<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 QUARTER ENDED JUNE 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 0-9498
BELLWETHER EXPLORATION COMPANY
(Exact name of registrant as specified in its charter)
Delaware 74-0437769
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
1331 Lamar, Suite 1455 Houston, Texas 77010-3039
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: (713) 495-3000
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 ___
-
As of August 5, 2000, 13,917,898 shares of common stock of Bellwether
Exploration Company were outstanding.
1
<PAGE>
BELLWETHER EXPLORATION COMPANY
------------------------------
INDEX
-----
<TABLE>
<CAPTION>
<S> <C>
PART I. FINANCIAL INFORMATION Page #
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets:
June 30, 2000 (Unaudited) and December 31, 1999.................... 3
Condensed Consolidated Statements of Operations (Unaudited):
Three and six months ended June 30, 2000 and June 30, 1999......... 5
Condensed Consolidated Statements of Cash Flows (Unaudited):
Six months ended June 30, 2000 and June 30, 1999................... 6
Notes to Condensed Consolidated Financial Statements (Unaudited)..... 8
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 12
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk........... 19
PART II. OTHER INFORMATION.................................................... 20
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
------- --------------------
BELLWETHER EXPLORATION COMPANY
------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Amounts in thousands)
ASSETS
------
<TABLE>
<S> <C> <C>
June 30, December 31,
2000 1999
------------------ ------------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents.................................... $ 4,356 $ 6,101
Accounts receivable and accrued revenues..................... 19,086 14,354
Prepaid expenses and other................................... 2,020 1,562
---------- ----------
Total current assets...................................... 25,462 22,017
---------- ----------
PROPERTY AND EQUIPMENT, AT COST:
Oil and gas properties (full cost)
United States - Unproved properties of $19,551 and
$16,325 excluded from amortization as of June 30, 2000
and December 31, 1999, respectively..................... 391,460 344,778
Latin America - Unproved properties of $1,769 and $404
excluded from amortization as of June 30, 2000 and
December 31, 1999, respectively......................... 4,664 1,246
Gas plant facilities......................................... 17,984 17,775
---------- ----------
414,108 363,799
Accum. deprec. depl. and amortz - oil and gas.............. (236,158) (221,092)
Accum. deprec. depl. and amortz - gas plant................. (6,765) (6,134)
---------- ----------
Net property, plant and equipment............................ 171,185 136,573
Leasehold, furniture and equipment........................... 2,191 438
Accumulated depreciation..................................... (184) (74)
---------- ----------
2,007 364
---------- ----------
INVESTMENTS IN OUTSIDE COMPANIES............................. 4,554 4,554
NOTES RECEIVABLE............................................. 281 ---
DEFERRED INCOME TAXES........................................ 18,596 2,739
OTHER ASSETS................................................. 5,397 5,514
---------- ----------
$ 227,482 $ 171,761
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
BELLWETHER EXPLORATION COMPANY
------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Amounts in thousands, except share information)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<S> <C> <C>
June 30, December 31,
2000 1999
-------------------- --------------------
(Unaudited)
CURRENT LIABILITIES:
Accounts payable and accrued liabilities....................... $ 35,660 $ 18,247
--------------- ---------------
Total current liabilities..................................... 35,660 18,247
--------------- ---------------
LONG-TERM DEBT................................................. 140,900 130,000
OTHER LIABILITIES.............................................. 200 200
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 1,000,000 shares authorized;
none issued or outstanding at June 30, 2000 and
December 31, 1999............................................. --- ---
Common stock, $0.01 par value, 30,000,000 shares authorized,
13,917,791 and 13,857,791 shares issued and outstanding
at June 30, 2000 and December 31, 1999, respectively.......... 142 142
Additional paid-in capital..................................... 81,444 80,442
Retained earnings.............................................. (28,959) (55,378)
Treasury stock, at cost, 311,000 shares........................ (1,905) (1,905)
--------------- ---------------
Total stockholders' equity................................... 50,722 23,314
--------------- ---------------
$227,482 $171,761
=============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE>
BELLWETHER EXPLORATION COMPANY
------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(UNAUDITED)
(Amounts in thousands, except per share information)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------ --------------------------------
2000 1999 2000 1999
------------------------------------------ --------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas revenues.......................... $24,826 $14,024 $ 48,493 $26,751
Gas plant operations, net..................... 737 254 1,391 475
Interest and other income..................... 342 986 566 1,269
-------- -------- --------- --------
25,905 15,264 50,450 28,495
-------- -------- --------- --------
COST AND EXPENSES:
Production expenses........................... 7,021 5,013 13,335 10,625
Depreciation, depletion and amortization...... 6,886 5,764 14,176 10,444
General and administrative expenses........... 3,239 1,474 5,115 2,868
Interest expense.............................. 3,748 2,890 7,157 5,719
-------- -------- --------- --------
20,894 15,141 39,783 29,656
-------- -------- --------- --------
Income (loss) before income taxes.............. 5,011 123 10,667 (1,161)
Provision (benefit) for income taxes........... 1,982 --- (15,752) ---
-------- -------- --------- --------
NET INCOME (LOSS).............................. $ 3,029 $ 123 $ 26,419 $(1,161)
======== ======== ========= ========
Net income (loss) per share.................... $ .22 $ 0.01 $ 1.90 $ (0.08)
======== ======== ========= ========
Net income (loss) per share-diluted............ $ .21 $ 0.01 $ 1.86 $ (0.08)
======== ======== ========= ========
Weighted average common shares
outstanding................................... 13,883 13,854 13,871 13,854
======== ======== ========= ========
Weighted average common shares
outstanding-diluted........................... 14,429 13,894 14,214 13,854
======== ======== ========= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE>
BELLWETHER EXPLORATION COMPANY
------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
(Amounts in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------------------
2000 1999
---------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS)................................................... $ 26,419 $ (1,161)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization........................ 14,632 10,854
Stock option expense amortization............................... 581 ---
------------------- -------------------
Deferred income taxes........................................... (15,791) ---
------------------- -------------------
25,841 9,693
Change in assets and liabilities:
Accounts receivable and accrued revenue............................. (4,732) 3,618
Accounts payable and other liabilities.............................. 17,412 379
Due from related parties............................................ --- 34
Other............................................................... (1,436) 158
------------------- -------------------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES..................... 37,085 4,189
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of oil and gas properties............................... (6,413) (14,269)
Additions to properties and facilities.............................. (44,070) (10,573)
Additions to leasehold, furniture and equipment..................... (1,856) (43)
Notes receiveable.................................................. (281) ---
Proceeds from sales of properties................................... 2,547 256
------------------- -------------------
NET CASH FLOWS USED IN INVESTING ACTIVITIES......................... (50,073) (24,629)
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings............................................ 28,900 23,500
Repayment of bank note.............................................. (18,000) (11,500)
Exercise of stock options........................................... 343 ---
Purchase of treasury shares......................................... --- (1)
------------------- -------------------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES..................... 11,243 11,999
------------------- -------------------
Net (decrease) increase in cash and cash equivalents............... (1,745) 1,252
Cash and cash equivalents at beginning of period.................... 6,101 10
------------------- -------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................... $ 4,356 $ 1,262
=================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements
6
<PAGE>
BELLWETHER EXPLORATION COMPANY
------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
-----------------------------------------------------------
(UNAUDITED)
(Amounts in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------------
2000 1999
----------------- ----------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.................................................... $6,364 $5,356
Income taxes................................................ $ 104 $ 28
</TABLE>
See accompanying notes to condensed consolidated financial statements
7
<PAGE>
BELLWETHER EXPLORATION COMPANY
------------------------------
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with instructions to Form 10-Q and, therefore,
do not include all disclosures required by generally accepted accounting
principles. However, in the opinion of management, these statements
include all adjustments, which are of a normal recurring nature, necessary
to present fairly the financial position at June 30, 2000 and December 31,
1999, and the results of operations and changes in cash flows for the
periods ended June 30, 2000 and 1999. These financial statements should be
read in conjunction with the consolidated financial statements and notes to
the consolidated financial statements in the December 31, 1999 Form 10-K of
Bellwether Exploration Company (the "Company") that was filed with the
Securities and Exchange Commission on March 24, 2000.
Certain reclassifications of prior period statements have been made to
conform with current reporting practices.
In order to prepare these financial statements in conformity with generally
accepted accounting principles, management of the Company has made a number
of estimates and assumptions relating to the reporting of assets and
liabilities, the disclosure of contingent assets and liabilities, and
reserve information. Actual results could differ from those estimates.
2. STOCKHOLDERS' EQUITY
--------------------
On May 15, 2000 the Company's president was granted 500,000 options with an
exercise price set at the average price for the 30 days prior to the grant
date. Such average price was less than the closing price on the grant
date. The Company is required to recognize compensation expense equal to
the difference between the exercise price and the close price of
Bellwether's stock on the grant date for every option. A charge of
$536,070 was recorded in May 2000, when one-third of the options vested.
The remaining expense will be charged ratably over the vesting period for
the remaining options, two years. Total compensation expense recognized
for the quarter relative to these options was $580,742.
8
<PAGE>
BELLWETHER EXPLORATION COMPANY
------------------------------
Notes to Condensed Consolidated Financial Statements (Continued)
----------------------------------------------------------------
(Unaudited)
The following represents a reconciliation of the numerator and denominator
of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. For the six months ended June 30, 1999, diluted
earnings per common share are not calculated since the issuance or
conversion of additional securities would have an antidilutive effect due
to the loss in the period. Options and warrants equal to 413,500 shares in
2000 that could potentially dilute basic earnings per share in the future
were not included in the June 30, 2000computation of diluted earnings per
share because to do so would have been antidilutive.
SFAS NO. 128 RECONCILIATION (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS):
<TABLE>
<CAPTION>
For the Six Months Ended For the Six Months Ended
June 30, 2000 June 30, 1999
----------------------------------------------- ------------------------------------------
Income Shares Per Share (Loss) Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- --------------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
INCOME (LOSS) PER COMMON
SHARE:
Income (Loss) available to common
stockholders................... $ 26,419 13,871 $ 1.91 $ (1,161) 13,854 $ (.08)
======== -------
EFFECT OF DILUTIVE SECURITIES:
Options and Warrants............ $ --- 343 $ --- ---
-------- ------- --------- -------
INCOME (LOSS) PER COMMON
SHARE-DILUTED:
Income (Loss) available to common
stockholders and assumed
conversions.................... $ 26,419 14,214 $ 1.86 $ (1,161) 13,854 $ (.08)
======== ======= ======== ========= ======= =======
</TABLE>
In September 1998, the Company's Board of Directors authorized the
repurchase of up to $5 million of the Company's common stock. As of June
30, 2000, 311,000 shares had been acquired at an aggregate price of
$1,905,000. These treasury shares are reported at cost as a reduction to
Stockholders' Equity.
3. LONG TERM DEBT
--------------
In April 1997, the Company entered into a senior unsecured revolving credit
facility ("Senior Credit Facility") which currently has a borrowing base of
$55.0 million and a maturity date of November 5, 2003. The Company may
elect an interest rate based either on a margin plus LIBOR or the higher of
the prime rate or the sum of 1/2 of 1% plus the Federal Funds Rate. For
LIBOR borrowings, the interest rate will vary from LIBOR plus 1.0% to LIBOR
plus 1.75% based upon the borrowing base usage. As of June 30, 2000 there
were $40.9 million borrowings outstanding under the Senior Credit Facility,
and available borrowing capacity of $6.8 million, net of outstanding
letters of credit of $7.3 million.
9
<PAGE>
BELLWETHER EXPLORATION COMPANY
------------------------------
Notes to Condensed Consolidated Financial Statements (Continued)
----------------------------------------------------------------
(Unaudited)
The Senior Credit Facility contains various covenants including certain
required financial measurements for current ratio, consolidated tangible
net worth and interest coverage ratio. In addition, the Senior Credit
Facility includes certain limitations on restricted payments, dividends,
incurrence of additional funded indebtedness and asset sales. As of June
30, 2000, the Company was in compliance with its covenants under the Senior
Credit Facility.
In April 1997, the Company issued $100.0 million of 10-7/8% senior
subordinated notes ("Notes") that mature April 1, 2007. Interest on the
Notes is payable semi-annually on April 1 and October 1. The Notes contain
certain covenants, including limitations on indebtedness, liens, dividends
and other payment restrictions affecting restricted subsidiaries, issuance
and sales of restricted subsidiary stock, dispositions of proceeds of asset
sales and restrictions on mergers and consolidations or sales of assets.
As of June 30, 2000, the Company was in compliance with its covenants under
the Notes.
Effective September 22, 1998, the Company entered into an eight and a half
year interest rate swap agreement with a notional value of $80 million.
Under the agreement, the Company receives a fixed interest rate and pays a
floating interest rate based on the simple average of three foreign LIBOR
rates. Floating rates are redetermined for a six month period each April 1
and October 1. The floating rate for the period from April 1, 2000 to
October 1, 2000 is 10.33%. Through April 1, 2002 the floating rate is
capped at 10.875% and capped at 12.875% thereafter. The fair value of the
interest rate swap at June 30, 2000 was a loss of $4.4 million.
4. NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes standards
of accounting for and disclosures of derivative instruments and hedging
activities. As amended, the statement is effective for fiscal quarters
beginning after January 1, 2001. The Company has not yet determined the
impact of this statement on the Company's financial condition or results of
operations but has begun documenting and implementing new policies to
ensure compliance with this pronouncement.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation: an Interpretation of APB
Opinion No. 25." Among other issues, Interpretation No. 44 clarifies the
application of Accounting Principles Board Opinion No. 25 (APB No. 25)
regarding (a) the definition of employee for purposes of applying APB No.
25, (b) the criteria for determining whether a plan qualifies as a non-
compensatory plan, (c) the accounting consequence of various modifications
to the terms of a previously fixed stock option or award, and (d) the
accounting for an exchange of stock options in a business combination. The
provisions of Interpretation No. 44 affecting us are to be applied on a
prospective basis effective July 1, 2000.
10
<PAGE>
BELLWETHER EXPLORATION COMPANY
------------------------------
Notes to Condensed Consolidated Financial Statements (Continued)
----------------------------------------------------------------
(Unaudited)
5. NATURAL GAS AND CRUDE OIL HEDGING
---------------------------------
Oil and gas revenues were reduced $4,269,000 and $5,422,000 in the three
and six months ended June 30, 2000, and were reduced $1,631,000 and
$1,643,000 in the three and six month period ended June 30, 1999, as a
result of hedging activity.
Since year end 1999, the Company has entered into additional swap contracts
as follows:
OIL HEDGES
----------
NYMEX NYMEX
PERIOD BBLS TOTAL BBLS TYPE PRICE PRICE
PER DAY FLOOR CEILING
---------------------------------------------------------------------------
July 2000-Sept. 2000 4,000 368,000 Collar* $22.25 $24.75
---------------------------------------------------------------------------
Oct. 2000-Dec. 2000 4,000 368,000 Collar** $23.00 $25.00
---------------------------------------------------------------------------
GAS HEDGES
----------
NYMEX NYMEX
PERIOD MCF TOTAL MCF TYPE PRICE PRICE
PER DAY FLOOR CEILING
--------------------------------------------------------------------------
April 2000-Oct. 2000 35,000 7,490,000 Collar $2.30 $2.84
--------------------------------------------------------------------------
Nov. 2000- March 2001 20,000 3,020,000 Collar $2.30 $3.35
--------------------------------------------------------------------------
April 2001-Oct. 2001 30,000 6,420,000 Collar $2.30 $2.88
--------------------------------------------------------------------------
* This agreement includes a put at $17.25 per barrel with a $0.50 cost per
barrel
** This agreement includes a put at $18.00 per barrel
The fair value at June 30, 2000 of all commodity swap agreements was an
unrealized loss of $25.6 million. A 10% change in prices would have a
$10.2 million impact on the fair value of the swaps.
6. INCOME TAXES
------------
At December 31, 1999 the Company had a tax valuation allowance of $19.8
million against its deferred tax assets. As of March 31, 2000, based on
projections of taxable income due to higher commodity prices, the Company
determined that it was more likely than not that the deferred tax assets
would be realized and the valuation allowance was removed. The $19.8
million benefit recorded for the removal of the valuation allowance was
offset by $2.1 million deferred tax liability that was generated during the
three months ended March 31, 2000, resulting in an overall tax benefit of
$17.7 million for the first quarter of 2000 and reported deferred tax
assets of $20.5 million. As the Company continues to realize earnings and
generate deferred taxes, the tax asset will decrease in amount. For the
second quarter of 2000, a deferred tax liability of $2 million was
generated, reducing the reported deferred tax asset to $18.6 million.
11
<PAGE>
BELLWETHER EXPLORATION COMPANY
------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
------- -------------------------------------------------
Condition and Results of Operations
-----------------------------------
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company strives to maximize long-term shareholder value through aggressive
growth in reserves and cash flow using advanced technologies, implementation of
a low cost structure and maintenance of a capital structure supportive of
growth. The Company employs an integrated interdisciplinary team approach to a
balanced program of strategic acquisitions of producing oil and gas properties
and technology driven development and exploration activities. The funding of
these activities has historically been provided by operating cash flows, bank
financing, equity placements and sale of non-core assets.
The Company invested $50.3 million in oil and gas properties for the six months
ended June 30, 2000 versus $24.8 million for the same period in 1999. Cash
flows from operations before changes in assets and liabilities were $25.8
million for the six months ended June 30, 2000 compared to $9.7 million provided
by operating activities in the same period of 1999. At June 30, 2000, the
Company had $6.8 million of available debt capacity under the Senior Credit
Facility, net of $7.3 million in outstanding lines of credit.
2000 CAPITAL EXPENDITURES
-------------------------
During 2000, the Company anticipates investing approximately $75 million,
primarily for development and exploratory drilling activities, leasehold costs,
and seismic acquisitions. Activity during 2000 was accelerated so that after
one-half of the year $50.3 million, or about two-thirds of the capital budget
was spent. Of the $50.3 million, $46.5 million related to United States
operations and $3.8 million related to Latin American operations. Spending will
decrease in the remainder of the year in order to keep within the budget. The
Company believes its cash flow provided by operating activities and borrowings
under its credit facilities will be sufficient to meet these projected capital
investments (See Note 3 of the Notes to Condensed Consolidated Financial
Statements). Additional cash flow is anticipated from the sale of non-core
properties. The Company currently has two packages of non-core properties out
for bids and anticipates closing the sales by the end of next quarter. The
Company continues to review acquisition opportunities and the consummation of
such a transaction will directly impact anticipated capital expenditures.
GAS BALANCING
-------------
It is customary in the industry for working interest partners to sell more or
less than their entitled share of natural gas. The settlement or disposition of
existing gas balancing positions is not anticipated to materially impact the
financial condition of the Company.
12
<PAGE>
BELLWETHER EXPLORATION COMPANY
------------------------------
Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations (Continued)
-----------------------------------------------
Oil and Gas Property Accounting
-------------------------------
The Company utilizes the full cost method of accounting for its investment in
oil and gas properties. Under this method of accounting, all costs of
acquisition, exploration and development of oil and gas reserves are capitalized
as incurred. To the extent that capitalized costs of oil and gas properties, net
of accumulated depreciation, depletion and amortization, exceed the discounted
future net revenues of proved oil and gas reserves net of deferred taxes, such
excess capitalized costs would be charged to operations. No such charges to
operations were required during the six month periods ending June 30, 2000 or
1999.
RESULTS OF OPERATIONS
----------------------
The following table sets forth certain operating information for the Company for
the periods presented:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------------------
2000 1999 2000 1999
-------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Production:
Oil and condensate (MBBLs)......................... 573 501 1,135 1,021
Natural gas (MMCF)................................. 4,685 4,196 9,693 8,981
Average sales price: (1)
Oil and condensate (per BBL)....................... $20.37 $11.61 $19.85 $10.46
Natural gas (per MCF)............................. $ 2.81 $ 1.96 $ 2.68 $ 1.79
Average costs:
Production expenses (per BOE)...................... $ 5.19 $ 4.18 $ 4.85 $ 4.22
General and administrative expense
(per BOE)....................................... $ 2.39 $ 1.23 $ 1.86 $ 1.14
Depreciation, depletion and amortization
(per BOE)(2).................................... $ 4.82 $ 4.54 $ 4.88 $ 3.90
</TABLE>
(1) Average sales prices include the effect of hedges, which reduced revenues
by $4,269,000 and $5,422,000 in the three and six month periods in 2000,
and reduced revenues by $1,631,000 and $1,643,000 in the three and six
month periods in 1999.
(2) Excludes depreciation, depletion and amortization on gas plants and other
assets of $310,000 and $616,000 in the three and six month periods in 2000,
and of $310,000 and $616,000 in the three and six month periods ended in
1999.
13
<PAGE>
BELLWETHER EXPLORATION COMPANY
------------------------------
Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations (Continued)
-----------------------------------------------
Three Months Ended June 30, 2000 and 1999
-----------------------------------------
Net income for the quarters ended June 30, 2000 and 1999 was $3.0 million or
$.21 per share, and $123,000 or $.01 per share, respectively. Significant
increases in oil and gas prices are the primary drivers of the improvement, but
increased production has also played a role.
Oil and gas revenues for the three months ended June 30, 2000 were $24.8
million, as compared to $14.0 million for the respective period in 1999.
Individual comparison shows $11.7 million in oil revenues for the quarter versus
$5.8 million for the same quarter of the previous year, in effect a doubling of
oil revenue. Oil revenues benefited from the 76% increase in realized prices
from $11.61 per barrel in the three months ended June 30, 1999 to $20.37 per
barrel realized in the three months ended June 30, 2000. Improved oil
production, primarily from the start of production at the Charapa field in
Ecuador and the Big Island field in Southwest Louisiana, accounts for the rest
of the increase. Oil production was 573,000 barrels during the quarter ended
June 30, 2000 compared to 501,000 for the same quarter of 1999.
Gas revenues increased 61% from $8.2 million reported for the quarter ended June
30, 1999 to $13.2 million for the quarter ended June 30, 2000. Again, prices
account for a large portion of the increase. Gas prices averaged $2.81 per mcf,
or 43% higher, in the three month period ended June 30, 2000 as compared to
$1.96 per mcf in the comparable period of 1999. Gas production was up 12%
compared to the same quarter of 1999 with 4,685 Mmcf and 4,196 Mmcf for the
three month periods ended June 30, 2000 and 1999, respectively.
The realized prices discussed above include the impact of oil and gas hedges. A
decrease of $4.3 million related to hedging activity was reflected in oil and
gas revenues for the quarter ended June 30, 2000, while a decrease in oil and
gas revenues of $1.6 million was reflected for the same period of 1999.
Net gas plant operating profit was $737,000 in the three months ended June 30,
2000 and $254,000 in the same period of 1999. Liquid prices were 45% higher in
2000, which combined with increased volumes, resulted in higher gas plant
revenues in 2000. Throughput volumes increased 28% in the second quarter as
compared to 1999. The throughput volume increase was due to the increased
production from the Exxon operated CO2 flood project that began in the latter
part of second quarter 2000 and is expected to continue production improvements.
Interest and other income decreased from $986,000 for the three months ended
June 30, 1999 to $342,000 for the three months ended June 30, 2000. A large
take or pay revenue contract settlement was included in 1999.
Production expenses for the three months ended June 30, 2000 totaled $7.0
million, or 40% above the $5.0 million for the three months ended June 30, 1999.
On a barrel equivalency basis (BOE), production expenses were $5.19 per BOE for
the quarter ended June 30, 2000 compared to $4.18 per BOE for the quarter ended
June 30, 1999. Numerous expense workovers were performed during the second
quarter of 2000 to increase production as much as possible in order to take
advantage of high commodity prices. The majority of the workovers targeted
fields owned and operated during the same period of 1999, such as the Ship Shoal
Complex and the Cove, Pine Prairie and Point Pedernales fields. Also,
significant maintenance work was performed at Eugene Island 307, which produced
minimally in 1999, as 3 new wells in 2000 now make it an economically viable
block once again.
14
<PAGE>
BELLWETHER EXPLORATION COMPANY
------------------------------
Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations (Continued)
-----------------------------------------------
Depreciation, depletion and amortization was $6.9 million for the three months
ended June 30, 2000 and $5.8 million for the three month period ended June 30,
1999. The increase is directly related to the accelerated level of capital
spending and increased production previously discussed. Depreciation, depletion
and amortization per BOE has increased from $4.54 per BOE in 1999 to $4.82 per
BOE in 2000.
General and administrative expenses totaled $3.2 million in the three months
ended June 30, 2000 as compared to $1.5 million for the comparable period of
fiscal 1999. On a BOE basis, general and administrative expenses were $2.39 per
BOE in the period ended June 30, 2000 and $1.23 per BOE in the period ended June
30, 1999. Significantly lower than normal outsourcing costs in 1999 contribute
to the disparity. Prior to October 1999, the Company was charged a management
fee based upon a specified percentage of the average book value of the Company's
total assets, excluding cash, plus a percentage of operating cash flows. Due to
the $73.9 million impairment charge in December 1998, the Company's total assets
and resulting percentage of such assets was reduced In October 1999, the
Company became party to a new Master Services Agreement ("MSA") and six specific
contracts which covered comparable outsourcing services as the 1999 contract.
The new contracts have varying terms and fees, but overall management fees have
increased to levels similar to 1998 management fee levels, a level management
feels is appropriate. For the current period, Ecuadorian operations,
nonexistant in 1999, contributed $200,000 to administrative costs, and an
$800,000 charge related to change in management was recorded. Included in that
charge was $581,000 required to be expensed based upon differences between
exercise and grant date prices on options awarded to the Company president.
Interest expense increased 28% to $3.7 million for the three months ended June
30, 2000 from $2.9 million in the same period of 1999 due to higher average
balances outstanding in 2000. Increased interest rates also contributed to the
expense increase.
The provision for federal and state income taxes for the three months ended June
30, 2000 and 1999 are based upon a 40% and 0% effective tax rate, respectively.
No tax was recorded in 1999 due to the adjustment to the Company's tax valuation
allowance for the current period's net income from operations. As of March 31,
2000, the Company determined it was more likely than not that the deferred tax
assets would be realized, based on current projections of taxable income due to
higher commodity prices, and the valuation allowance was removed. Subsequent
tax accruals are calculated at the 38% rate.
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
---------------------------------------
Net income for the six months ended June 30, 2000 was $26.4 million, or $1.91
per share, and the net loss for the six months ended June 30, 1999 was $1.2
million, or $.08 per share. A major contributor to the increase was a deferred
tax benefit of $19.8 million resulting from the reversal of the Company's tax
valuation allowance recorded March 31, 2000. Also contributing to the increase
were higher oil and gas prices and increased oil and gas production as compared
to the six months ended June 30, 1999.
Oil and gas revenues for the six months ended June 30, 2000 were $48.5 million,
as compared to $26.8 million for the respective period in 1999. Most
significantly, oil revenues more than doubled, with $22.5 million in 2000 versus
$10.7 million in the previous year. A 90% increase in oil prices from an average
of $10.46 per barrel in the six month period ended June 30, 1999 to an average
of $19.85 per barrel in the six months ended
15
<PAGE>
BELLWETHER EXPLORATION COMPANY
------------------------------
Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations (Continued)
-----------------------------------------------
June 30, 2000 drove the revenue improvement. Complementing the improved prices
was increased oil production, primarily from the start of production at the
Charapa field in Ecuador and the Big Island field in Southwest Louisiana. Oil
production increased 11% compared to the same quarter of 1999. The Company
produced 1,135,000 and 1,021,000 barrels for the six month periods ended June
30, 2000 and 1999, respectively.
Gas revenues had a slightly smaller impact with $26.0 million reported for the
six months ended June 30, 2000 and $16.1 million for the same period of 1999.
Gas prices averaged $2.68 per mcf in the six month period ended June 30, 2000, a
50% increase, as compared to $1.79 per mcf in the comparable period of 1999. Gas
production increased 8% compared the the same quarter of 1999 with production of
9,693 and 8,981 million cubic feet (MMcf) for the six month periods ended June
30, 2000 and 1999, respectively. New Mexico and Giddings field properties
acquired late in 1999 account for most of the production increase.
The realized prices discussed above included the impact of oil and gas hedges.
Oil and gas hedges in place in 2000 resulted in a $5.4 million decrease in oil
and gas revenues in the period ended June 30, 2000 while a decrease in revenues
of $1.6 million was reflected in the same period of 1999.
Net gas plant operating profit was $1.4 million in the six months ended June 30,
2000 and $475,000 in the same period of 1999. Throughput volume increases and
liquid price increases in 2000 significantly increased gas plant revenues. The
throughput volume increase was due to increased production from the Exxon
operated CO2 flood project that began in the latter part of second quarter 2000
and is expected to continue production improvements. Liquid prices averaged
$18.51 for the six month period ended June 30, 2000, but only averaged $10.72
for the six month period ended June 30, 1999.
Interest and other income decreased from $1.3 million at June 30, 1999 to
$566,000 at June 30, 2000 primarily due to a large take or pay revenue contract
settlement recorded in 1999.
Production expenses for the six months ended June 30, 2000 totaled $13.3
million, or 25% above the $10.6 million for the six months ended June 30, 1999.
On a BOE basis, production expenses of $4.85 per BOE for the six months ended
June 30, 2000 exceeded production expenses of $4.22 per BOE for the six months
ended June 30, 1999 by 15%. Numerous expense workovers were performed during the
second quarter of 2000 to increase production as much as possible in order to
take advantage of high commodity prices. The majority of the workovers targeted
fields owned and operated during the same period of 1999, such as the Ship Shoal
Complex and the Cove, Pine Prairie and Point Pedernales fields. Also,
significant maintenance work was performed at Eugene Island 307, which produced
minimally in 1999, as 3 new wells in 2000 now make it an economically viable
block once again.
Depreciation, depletion and amortization was $14.2 million for the six months
ended June 30, 2000 and $10.4 million for the six month period ended June 30,
1999. The increase is directly related to the accelerated level of capital
spending and production increases previously discussed. Depreciation, depletion
and amortization per BOE has increased from $3.90 per BOE in 1999 to $4.88 per
BOE in 2000.
16
<PAGE>
BELLWETHER EXPLORATION COMPANY
------------------------------
Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations (Continued)
-----------------------------------------------
General and administrative expenses totaled $5.1 million in the six months ended
June 30, 2000 as compared to $2.9 million for the comparable period of fiscal
1999. An increase in outsourcing costs from $1.1 million to $2.6 million was the
major contribution to the increase. In 1999, the Company was charged a
management fee under its outsourcing contract which was based upon a specified
percentage of the average book value of the Company's total assets, excluding
cash, plus a percentage of operating cash flows. Due to the $73.9 million
impairment charge in December 1998, the Company's total assets and resulting
percentage of such assets was reduced. In addition, with the depressed oil and
gas prices in the first half of 1999, management fees were further reduced in
such period. In October 1999, the Company became party to a new Master Services
Agreement ("MSA") and six specific contracts which covered comparable
outsourcing services as the 1999 contract. The new contracts have varying terms
and fees, but overall management fees have increased to levels similar to 1998
management fee levels, a level management feels is appropriate. For the current
period, Ecuadorian operations, nonexistant in 1999, contributed almost $300,000
to administrative costs, and an $800,000 charge related to change in management
was recorded. Included in that charge was $581,000 required to be expenses based
upon differences between exercise and grant date prices on options awarded to
the Company president.
Interest expense increased 26% to $7.2 million for the six months ended June
30, 2000 from $5.7 million in the same period of 1999. Increased interest rates
and higher borrowings outstanding resulted in the increase.
At December 31, 1999 the Company had a tax valuation allowance of $19.8 million
against its deferred tax assets. As of March 31, 2000, the Company determined
that it was more likely than not that the deferred tax assets would be realized,
based on current projections of taxable income due to higher commodity prices,
and the valuation allowance was removed. The $19.8 million benefit recorded for
the removal of the valuation allowance was offset by a $2.1 million deferred tax
liability that was generated during the three months ended March 31, 2000 and
$2.0 million deferred tax liability generated during the three months ended June
30, 2000, resulting in an overall tax benefit of $15.7 million for the year to
date. The provision for federal and state income taxes for the six months ended
June 30, 1999 was based upon a 0% effective tax rate. No tax accrual was made in
1999 because of an increase in the Company's tax valuation allowance for the
benefit for the current period's net loss from operations.
New Accounting Pronouncements
-----------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
instruments and Heding Activities." This statement establishes standards of
accounting for and disclosures of derivative instruments and hedging activities.
As amended, this statement is effective for fiscal quarters beginnning after
January 1, 2001. The Company has not yet determined the impact of this statement
on the Company's financial condition or results of operations but has begun
documenting and implementing new policies to ensure compliance with the
pronouncement when it becomes effective.
17
<PAGE>
BELLWETHER EXPLORATION COMPANY
------------------------------
Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations (Continued)
-----------------------------------------------
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation: an Interpretation of APB Opinion No.
25." Among other issues, Interpretation No. 44 clarifies the application of
Accounting Principles Board Opinion No. 25 (APB No. 25) regarding (a) the
definition of employee for purposes of applying APB No. 25, (b) the criteria for
determining whether a plan qualifies as a non-compensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
options in a business combination. The provisions of Interpretation No. 44
affecting us are to be applied on a prospective basis effective July 1, 2000.
FORWARD LOOKING STATEMENTS
--------------------------
This Form 10-Q contains "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included herein, including without limitation,
statements under "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and in the notes to the financial statements
regarding the Company's financial position, capital budget, intent to acquire
oil and gas properties, estimated quantities and net present values of reserves,
business strategy, plans and objectives of management of the Company for future
operations, and the effect of gas balancing, are forward-looking statements.
There can be no assurances that such forward looking statements will prove to
have been correct. Important factors that could cause actual results to differ
materially from the Company's expectations ("Cautionary Statements") include the
volatility of oil and gas prices, operating hazards, government regulations,
exploration risks and other factors described in the Company's Form 10-K filed
with the Securities and Exchange Commission. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified by the Cautionary Statements.
18
<PAGE>
BELLWETHER EXPLORATION COMPANY
------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------- ----------------------------------------------------------
The Company is exposed to market risk, including adverse changes in commodity
prices and interest rates. Since year end 1999, the Company has entered into
additional swap contracts as follows:
OIL HEDGES
----------
NYMEX NYMEX
PERIOD BBLS TOTAL BBLS TYPE PRICE PRICE
PER DAY FLOOR CEILING
------------------------------------------------------------------------------
July 2000-Sept. 2000 4,000 368,000 Collar* $22.25 $24.75
------------------------------------------------------------------------------
Oct. 2000-Dec. 2000 4,000 368,000 Collar** $23.00 $25.00
------------------------------------------------------------------------------
GAS HEDGES
----------
NYMEX NYMEX
PERIOD MCF TOTAL MCF TYPE PRICE PRICE
PER DAY FLOOR CEILING
-----------------------------------------------------------------------------
April 2000-Oct. 2000 35,000 7,490,000 Collar $2.30 $2.84
-----------------------------------------------------------------------------
Nov. 2000- March 2001 20,000 3,020,000 Collar $2.30 $3.35
-----------------------------------------------------------------------------
April 2001-Oct. 2001 30,000 6,420,000 Collar $2.30 $2.88
-----------------------------------------------------------------------------
* This agreement includes a put at $17.25 per barrel with a $0.50 cost per
barrel
** This agreement includes a put at $18.00 per barrel
The fair value at June 30, 2000 of all commodity swap agreements was an
unrealized loss of $25.6 million. A 10% change in price would have a $ 10.2
million impact on the fair value of the swaps.
The fair value of the interest rate swap at June 30, 2000 was a loss of $4.4
million.
19
<PAGE>
BELLWETHER EXPLORATION COMPANY
------------------------------
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
------- -----------------
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
------- -----------------------------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
------- -------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------- ---------------------------------------------------
A Proxy statement was sent to all shareholders of record as of
April 10, 2000 for the following matters which were voted on at
the annual meeting of shareholders held on May 31, 2000:
1. Habib Kairouz, Judy Ley Allen, A.K. McLanahan, Vincent H.
Buckley, Dr. Jack Birks, and Townes Pressler were elected as
directors with 12,144,931 shares voting in favor, 897,938
shares abstaining and no shares voting against. J.P. Bryan
was elected with 12,144,897 shares voting in favor, 897,972
shares abstaining and no shares voting against.
2. Shares of common stock authorized and reserved for issuance
under the 1996 Stock Incentive Plan were increased by 900,000
shares with 3,694,881 shares voting in favor and 3,352,348
shares voting against.
No other matters were brought up at the meeting. A copy of the
Proxy Statement was filed with the Securities and Exchange
Commission on April 28, 2000 and is incorporated herein by
reference.
ITEM 5. OTHER INFORMATION
------- -----------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
------- --------------------------------
a. Exhibits.
The following exhibits are filed with this Form 10-Q and they
are identified by the number indicated.
10.20 Employment Contract dated May 15, 2000 between the
Company and Douglas G. Manner - included herewith
27 Financial Data Schedule - Included herewith
b. Reports on Form 8-K.
None.
20
<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.
BELLWETHER EXPLORATION COMPANY
------------------------------
(Registrant)
Date: August 11, 2000 By: /s/ Douglas G. Manner
---------------------- ---------------------------------------
Douglas G. Manner
President and Chief Executive Officer
Date: August 11, 2000 By: /s/ Robert J. Bensh
---------------------- ---------------------------------------
Robert J. Bensh
Chief Financial Officer
21
