credit Agreement mature in May 2004, but may be prepaid at anytime.
Elysium may elect that all or a portion of the credit facility bear interest at
a rate equal to: (i) the Eurodollar rate for one, two, three or six months plus
a margin which fluctuates from 1.50% to 2.00%, or (ii) the prime rate plus a
margin which fluctuates from 0.25% to 0.75%. The margin is determined by a
utilization of borrowing base percentage. The weighted average interest rate
under the facility was 3.8% during the first quarter of 2002 and 3.8% at March
31, 2002.
Cash Flow
The Company's principal sources of cash are operating cash flow and bank
borrowings. The Company's cash flow is highly dependent on oil and gas prices.
Pricing volatility will be somewhat reduced as the Company has entered into
hedging agreements for 2002, 2003, 2004 and 2005, respectively. The $18.7
million of capital expenditures for the first quarter of 2002 were funded
entirely with internal cash flow. A proposal to the Board of Directors to
increase the 2002 approved capital budget of $77.0 million to $88.0 million is
currently under consideration. The proposed 2002 capital budget of $88.0
million, comprised of approximately $77.0 million of development expenditures in
Wattenberg, is expected to increase production over 10%. The Company expects
the capital program to be funded with internal cash flow. As such, exclusive of
any acquisitions or significant equity repurchases, management expects to
continue to reduce long-term debt in 2002.
Net cash provided by operations in the three months ended March 31, 2001
and 2002 was $54.7 million and $28.7 million, respectively. Cash flow from
operations decreased due to the sharp decline in oil and gas prices from the
first quarter of 2001, somewhat offset by the 16% increase in oil and gas
production. As a result of the lower prices, production taxes declined, more
than offsetting the slight increase in lease operating expenses. Interest
expense declined due to the continued repayment of debt and lower average
interest rates in 2002. Operating cash flows in the first quarter of 2002 were
benefited by $2.4 million related to the tax deduction generated from the
exercise and same day sale of stock options.
Net cash used by investing in the three months ended March 31, 2001 and
2002 totaled $8.2 million and $18.1 million, respectively. Acquisition,
development and exploration expenditures totaled $18.7 million in the first
quarter of 2002 compared to $23.2 million in 2001. The decrease in expenditures
in the first quarter of 2002 was primarily due to the Company incurring $5.4
million of acquisition costs in the first quarter of 2001 related to the
initiation of our grassroots projects. Development expenditures in Wattenberg
remained relatively constant at $17.2 million in 2002. The net expenditure
amount in the first quarter of 2001 was reduced due to $16.5 million of proceeds
from sales of assets, primarily Elysium's properties in the Lake Washington
Field in Louisiana.
Net cash used by financing in the three months ended March 31, 2001 and
2002 was $48.7 million and $10.7 million, respectively. Sources of financing
have been primarily bank borrowings. During the first quarter of 2001, the
combination of operating cash flow, the refinancing of Elysium loan, and
proceeds from the sale of the Lake Washington properties, allowed the Company to
repay $39.0 million of bank debt, repurchase $17.0 million of equity securities
and fund capital development and acquisition expenditures of $23.2 million.
During the first quarter of 2002, the combination of operating cash flow and
$4.9 million in proceeds from the exercise of stock options, allowed the Company
to repay $14.5 million of bank debt and fund capital development and acquisition
expenditures of $18.7 million.
20
Capital Requirements
During the first quarter of 2002, $18.7 million of capital was expended,
primarily on development projects. This represented approximately 51% of
internal cash flow. The proposed 2002 capital budget of $88.0 million is
expected to increase production over 10%. The Company expects the capital
program to be funded with internal cash flow. As such, exclusive of any
acquisitions or significant equity repurchases, management expects to continue
to reduce long-term debt in 2002. Development and exploration activities are
highly discretionary, and, for the foreseeable future, management expects such
activities to be maintained at levels equal to or below internal cash flow.
Hedging
The Company regularly enters into hedging agreements to reduce the impact
on its operations of fluctuations in oil and gas prices. All such contracts are
entered into solely to hedge prices and limit volatility. The Company's current
policy is to hedge between 50% and 75% of its production, when futures prices
justify, on a rolling twelve to eighteen month basis. Due to the exceptional
gas prices in 2001, the Company extended their hedging program into 2005. At
March 31, 2002, hedges were in place covering 61.7 Bcf at prices averaging $3.39
per MMBtu and 1,898,000 barrels of oil averaging $23.33 per barrel. The
estimated fair value of the Company's hedge contracts that would be realized on
termination, approximated a net unrealized pre-tax gain of $16.3 million ($10.4
million gain net of $5.9 million of deferred taxes) at March 31, 2002, which is
presented on the balance sheet as a short-term gain of $7.0 million, a long-term
gain of $18.8 million, a short term liability of $8.0 million and a long term
liability of $1.5 million based on contract expiration. The gas contracts
expire monthly through December 2005 and the oil contracts expire monthly
through December 2003. Gains or losses on both realized and unrealized hedging
transactions are determined as the difference between the contract price and a
reference price, generally NYMEX for oil and the Colorado Interstate Gas ("CIG")
index for natural gas. Transaction gains and losses are determined monthly and
are included as increases or decreases in oil and gas revenues in the period the
hedged production is sold. Any ineffective portion of such hedges is
recognized in earnings as it occurs. Net pre-tax gains relating to these
derivatives in 2001 and the first quarter of 2002 were $4.0 million and $9.0
million, respectively. Effective January 1, 2001, the unrealized gains (losses)
on these hedging positions were recorded at an estimate of fair value which the
Company based on a comparison of the contract price and a reference price,
generally NYMEX or CIG, on the Company's balance sheet as Other comprehensive
income (loss), a component of Stockholders' Equity.
Basis Differentials
The Company sells the majority of its gas production based on the Colorado
Interstate Gas ("CIG") index. The realized price of the Company's gas and that
of other Rocky Mountain producers has historically traded at a discount to NYMEX
gas. This discount is referred to as a "basis differential" and averaged $0.78
per MMBtu in 2001, ranging from a positive differential of $0.02 per MMBtu in
February 2001 to a negative differential of $1.43 MMBtu in July 2001. The CIG
basis differential for the first quarter of 2002 averaged $0.38 discount from
NYMEX. Based on futures prices as of March 31, 2002, the basis differential for
CIG from NYMEX for April 2002 through December 2002 averaged a $0.84 per MMBtu
discount, ranging from a discount of $1.09 per MMBtu in June 2002 to a discount
of $0.42 per MMBtu in December 2002.
21
Results of Operations
Three months ended March 31, 2002 compared to the three months ended March 31,
2001.
Revenues for the first quarter of 2002 totaled $51.8 million, a 20%
decrease from the prior year period. Net income for the first quarter of 2002
totaled $15.8 million compared to $22.4 million in 2001. The decreases in
revenue and net income were due to lower oil and gas prices, somewhat offset by
increasing production.
Average daily oil and gas production in the first quarter of 2002 totaled
8,044 barrels and 128.2 MMcf (176.4 MMcfe), an increase of 16% on an equivalent
basis from the same period in 2001. The rise in production was due to the
continued development activity in Wattenberg, contributions from our Elysium
operations and to a minor degree, the grassroots projects. During the first
quarter of 2002, five wells were drilled or deepened and 107 refracs and three
recompletions were performed in Wattenberg, compared to 19 new wells or
deepenings and 99 refracs and two recompletions in Wattenberg in 2001. Based
upon an $88.0 million development budget for 2002, the Company expects
production to continue to increase in the coming year.
Average oil prices decreased 15% from $27.44 per barrel in the first quarter
of 2001 to $23.26 in 2002. Average gas prices decreased 42% from $4.65 per Mcf
in the first quarter of 2001 to $2.70 in 2002. Average oil prices include
hedging losses of $276,000 or $0.41 per barrel in the first quarter of 2001 and
hedging gains of $1.6 million or $2.24 per barrel in 2002. Average gas prices
included hedging losses of $14.7 million or $1.51 per Mcf in the first quarter
of 2001 and hedging gains of $7.4 million or $0.64 per Mcf in 2002. Lease
operating expenses totaled $7.2 million or $0.45 per Mcfe for the first quarter
of 2002 compared to $6.5 million or $0.48 per Mcfe in the prior year period. The
increase in operating expenses was primarily attributed to $524,000 of
additional operating expenses associated with the grassroots projects.
Production taxes totaled $2.1 million or $0.13 per Mcfe in the first quarter of
2002 compared to $5.4 million in 2001 or $0.39 per Mcfe. The $3.3 million
decrease was a result of lower oil and gas prices. Production taxes are
calculated on unhedged oil and gas revenues. The significant decrease coincides
with the large drop in unhedged oil and gas prices (oil dropped 25% while gas
dropped 66% from the first quarter of 2001).
General and administrative expenses for the first quarter of 2002, net of
reimbursements, totaled $2.6 million, approximately the same level incurred in
2001. In December 2001, Elysium's administrative offices in Texas were closed
down and their functions were moved to Denver, Colorado. This move should
result in over $500,000 of savings in 2002.
Interest and other expenses fell to $634,000 in the first quarter of 2002, a
decrease of nearly 80% from the prior year period. Interest expense decreased as
a result of lower average debt balances and lower average interest rates. The
Company's average interest rate during the first quarter of 2002 was 3.1%
compared to 7.0% in 2001.
Depletion, depreciation and amortization expense for the first quarter of
2002 totaled $14.8 million, an increase of $2.9 million or 24% from 2001.
Depletion expense totaled $14.5 million or $0.91 per Mcfe for the first quarter
of 2002 compared to $11.6 million or $0.85 per Mcfe for 2001. The increase in
depletion expense resulted primarily from the 16% increase in oil and gas
production in the first quarter of 2002 and a higher depletion rate. The
depletion rate was increased in the fourth quarter of 2001 in conjunction with
the completion of the year-end 2001 reserve report. The increased depletion
rate reflects the lower oil and gas reserves resulting from lower year-end oil
and gas prices. Depreciation and amortization expense for the three months
ended March 31, 2002 totaled $309,000 or $0.02 per Mcfe, approximately the same
per unit rate as in the first quarter of 2001.
Provision for income taxes for the first quarter of 2002 totaled $8.6
million, a decrease of $4.0 million from the same period in 2001. The decrease
was due to lower earnings and utilization of the Section 29 tax credits in 2002.
The Company recorded a 35% tax provision for the first quarter of 2002 compared
to a 36% tax provision in 2001.
22
Inflation and Changes in Prices
While certain costs are affected by the general level of inflation, factors
unique to the oil and gas industry result in independent price fluctuations.
Over the past five years, significant fluctuations have occurred in oil and gas
prices. Although it is particularly difficult to estimate future prices of oil
and gas, price fluctuations have had, and will continue to have, a material
effect on the Company.
The following table indicates the average oil and gas prices received over
the last five years and highlights the price fluctuations by quarter for 2001
and 2002. 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
--- --- ---
(Per Bbl) (Per Mcf) (Per Mcfe)
Annual
------
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
2001................... 24.99 3.42 3.63
Quarterly
---------
2001
----
First.................. $ 27.86 $ 6.09 $ 5.67
Second................. 26.96 3.70 3.93
Third.................. 25.81 2.21 2.77
Fourth................. 19.69 1.94 2.31
2002
----
First.................. $ 21.02 $ 2.06 $ 2.45
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Price Risk
The Company's major market risk exposure is to oil and gas prices. Pricing is
primarily driven by the prevailing domestic price for oil and prices applicable
to the Rocky Mountain and Mid-Continent 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 2001 and the first three months of 2002, exclusive of any hedges, ranged
from a monthly low of $1.34 per Mcf to a monthly high of $7.65 per Mcf. Oil
prices, exclusive of any hedges, ranged from a monthly low of $18.74 per barrel
to a monthly high of $28.87 per barrel during 2001 and the first three months of
2002. While oil and gas prices decreased significantly in the second half of
2001, they have increased in 2002. A significant decline in the price of oil or
gas could have a material adverse effect on the Company's financial condition
and results of operations.
In the first quarter of 2002, a 10% reduction in oil and gas prices,
excluding oil and gas quantities that were fixed through hedging transactions,
would have reduced revenues by $2.7 million. If oil and gas future prices at
March 31, 2002 had declined by 10%, the unrealized hedging gains at that date
would have increased by $23.7 million (from $16.3 million to $40.0 million).
The Company regularly enters into commodity derivative contracts and fixed-
price physical contracts to manage its exposure to oil and gas price volatility.
The contracts, which are generally placed with major financial institutions or
counter parties which management believes to be of high credit quality, may take
the form of futures contracts, swaps or options. The oil and gas reference
prices of these 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.
The Company entered into various swap contracts for oil based on NYMEX prices
for the first quarter of 2001 and 2002, recognizing a loss of $276,000 and a
gain of $1.6 million, respectively, related to these contracts. The Company
entered into various swap contracts for natural gas based on the Colorado
Interstate Gas ("CIG") index during the first quarter of 2001 and 2002,
recognizing a loss of $14.7 million and a gain of $7.4 million, respectively,
related to these contracts.
At March 31, 2002, the Company was a party to swap contracts for oil based on
NYMEX prices covering approximately 4,750 barrels of oil per day for the
remainder of 2002 at fixed prices ranging from $21.50 to $26.43 per barrel and
1,625 barrels of oil per day for 2003 at fixed prices ranging from $22.31 to
$23.37 per barrel. These swaps are summarized in the table below. The overall
weighted average hedged price for the swap contracts is $23.54 per barrel for
the remainder of 2002 and $22.84 per barrel for 2003. The unrecognized losses on
these contracts totaled $3.6 million based on NYMEX futures prices at March 31,
2002.
At March 31, 2002, the Company was a party to swap contracts for natural gas
based on CIG index prices covering approximately 71,650 MMBtu's per day for the
remainder of 2002 at fixed prices ranging from $1.95 to $4.43 per MMBtu. The
overall weighted average hedged price for the swap contracts is $2.81 per MMBtu
for the remainder 2002. The Company also entered into natural gas swap contracts
for 2003, 2004 and 2005 as of March 31, 2002, which are summarized in the table
below. The unrecognized gains on these contracts totaled $19.9 million based on
CIG futures prices at March 31, 2002.
24
At March 31, 2002, the Company was a party to the fixed price swaps summarized
below:
Oil Swaps (NYMEX)
----------------------------------------
Daily Unrealized
Volume Gain (Loss)
Time Period Bbl $/Bbl ($/thousands)
----------- --- ----- -------------
04/01/02 - 06/30/02................ 4,750 24.76 $ (673)
07/01/02 - 09/30/02................ 4,750 23.02 (1,232)
10/01/02 - 12/31/02................ 4,750 22.85 (1,008)
2003............................... 1,625 22.84 (667)
Natural Gas Swaps (CIG Index)
--------------------------------------
Daily Unrealized
Volume Gain (Loss)
Time Period MMBtu $/MMBtu ($/thousands)
----------- ----- ------- -------------
04/01/02 - 06/30/02................ 75,000 2.90 $ 2,033
07/01/02 - 09/30/02................ 75,000 2.56 (36)
10/01/02 - 12/31/02................ 65,000 2.99 (942)
2003............................... 55,000 3.42 5,248
2004............................... 30,000 3.85 6,978
2005............................... 30,000 3.90 6,569
Interest Rate Risk
At March 31, 2002, the Company had $57.0 million outstanding under its credit
facility at an average interest rate of 3.1% and $5.5 million (net to Patina)
outstanding under the Elysium credit facility at an average interest rate of
3.8%. The Company may elect that all or a portion of the credit facility bear
interest at a rate equal to: (i) the Eurodollar rate for one, two, three or six
months plus a margin which fluctuates from 1.00% to 1.50% on the Patina facility
and 1.50% to 2.00% on the Elysium facility or (ii) the prime rate plus a margin
which fluctuates from 0.00% to 0.50% on the Patina facility and 0.25% to 0.75%
on the Elysium facility. The weighted average interest rates under the Patina
and Elysium facilities approximated 3.0% and 3.8%, respectively during the first
quarter of 2002. Assuming no change in the amount outstanding at March 31,
2002, the annual impact on interest expense of a ten percent change in the
average interest rate would be approximately $125,000, net of tax. As the
interest rate is variable and is reflective of current market conditions, the
carrying value approximates the fair value.
25
Risk Factors and Cautionary Statement for purposes of the Safe Harbor Provisions
of the Private Securities Litigation Reform Act of 1995
Certain information included in this report, other materials filed or to be
filed by the Company with the Securities and Exchange Commission ("SEC"), as
well as information included in oral statements or written statements made or to
be made by the Company contain or incorporate by reference certain statements
(other than statements of historical fact) that constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. 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, grassroots prospects and 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 Gathering, Processing and Marketing, Competition, and Regulation sections
in 2001 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
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.
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 filed by Registrant during the quarter ended
March 31, 2002.
26
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, 2002
27