<PAGE>
================================================================================
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 September 30, 2000
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 20,257,218 shares of common stock outstanding on October 25, 2000.
================================================================================
<PAGE>
PART I. FINANCIAL INFORMATION
Patina Oil & Gas Corporation was formed in 1996 to hold the assets and
operations of Snyder Oil Corporation in the Wattenberg Field and to facilitate
the acquisition of Gerrity Oil & Gas Corporation in 1996. 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
<PAGE>
PATINA OIL & GAS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and equivalents $ 626 $ 1,758
Accounts receivable 15,694 19,494
Inventory and other 3,030 3,809
------------ ------------
19,350 25,061
------------ ------------
Oil and gas properties, successful efforts method 621,767 646,307
Accumulated depletion, depreciation and amortization (313,732) (342,657)
------------ ------------
308,035 303,650
------------ ------------
Gas facilities and other 3,790 4,066
Accumulated depreciation (2,251) (2,862)
------------ ------------
1,539 1,204
------------ ------------
Other assets, net 1,292 -
------------ ------------
$ 330,216 $ 329,915
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 14,993 $ 18,727
Accrued liabilities 4,115 5,223
------------ ------------
19,108 23,950
------------ ------------
Senior debt 132,000 119,000
Deferred income taxes - 8,312
Other noncurrent liabilities 13,218 15,036
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par, 5,000,000 shares
authorized, 2,383,328 and 0 shares issued
and outstanding 24 -
Common stock, $.01 par, 100,000,000 shares
authorized, 16,131,310 and 20,253,506 shares
issued and outstanding 161 203
Capital in excess of par value 188,545 157,023
Deferred compensation (279) (70)
Retained earnings (deficit) (22,561) 6,461
------------ ------------
165,890 163,617
------------ ------------
$ 330,216 $ 329,915
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
PATINA OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 2000 1999 2000
-------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues
Oil and gas sales $ 24,242 $ 35,681 $ 60,749 $ 98,524
Other 234 455 830 1,046
-------- -------- -------- --------
24,476 36,136 61,579 99,570
-------- -------- -------- --------
Expenses
Direct operating 4,762 5,404 13,338 15,896
Exploration 170 149 191 174
General and administrative 1,562 1,646 4,381 5,040
Interest and other 2,410 2,271 8,288 7,226
Depletion, depreciation and amortization 10,292 9,867 30,377 29,676
-------- -------- -------- --------
19,196 19,337 56,575 58,012
-------- -------- -------- --------
Income before taxes 5,280 16,799 5,004 41,558
-------- -------- -------- --------
Provision for income taxes
Current - - - -
Deferred - 3,360 - 8,312
-------- -------- -------- --------
- 3,360 - 8,312
-------- -------- -------- --------
Net income $ 5,280 $ 13,439 $ 5,004 $ 33,246
======== ======== ======== ========
Net income per share
Basic $ 0.23 $ 0.73 $ 0.01 $ 1.80
======== ======== ======== ========
Diluted $ 0.21 $ 0.57 $ 0.01 $ 1.43
======== ======== ======== ========
Weighted average shares outstanding
Basic 16,029 17,485 15,913 16,727
======== ======== ======== ========
Diluted 25,225 23,467 16,363 22,774
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
PATINA OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Capital in Retained
Preferred Stock Common Stock Excess of Deferred Earnings
----------------- -----------------
Shares Amount Shares Amount Par Value Compensation (Deficit)
-------- -------- -------- -------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 3,167 $ 32 15,752 $158 $206,792 $(1,038) $(29,968)
Repurchase of common and preferred (735) (7) (868) (9) (24,674) - (489)
Conversion of preferred into common (168) (2) 489 4 - - -
Issuance of common - - 758 8 3,108 (334) -
Preferred dividends 119 1 - - 3,319 - (6,251)
Common dividends - - - - - - (812)
Net income - - - - - 1,093 14,959
------ ---- ------ ---- -------- ------- --------
Balance, December 31, 1999 2,383 24 16,131 161 188,545 (279) (22,561)
Repurchase of common and preferred (514) (5) (1,277) (13) (35,207) - (549)
Conversion of preferred into common (1,869) (19) 4,934 49 (31) - -
Issuance of common - - 466 6 3,716 - -
Preferred dividends - - - - - - (2,661)
Common dividends - - - - - - (1,014)
Net income - - - - - 209 33,246
------ ---- ------ ---- -------- ------- --------
Balance, September 30, 2000
(unaudited) - $ - 20,254 $203 $157,023 $ (70) $ 6,461
====== ==== ====== ==== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
PATINA OIL & GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 2000
-------- --------
(Unaudited)
<S> <C> <C>
Operating activities
Net income $ 5,004 $ 33,246
Adjustments to reconcile net income to net
cash provided by operations
Exploration expense 191 174
Depletion, depreciation and amortization 30,377 29,676
Deferred income tax provision - 8,312
Deferred compensation expense 769 209
Amortization of deferred credits (836) (971)
Amortization of loan fees 37 228
Changes in current and other assets and liabilities
Decrease (increase) in
Accounts receivable (2,518) (3,800)
Inventory and other (99) 74
Increase (decrease) in
Accounts payable (2,584) 3,734
Accrued liabilities (2,709) 1,222
Other assets and liabilities (94) 1,615
-------- --------
Net cash provided by operating activities 27,538 73,719
-------- --------
Investing activities
Acquisition, development and exploration (17,454) (26,376)
Other (211) 1,458
-------- --------
Net cash used by investing activities (17,665) (24,918)
-------- --------
Financing activities
Decrease in indebtedness (12,021) (13,000)
Deferred credits 2,087 1,446
Loan origination fees (455) -
Issuance of common stock 855 3,449
Repurchase of common stock (427) (22,379)
Repurchase of preferred stock (5,218) (12,846)
Preferred stock redemption premium - (549)
Preferred dividends (1,941) (2,776)
Common dividends (487) (1,014)
-------- --------
Net cash used by financing activities (17,607) (47,669)
-------- --------
Increase (decrease) in cash (7,734) 1,132
Cash and equivalents, beginning of period 10,086 626
-------- --------
Cash and equivalents, end of period $ 2,352 $ 1,758
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
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.
The Company's operations currently consist of the acquisition, development,
exploitation and production of oil and natural gas properties in the Wattenberg
Field of Colorado's D-J Basin.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Producing Activities
The Company utilizes the successful efforts method of accounting for its
oil and gas properties. Consequently, 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 initially
capitalized, but charged to expense if and when 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 remaining proved or proved developed reserves, as
applicable. 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 over the entire Wattenberg Field, as the wells are located in the same
reservoirs. No accrual has been provided for estimated future abandonment costs
as management estimates that salvage value will approximate or exceed such
costs.
In 1995, the Company adopted Statement of Financial Accounting Standards
No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets." SFAS
121 requires the Company to assess the need for an impairment of capitalized
costs of oil and gas properties on a field-by-field basis. During 1997, the
Company recorded an impairment of $26.0 million to oil and gas properties as the
estimated undiscounted future cash flows expected to result from these assets
and their disposition, largely proven undeveloped drilling locations, was less
than their net book value. The impairment primarily resulted from low year-end
oil and natural gas prices. While no impairments have been necessary since 1997,
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 ranging from three to five years.
Other Assets
Other Assets at December 31, 1999 were comprised of $988,000 of notes
receivable from certain officers and key managers of the Company. See Note (9).
At September 30, 2000, the notes receivable balance of $690,000 was classified
as a current asset and included in Inventory and other as these notes are due
within one year. At December 31, 1999, the balance also included net loan
origination fees of $303,000. The remaining net loan origination of fees $76,000
at September 30, 2000 were classified as a current asset and are included in
Inventory and other. They will be fully amortized by December 31, 2000.
7
<PAGE>
Section 29 Tax Credits
The Company has entered into arrangements to monetize its Section 29 tax
credits. These arrangements result in revenue increases of approximately $0.40
per Mcf on production volumes from qualified Section 29 properties. As a
result, additional gas revenues of $2.0 million and $2.6 million were recognized
for the nine months ended September 30, 1999 and 2000, respectively. These
arrangements are expected to increase revenues through December 31, 2002, at
which point the tax credits expire.
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,
1999 and September 30, 2000 were insignificant.
Financial Instruments
The book value and estimated fair value of cash and equivalents was $626,000
and $1.8 million at December 31, 1999 and September 30, 2000. The book value
and estimated fair value of the senior debt was $132.0 million and $119.0
million at December 31, 1999 and September 30, 2000. The book value of these
assets and liabilities approximates fair value due to the short maturity or
floating rate structure of these instruments.
From time to time, the Company enters into commodity derivative contracts and
fixed-price physical contracts to manage its exposure to oil and gas price
volatility. Commodity derivatives contracts, which are generally placed with
major financial institutions or with counterparties 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 derivatives contracts are based upon oil and natural gas futures which
have a high degree of historical correlation with actual prices received by the
Company. The Company accounts for its commodity derivatives contracts using the
hedge (deferral) method of accounting. Under this method, realized gains and
losses on such contracts are deferred and recognized as an adjustment to oil and
gas sales revenues in the period in which the physical product to which the
contracts relate, is actually sold. Gains and losses on commodity derivatives
contracts that are closed before the hedged production occurs are deferred until
the production month originally hedged.
The Company entered into various swap contracts for oil (NYMEX based) for the
first nine months of 1999 and 2000 and recognized losses of $1.4 million and
$7.5 million related to these swap contracts. The Company entered into various
CIG and PEPL index based swap contracts for natural gas for the first nine
months of 1999 and 2000 and recognized losses of $1.1 million and $6.3 million
related to these swap contracts.
As of September 30, 2000, the Company had entered into swap contracts for oil
(NYMEX based) for approximately 3,250 barrels of oil per day for the remainder
of 2000 at fixed prices ranging from $20.00 to $25.75 per barrel and 2,700
barrels of oil per day for 2001 at fixed prices ranging from $23.05 to $30.75
per barrel. Certain swap contracts for oil (NYMEX based) contain "knock-out"
provisions. If the average price of NYMEX WTI crude oil 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 $22.08 per barrel for the remainder of 2000 and
$25.68 per barrel for 2001 (NYMEX based). The unrecognized losses on these
contracts totaled $5.7 million and $7.4 million based on estimated market values
at September 30, 2000 and October 23, 2000, respectively.
As of September 30, 2000, the Company had entered into natural gas swap
contracts for approximately 50,800 MMBtu's per day for the remainder of 2000 at
fixed prices ranging from $2.06 to $4.67 per MMBtu and 45,200 MMBtu's per day
for 2001 at fixed prices ranging from $2.55 to $5.04 per MMBtu on CIG index
based swap contracts. The Company also has entered into physical natural gas
sale contracts for the delivery of approximately 6,700 MMBtu's per day for the
remainder of 2000 at prices ranging from $2.29 to $3.04 per MMBtu and 2,500
MMBtu's per day for the first quarter of 2001 at prices ranging from $2.67 to
$3.08 per MMBtu. The weighted average daily volumes and prices for
8
<PAGE>
these natural gas swaps and physical contracts are 57,500 MMBtu's per day at
$3.23 per MMBtu for the remainder of 2000 and 45,800 MMBtu's per day at $3.50
per MMBtu for 2001. The unrecognized losses on the swap contracts totaled $15.6
million and $13.8 million based on estimated market values at September 30, 2000
and October 23, 2000, respectively.
As of October 23, 2000, the Company was a party to the following fixed price
swap and physical arrangements summarized below:
<TABLE>
<CAPTION>
Oil (NYMEX)
------------------------------------------------------------------------------------------
Swap Swap "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)
---------- ------ ------- ------ ----------- ------------ ------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10/01/00 - 12/31/00.. 900 22.28 2,350 22.00 16.00-17.00 3,250 22.08 (3,305)
01/01/01 - 03/31/01.. 2,000 28.94 1,500 23.41 17.00 3,500 26.57 (1,662)
04/01/01 - 06/30/01.. 2,000 27.96 1,250 23.29 17.00 3,250 26.16 (1,255)
07/01/01 - 09/30/01.. 2,000 27.22 750 23.13 17.00 2,750 26.10 (761)
10/01/01 - 12/31/01.. 1,900 27.23 750 23.13 17.00 2,650 26.08 (458)
01/01/02 - 04/30/02.. 750 26.51 - - - 750 26.51 (20)
</TABLE>
<TABLE>
<CAPTION>
Natural Gas
----------------------------------------------------------------------------
CIG Swap Physical Combined
--------------- ------------------ -------------------
Daily Daily Daily Unrealized
Volume Volume Volume Gain / (Loss)
Time Period MMBtu $/MMBtu MMBtu $/MMBtu MMBtu $/MMBtu ($/thousand)
----------- ------ ------- ------ ---------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
10/01/00 - 12/31/00.. 50,800 3.33 6,700 2.52 57,500 3.23 (5,670)
01/01/01 - 03/31/01.. 55,900 3.61 2,500 2.87 58,400 3.58 (4,651)
04/01/01 - 06/30/01.. 50,000 3.31 - - 50,000 3.31 (2,292)
07/01/01 - 09/30/01.. 45,000 3.50 - - 45,000 3.50 (642)
10/01/01 - 12/31/01.. 40,000 3.79 - - 40,000 3.79 (565)
</TABLE>
In October 1998, the Company entered into an interest rate swap contract for
a two-year period, extendable for one additional year at the option of the third
party. 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 Company's fixed
rate of 4.57% and the three-month LIBOR rate, which is reset every 90 days, is
received or paid by the Company in arrears every 90 days. The Company received
$184,000 in 1999 pursuant to this contract and $363,000 in the first nine months
of 2000. In October 2000, the swap contract lapsed as the third party elected
not to extend it.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 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 133 is effective for fiscal
years beginning after June 15, 2000. The Company has not yet quantified the
impacts of adopting SFAS 133 on its financial statements and has not determined
the timing of, or method of, adoption of SFAS 133. However, SFAS 133 will
likely increase volatility in earnings and other comprehensive income.
9
<PAGE>
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. However, the restricted stock awarded under the
Restricted Stock Plan is considered to be "compensatory" and the Company
recognized $769,000 and $209,000 of non-cash general and administrative expenses
for the nine months ended September 30, 1999 and 2000, respectively. These
costs will be fully amortized by December 31, 2000. See Note (6).
Per Share Data
The Company uses the weighted average number of 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 is also included in the
calculation of diluted per share data if their effect is dilutive.
Risks and Uncertainties
Historically, the market for oil and natural gas has experienced significant
price fluctuations. Prices for oil and natural gas in the Rocky Mountain region
have been particularly volatile in recent years. The price fluctuations can
result from variations in weather, levels of regional or national production,
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 an original 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 and its wholly owned subsidiaries.
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, 1999.
10
<PAGE>
(3) OIL AND GAS PROPERTIES
The cost of oil and gas properties at December 31, 1999 and September 30,
2000 included approximately $225,000 and $236,000 in net unevaluated leasehold
costs. Acreage is generally held for exploration, development or resale and its
value, if any, is excluded from amortization. The following table sets forth
costs incurred related to oil and gas properties:
<TABLE>
<CAPTION>
Nine
Year Ended Months Ended
December 31, September 30,
1999 2000
---- ----
(In thousands)
<S> <C> <C>
Development............ $21,122 $25,674
Acquisition............ 2,215 528
Exploration and other.. 666 174
------- -------
$24,003 $26,376
======= =======
</TABLE>
(4) INDEBTEDNESS
The following indebtedness was outstanding on the respective dates:
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
---- ----
(In thousands)
<S> <C> <C>
Bank debt............. $132,000 $119,000
Less current portion.. - -
-------- --------
Senior debt, net...... $132,000 $119,000
======== ========
</TABLE>
In July 1999, in conjunction with the redemption of the 11.75% Senior
Subordinated Notes, 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 $175.0 million at September 30, 2000.
The Company may elect that all or a portion of the credit facility bear
interest at a rate equal to: (i) the higher of (a) the prime rate or (b) the
Federal Funds Effective Rate plus .5%, or (ii) the rate at which Eurodollar
deposits for one, two, three or six months (as selected by the Company) 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 Company's borrowings
are generally made under the Eurodollar election. The average interest rate
under the facility approximated 7.6% during the first nine months of 2000 and
was 7.6% at September 30, 2000.
In October 1998, the Company entered into an interest rate swap contract
for a two-year period, extendable for one additional year at the option of the
third party. 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 Company's
fixed rate of 4.57% and the three-month LIBOR rate, which is reset every 90
days, is received or paid by the Company in arrears every 90 days. The Company
received $184,000 in 1999 pursuant to this contract and $363,000 in the first
nine months of 2000. In October 2000, the swap contract lapsed as the third
party elected not to extend it.
11
<PAGE>
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 $17.3 million as of October 1,
2000, which may be used to repurchase common stock, preferred stock and warrants
and pay dividends on its common stock. In July 2000, the Company amended the
Credit Agreement and created an additional restricted payment basket to allow
for the repurchase of up to $25.0 million of 8.50% preferred stock or the common
stock issued upon conversion of the 8.50% preferred stock. The Company
repurchased $15.4 million under this basket during September 2000. This
additional repurchase basket expires on December 31, 2000.
Scheduled maturities of indebtedness for the next five years are zero for
2001, 2002, and $119.0 million in 2003. Management intends to review the
facility and extend the maturity on a regular basis; however, there can be no
assurance that the Company will be able to do so. Cash payments for interest
totaled $12.0 million and $7.3 million during the nine months ended September
30, 1999 and 2000, respectively.
(5) STOCKHOLDERS' EQUITY
A total of 100,000,000 common shares, $0.01 par value, are authorized of
which 20,253,506 were issued and outstanding at September 30, 2000. The common
stock is listed on the New York Stock Exchange. Prior to December 1997, no
dividends had been paid on common stock. 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. The following is a schedule of
the changes in the Company's outstanding common stock for the following periods:
<TABLE>
<CAPTION>
Twelve Nine
Months Ended Months Ended
December 31, 1999 September 30, 2000
------------------ -------------------
<S> <C> <C>
Beginning shares outstanding................... 15,752,400 16,131,300
Exercise of stock options...................... 226,300 235,800
Shares issued under Stock Purchase Plan........ 92,900 52,400
Shares issued in lieu of salaries and bonuses.. 164,800 128,300
Shares issued for directors fees............... 8,600 2,300
Conversion of 7.125% preferred................. 488,800 148,000
Conversion of 8.50% preferred.................. - 4,785,600
Exercise of $12.50 warrants.................... - 1,300
Shares issued to deferred compensation plan.... 35,200 12,700
Stock grant (vested)........................... 168,600 33,300
401(K) profit sharing contribution............. 61,300 -
Shares repurchased and retired................. (867,600) (1,277,500)
---------- ----------
Ending shares outstanding...................... 16,131,300 20,253,500
========== ==========
</TABLE>
At September 30, 2000, the Company had 2,918,139 common stock warrants
outstanding. These warrants are exercisable at $12.50 for one share of common
stock and expire in May 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 with
none outstanding at September 30, 2000.
12
<PAGE>
In August 2000, the Company called for redemption all remaining 1,618,500
shares of the 8.5% preferred stock outstanding. The issue was converted into
4.8 million shares of common stock including more than 500,000 shares of common
stock, which had been issued upon conversion in June 2000. The final preferred
dividend of $678,000 was paid on September 29, 2000 on shares that had not
converted prior to the record date of September 15, 2000. The Company paid $2.8
million and $2.6 million in dividends during the nine months ended September 30,
1999 and 2000, respectively. Dividends through October 1999 were paid in kind.
As such, the Company issued 110,610 of additional 8.50% preferred shares as
dividends during the first nine months of 1999. Dividends subsequent to October
1999 were paid in cash.
In December 1999, the Company called for redemption all remaining 7.125%
preferred stock. The effective date of the redemption was January 21, 2000. 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 cash redemption was financed with borrowings under the bank credit
facility. The Company paid $1.9 million and $600,000 in preferred dividends
during the nine months ended, September 30, 1999 and 2000, respectively.
Included in the first quarter 2000 payment was $549,000 of redemption premium
paid to shareholders that elected to redeem their preferred stock for cash.
The Company adopted Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings per Share" during 1997. SFAS 128 specifies computation,
presentation and disclosure requirements for earnings per share for entities
with publicly held common stock or potential common stock. The following tables
set forth the computation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------------------------
1999 2000
------------------------ -------------------------
Net Common Per Net Common Per
Income Shares Share Income Shares Share
------ ------ ----- ------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Basic net income $5,280 16,029 $13,439 17,485
7.125% preferred stock dividends (567) - - -
8.50% preferred stock dividends (941) - (678) -
Preferred stock accretion (83) - - -
------ ------ ------- ------
Basic net income attributable
to common stock 3,689 16,029 $ 0.23 12,761 17,485 $0.73
======= =====
Effect of dilutive securities:
7.125% preferred stock 567 3,834 - -
8.50% preferred stock 941 4,663 678 3,510
Stock options - 422 - 1,274
Stock grant - 277 - 138
$12.50 common stock warrants - - - 1,060
------ ------ ------- -------
Diluted net income attributable
to common stock $5,197 25,225 $ 0.21 $13,439 23,467 $0.57
====== ====== ======= ======= ======= =====
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------------------------
1999 2000
--------------------------- --------------------------
Net Common Per Net Common Per
Income Shares Share Income Shares Share
------ ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Basic net income $ 5,004 15,913 $33,247 16,727
7.125% preferred stock dividends (1,859) - (600) -
8.50% preferred stock dividends (2,766) - (2,610) -
Preferred stock accretion (248) - - -
------- ------ ------- ------
Basic net income attributable -
to common stock 131 15,913 $ 0.01 30,037 16,727 $1.80
======= =====
Effect of dilutive securities:
7.125% preferred stock - - - -
8.50% preferred stock - - 2,610 4,330
Stock options - 173 - 1,057
Stock grant - 277 - 148
$12.50 common stock warrants - - - 512
------- ------ ------- ------
Diluted net income attributable
to common stock $ 131 16,363 $ 0.01 $32,647 22,774 $1.43
======= ====== ======= ======= ====== =====
</TABLE>
(6) EMPLOYEE BENEFIT PLANS
401(k) Savings
The Company has a 401(k) profit sharing and savings plan (the "401(k)
Plan"). Eligible employees may make voluntary contributions to the 401(k) Plan.
Employee contributions are limited as specified in the 401(k) Plan. The Company
may, at its discretion, make matching or profit sharing contributions to the
401(k) Plan. The Company has historically made profit sharing contributions to
the 401(k) Plan, which totaled $483,000 for 1999. The 1999 profit sharing
contribution was made through the issuance of 61,300 shares of common stock.
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 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 Plan. In 1999, the Board
of Directors approved 136,300 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 defined
in the Stock Purchase Plan. During the twelve months ended December 31, 1999,
participants had purchased 92,900 shares of common stock at prices ranging from
$5.06 to $8.63 per share ($3.80 to $6.47 net price per share), resulting in cash
proceeds to the Company of $395,000. The Company recorded non-cash general and
administrative expenses of $53,000 associated with these purchases in 1999.
During the nine months ended, September 30, 2000, participants had purchased
85,800 of common stock with participant's 1999 bonuses at $9.19 per share ($6.89
net price per share) and 52,400 shares of common stock at prices ranging from
$16.50 to $17.31 per share ($12.38 to $12.98 net price per share), resulting in
cash proceeds to the Company of $665,000. The Company recorded non-cash general
and administrative expenses of $89,000 associated with these purchases in 2000.
14
<PAGE>
Stock Option and Award Plans
The Company maintains a shareholder approved stock option plan for
employees ("Employee Plan") providing for the issuance of options at prices not
less than fair market value. Options to acquire the greater of up to 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. A
summary by year of stock options granted under the Employee Plan is summarized
below:
Weighted
Range Average
of Exercise Exercise
Options Prices Per Price Per
Year Granted Common Share Common Share
---- ------- -------------- ------------
1996............. 512,000 $7.75 $7.75
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
The options generally 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 at an exercise price of
$9.88.
The Company 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 shares were issued in 1999 and 2,300 were issued in the first nine months
of 2000. It also provides for 5,000 options to be granted annually to each non-
employee Director. 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
---- ------- -------------- ------------
1996............. 20,000 $7.75 $ 7.75
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
The options generally vest over a three-year period (30%, 60%, 100%) and
expire five years from the date of grant.
In 1997, the shareholders approved a special stock grant and purchase plan
for certain officers and managers ("Management Investors"). The plan provided
for the grant of certain restricted common shares to the Management Investors.
These shares vest at 25% per year on January 1, 1998, 1999, 2000 and 2001. The
non-vested granted common shares have been recorded as Deferred Compensation in
the equity section of the accompanying consolidated balance sheets. 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. See Note (9).
In conjunction with the appointment of a President in March 1998, the
President was included in the stock grant and purchase plans. He was granted
100,000 restricted common shares that vest at 33% per year in March 1999, 2000
and 2001. The non-vested granted common shares have been recorded as Deferred
Compensation in the equity section of the accompanying consolidated balance
sheets. The President simultaneously purchased 100,000 common shares from the
Company at $6.875 per share. A portion of this purchase ($584,000) was also
financed by the Company. See Note (9).
15
<PAGE>
In April 1999, the Chief Executive Officer was granted 100,000 restricted
shares of common stock and was simultaneously granted options to purchase
300,000 common shares in consideration of his voluntary reduction in cash
salary, waiver of any 1998 bonus and other compensation arrangements. The shares
vested ratably throughout 1999.
The Company recognized $769,000 and $209,000 of non-cash general and
administrative expenses for the nine months ended September 30, 1999 and 2000,
with respect to the stock grants. These costs will be fully amortized by
December 31, 2000.
(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 nine months ended September 30, 1999
and 2000 follows:
1999 2000
---- ----
Federal statutory rate.................................. 35% 35%
Utilization of net deferred tax asset................... (35%) (15%)
---- ----
Effective income tax rate............................... - 20%
==== ====
For tax purposes, the Company had regular net operating loss carryforwards
of approximately $88.4 million and alternative minimum tax ("AMT") loss
carryforwards of approximately $42.0 million at December 31, 1999. Utilization
of the regular and AMT 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 October 1997. In addition, utilization of
$31.9 million regular net operating loss carryforwards and $31.6 million AMT
loss carryforwards will be limited to $5.2 million per year as a result of the
Gerrity acquisition in 1996. These carryforwards expire from 2006 through 2018.
At December 31, 1999, the Company had alternative minimum tax credit
carryforwards of $650,000 that are available indefinitely.
(8) MAJOR CUSTOMERS
During the nine months ended September 30, 1999 and 2000, Duke Energy Field
Services, Inc. accounted for 37% and 33%, BP Amoco Production Company accounted
for 23% and 21% and Aurora Natural Gas, LLC accounted for 12% and 2% 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 October 1997, certain officers and managers purchased common shares at
$9.875 per share from the Company. A portion of this original purchase was
financed by the Company through the issuance of 8.50% recourse promissory notes.
The remaining notes balance at September 30, 2000 of $106,000 are secured by the
common stock purchased and additional common shares granted to the respective
officers and managers. Interest is due annually and the notes mature in January
2001. These notes have been reflected as current assets and are included in
Inventory and other in the accompanying consolidated balance sheets.
In conjunction with the appointment of the new President in March 1998, the
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 a
recourse promissory note that bears interest at 8.50% per annum payable each
March 31 until the note is paid. The note matures in March 2001 and is secured
by all of the shares purchased and granted to him (100,000 shares) in connection
with his employment with the Company. In consideration of the depressed stock
price and overall lower year-end bonuses, the interest due as of March 31, 1999
under the Management Investor's and President's notes was forgiven by the
Company in April 1999. Interest on the notes due March 31, 2000 was paid in
full. This note has been reflected as a current asset and included in Inventory
and other in the accompanying consolidated balance sheets.
16
<PAGE>
(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
$500,000 per year from 2000 through 2001. The office lease expires in November
2001. The Company is a party to various other lawsuits incidental to its
business, none of which are anticipated to have a material adverse impact on its
financial position or results of operations.
17
<PAGE>
PATINA OIL & GAS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three months ended September 30, 2000 compared to three months ended September
30, 1999.
Revenues for the third quarter of 2000 totaled $36.1 million, a 48%
increase from the prior year period. The increase was due primarily to a rise in
production and higher oil and gas prices. Net income for the third quarter of
2000 totaled $13.4 million compared to net income of $5.3 million in the third
quarter of 1999. The increase was attributable to higher production and the
sharp increase in oil and gas prices.
Average daily production for the third quarter totaled 4,313 barrels of oil
and 90.4 MMcf of gas (116.3 MMcfe), an increase of 7% on an equivalent basis
from the same period in 1999. During the quarter, 17 wells were drilled or
deepened and 47 refracs and three recompletions were performed, compared to four
new wells or deepenings and 25 refracs in 1999. Based on a current capital
budget of $40.0 million for 2000, the Company expects production to continue to
increase in the remainder of the year. The level of development activity is
heavily dependent on oil and gas prices.
Average oil prices increased 36% from $17.35 per barrel in the third
quarter of 1999 to $23.64 in 2000. Average natural gas prices increased 38% from
$2.29 per Mcf for the third quarter of 1999 to $3.16 in 2000. The average oil
prices include hedging losses of $1.0 million or $2.55 per barrel and $2.9
million or $7.20 per barrel in the third quarters of 1999 and 2000,
respectively. The average natural gas prices include hedging losses of $1.5
million or $0.19 per Mcf and $3.8 million or $0.46 per Mcf for the third
quarters of 1999 and 2000, respectively. Direct operating expenses, consisting
of lease operating expenses and production taxes, totaled $5.4 million or $0.51
per Mcfe for the third quarter of 2000 compared to $4.8 million or $0.48 per
Mcfe in the prior year period. The increase in direct operating expenses for the
quarter was attributed to a $565,000 rise in production taxes as a result of
higher average oil and gas prices and production.
General and administrative expenses, net of third party reimbursements, for
the third quarter of 2000 totaled $1.6 million, a $84,000 or 5% increase from
the same period in 1999. The increase in expense is primarily due to the Company
receiving lower reimbursements from third party working interest owners that are
offset against general and administrative expenses. The lower operating fees are
a result of the Company increasing its working interest ownership in its oil and
gas properties as a result of a property exchange with HS Resources and other
minor interest acquisitions in late 1999. Included in general and administrative
expenses is $289,000 and $70,000 for the three months ended September 30, 1999
and 2000 of non-cash expenses related to the common stock grants awarded to
officers and managers in 1997. These non-cash expenses will be fully amortized
by December 31, 2000.
Interest and other expenses fell to $2.3 million in the third quarter of
2000, a decrease of $139,000 or 6% from the prior year period. Interest expense
decreased as a result of lower average debt balances and lower interest rates on
the Company's debt due to the redemption of the 11.75% Subordinated Notes in
July 1999. The redemption was financed with borrowings under the bank credit
facility. The Company's average interest rate for the third quarter of 2000 was
7.8% compared to 7.1% in 1999.
Depletion, depreciation and amortization expense for the third quarter of
2000 totaled $9.9 million, a decrease of $425,000 from the prior year period.
Depletion expense totaled $9.6 million or $0.90 per Mcfe for the third quarter
of 2000 compared to $10.1 million or $1.01 per Mcfe for 1999. Although there was
a 7% increase in oil and gas production over the third quarter of 1999, total
depletion expense declined due to a decrease in the depletion rate. The
depletion rate was lowered in the fourth quarter of 1999 and in the second
quarter of 2000 in conjunction with the completion of the year-end 1999 and mid-
year 2000 reserve reports. The reduction reflects 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 quarter
totaled $240,000 or $0.02 per Mcfe compared to $242,000 or $0.02 per Mcfe in
1999.
18
<PAGE>
Nine months ended September 30, 2000 compared to nine months ended September 30,
1999.
Revenues for the nine months ended September 30, 2000 totaled $99.6
million, a 62% increase from the prior year period. The increase was due
primarily to increases in production and higher oil and gas prices. Net income
for the nine-month period totaled $33.2 million compared to net income of $5.0
million in 1999. The increase was attributable to higher production and the
sharp increase in oil and gas prices.
Average daily production for the first nine months of 2000 totaled 4,389
barrels of oil and 89.2 MMcf of gas (115.5 MMcfe), an increase of 10% on an
equivalent basis from the same period in 1999. During the period, 43 wells were
drilled or deepened and 124 refracs and eight recompletions were performed,
compared to 25 new wells or deepenings and 73 refracs and one recompletion in
1999. Based on a current capital budget of $40.0 million for 2000, the Company
expects production to continue to increase in the remainder of the year. The
level of development activity is heavily dependent on oil and gas prices.
Average oil prices increased 52% from $14.68 per barrel in the first nine
months of 1999 to $22.35 in 2000. Average natural gas prices increased 47% from
$2.00 per Mcf for the first nine months of 1999 to $2.93 in 2000. The average
oil prices include hedging losses of $1.4 million or $1.14 per barrel and $7.5
million or $6.26 per barrel in the first nine months of 1999 and 2000,
respectively. The average natural gas prices include hedging losses of $1.1
million or $0.05 per Mcf and $6.3 million or $0.26 per Mcf for the nine months
ended September 30, 1999 and 2000, respectively. Direct operating expenses,
consisting of lease operating expenses and production taxes, totaled $15.9
million or $0.50 per Mcfe for the first nine months of 2000 compared to $13.3
million or $0.46 per Mcfe in the prior year period. The increase in direct
operating expenses in the first nine months of 2000 was attributed to a $2.2
million rise in production taxes as a result of higher average oil and gas
prices and production.
General and administrative expenses, net of third party reimbursements, for
the first nine months of 2000 totaled $5.0 million, a $659,000 or 15% increase
from the same period in 1999. The increase in expense is primarily due to the
Company receiving lower reimbursements from third party working interest owners
that are offset against general and administrative expenses. The lower
reimbursements are a result of the Company increasing its working interest
ownership in its oil and gas properties as a result of a property exchange with
HS Resources and other minor interest acquisitions in late 1999. Included in
general and administrative expenses is $769,000 and $209,000 for the nine months
ended September 30, 1999 and 2000 of non-cash expenses related to the common
stock grants awarded to officers and managers in 1997. These non-cash expenses
will be fully amortized by December 31, 2000.
Interest and other expenses fell to $7.2 million in the nine-month period
ended September 30, 2000, a decrease of $1.1 million or 13% from the prior year
period. Interest expense decreased as a result of lower average debt balances
and lower interest rates on the Company's debt due to the redemption of the
11.75% Subordinated Notes in July 1999. The redemption was financed with
borrowings under the bank credit facility. The Company's average interest rate
for the first nine months of 2000 was 7.6% compared to 8.4% in 1999.
Depletion, depreciation and amortization expense for the first nine months
of 2000 totaled $29.7 million, a decrease of $701,000 from the prior year
period. Depletion expense totaled $28.9 million or $0.91 per Mcfe for the first
nine months of 2000 compared to $29.7 million or $1.03 per Mcfe for 1999.
Although there was a 10% increase in oil and gas production over 1999, total
depletion expense declined due to decreases in the depletion rate. The depletion
rate was lowered in the fourth quarter of 1999 and in the second quarter of 2000
in conjunction with the completion of the year-end 1999 and mid-year 2000
reserve reports reflecting additional oil and gas reserves. Depreciation and
amortization expense for the nine month period totaled $751,000 or $0.02 per
Mcfe compared to $712,000 or $0.02 per Mcfe in 1999.
19
<PAGE>
Development, Acquisition and Exploration
During the first nine months of 2000, the Company incurred $26.4 million in
capital expenditures, including $25.7 million of development expenditures.
During the period, the Company successfully drilled or deepened 43 wells,
refraced 124 wells, and recompleted eight wells. The Company anticipates
incurring approximately $40.0 million on development expenditures during 2000.
The decision to increase or decrease development activity is heavily dependent
on oil and gas prices.
Financial Condition and Capital Resources
At September 30, 2000, the Company had $329.9 million of assets. Total
capitalization was $282.6 million, of which 58% was represented by stockholders'
equity and 42% by bank debt. During the first nine months of 2000, net cash
provided by operations totaled $73.7 million, as compared to $27.5 million in
the same period in 1999 ($70.9 million and $35.5 million prior to changes in
working capital, respectively). At September 30, 2000, there were no significant
commitments for capital expenditures. The Company anticipates 2000 capital
expenditures, exclusive of acquisitions, to approximate $40.0 million. 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 security 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.
In July 1999, in conjunction with the redemption of the 11.75% Senior
Subordinated Notes, 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 $175.0 million at September 30, 2000.
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 by the Credit Agreement, of $17.3 million as of October 1,
2000, which may be used to repurchase common stock, preferred stock and warrants
and pay dividends on its common stock. In July 2000, the Company amended the
Credit Agreement and created an additional restricted payment basket to allow
for the repurchase of up to $25.0 million of 8.50% preferred stock or the common
stock issued upon conversion of the 8.50% preferred stock. The Company
repurchased $15.4 million under this basket during September 2000. This
additional repurchase basket expires on December 31, 2000.
The Company may elect that all or a portion of the credit facility bear
interest at a rate equal to: (i) the higher of (a) the prime rate or (b) the
Federal Funds Effective Rate plus .5%, or (ii) the rate at which Eurodollar
deposits for one, two, three or six months (as selected by the Company) 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 Company's borrowings
are generally made under the Eurodollar election. The average interest rate
under the facility approximated 7.6% during the first nine months of 2000 and
was 7.6% at September 30, 2000.
20
<PAGE>
The Company had $72.3 million of 11.75% Senior Subordinated Notes due July
15, 2004 outstanding on June 30, 1999. The Notes had been reflected in the
financial statements at a book value of 105.875% of their principal amount, the
initial call price ($68.3 million of principal amount outstanding as of
September 30, 1999). The Notes became redeemable and were redeemed on July 15,
1999 at the call price of 105.875%. The redemption was financed with borrowings
under the bank credit facility.
In conjunction with the appointment of a President in March 1998, the
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 a
recourse promissory note that bears interest at 8.50% per annum payable each
March 31 until the note is paid. The note matures in March 2001 and is secured
by the 200,000 shares purchased and granted to him in connection with his
employment with the Company.
The Company has entered into arrangements to monetize its Section 29 tax
credits. These arrangements result in revenue increases of approximately $0.40
per Mcf on production volumes from qualified Section 29 properties. As a result,
additional gas revenues of $2.0 million and $2.6 million were recognized for the
nine months ended September 30, 1999 and 2000, respectively. These arrangements
are expected to increase revenues through December 31, 2002, at which point the
tax credits expire.
The Company's primary cash requirements will be to finance acquisitions,
development expenditures, repayment of 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 terms that are acceptable
to the Company.
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 1999 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.
21
<PAGE>
Market and Commodity 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 1999 and the first nine months of 2000, exclusive of any hedges, ranged
from a monthly low of $1.51 per Mcf to a monthly high of $3.72 per Mcf. Oil
prices, exclusive of any hedges, ranged from a monthly low of $10.70 per barrel
to a monthly high of $32.92 per barrel during 1999 and the first nine months of
2000. Both oil and natural gas prices have increased significantly from the
third quarter 1999 to the third quarter of 2000. A significant decline in the
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 gas price
volatility. Commodity derivatives contracts, which are generally placed with
major financial institutions or with counterparties 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
derivatives contracts are based upon oil and natural gas futures which have a
high degree of historical correlation with actual prices received by the
Company. The Company accounts for its commodity derivative contracts using the
hedge (deferral) method of accounting. Under this method, realized gains and
losses on such contracts are deferred and recognized as an adjustment to oil and
gas sales revenues in the period in which the physical product to which the
contracts relate, is actually sold. Gains and losses on commodity derivative
contracts that are closed before the hedged production occurs are deferred until
the production month originally hedged.
As of September 30, 2000, the Company had entered into swap contracts for
oil (NYMEX based) for approximately 3,250 barrels of oil per day for the
remainder of 2000 at fixed prices ranging from $20.00 to $25.75 per barrel and
2,700 barrels of oil per day for 2001 at fixed prices ranging from $23.05 to
$30.75 per barrel. Certain swap contracts for oil (NYMEX based) contain
"knock-out" provisions. If the average price of NYMEX WTI crude oil 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 $22.08 per barrel for the
remainder of 2000 and $25.68 per barrel for 2001 (NYMEX based). The unrecognized
losses on these contracts totaled $5.7 million and $7.4 million based on
estimated market values at September 30, 2000 and October 23, 2000,
respectively.
As of September 30, 2000, the Company had entered into natural gas swap
contracts for approximately 50,800 MMBtu's per day for the remainder of 2000 at
fixed prices ranging from $2.06 to $4.67 per MMBtu and 45,200 MMBtu's per day
for 2001 at fixed prices ranging from $2.55 to $5.04 per MMBtu on CIG index
based swap contracts. The Company also has entered into physical natural gas
sale contracts for the delivery of approximately 6,700 MMBtu's per day for the
remainder of 2000 at prices ranging from $2.29 to $3.04 per MMBtu and 2,500
MMBtu's per day for the first quarter of 2001 at prices ranging from $2.67 to
$3.08 per MMBtu. The weighted average daily volumes and prices for these natural
gas swaps and physical contracts are 57,500 MMBtu's per day at $3.23 per MMBtu
for the remainder of 2000 and 45,800 MMBtu's per day at $3.50 per MMBtu for
2001. The unrecognized losses on the swap contracts totaled $15.6 million and
$13.8 million based on estimated market values at September 30, 2000 and October
23, 2000, respectively.
22
<PAGE>
As of October 23, 2000, the Company was a party to the following fixed price
swap and physical arrangements summarized below:
<TABLE>
<CAPTION>
Oil (NYMEX)
------------------------------------------------------------------------------------------
Swap Swap "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)
----------- --- ----- --- ----- ----- --- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10/01/00 - 12/31/00............... 900 22.28 2,350 22.00 16.00-17.00 3,250 22.08 (3,305)
01/01/01 - 03/31/01............... 2,000 28.94 1,500 23.41 17.00 3,500 26.57 (1,662)
04/01/01 - 06/30/01............... 2,000 27.96 1,250 23.29 17.00 3,250 26.16 (1,255)
07/01/01 - 09/30/01............... 2,000 27.22 750 23.13 17.00 2,750 26.10 (761)
10/01/01 - 12/31/01............... 1,900 27.23 750 23.13 17.00 2,650 26.08 (458)
01/01/02 - 04/30/02............... 750 26.51 - - - 750 26.51 (20)
</TABLE>
<TABLE>
<CAPTION>
Natural Gas
--------------------------------------------------------------------------
CIG Swap Physical Combined
--------------- ----------------- ------------------
Daily Daily Daily Unrealized
Volume Volume Volume Gain / (Loss)
Time Period MMBtu $/MMBtu MMBtu $/MMBtu MMBtu $/MMBtu ($/thousand)
----------- ------ ------- ------ ---------- ------------ ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
10/01/00 - 12/31/00............... 50,800 3.33 6,700 2.52 57,500 3.23 (5,670)
01/01/01 - 03/31/01............... 55,900 3.61 2,500 2.87 58,400 3.58 (4,651)
04/01/01 - 06/30/01............... 50,000 3.31 - - 50,000 3.31 (2,292)
07/01/01 - 09/30/01............... 45,000 3.50 - - 45,000 3.50 (642)
10/01/01 - 12/31/01............... 40,000 3.79 - - 40,000 3.79 (565)
</TABLE>
23
<PAGE>
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 1999 and the first three quarters of 2000. 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
------
1995...................... $16.43 $1.34 $1.73
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
Quarterly
---------
1999
----
First..................... $11.65 $1.65 $1.72
Second.................... 16.10 1.99 2.17
Third..................... 19.90 2.48 2.68
Fourth.................... 23.01 2.63 2.92
2000
----
First..................... $27.30 $2.70 $3.13
Second.................... 27.75 3.23 3.55
Third..................... 30.85 3.63 3.96
24
<PAGE>
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 -
27 Financial Data Schedule. *
* Filed herewith
(b) No reports on Form 8-K were filled by Registrant during the quarter ended
September 30, 2000.
25
<PAGE>
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, Vice President and Chief
Financial Officer
October 26, 2000
26
