FORM 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1999
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: 0-610
EQUITY OIL COMPANY
(Exact name of registrant as specified in its charter)
COLORADO 87-0129795
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Suite 806, #10 West Third South, Salt Lake City, Utah 84101
(Address of principal executive offices)
(Zip Code)
(801) 521-3515
Registrant's telephone number, including area code
(Former name, former address and former fiscal year,
if changed since last report)
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
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 12,629,440
1
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ITEM I: Financial Statements
EQUITY OIL COMPANY
Statement of Operations
For the three months ended March 31, 1999 and 1998
(Unaudited)
1999 1998
------------ -----------
REVENUES
Oil and gas sales ................. $ 2,610,852 $ 3,500,460
Partnership income ................ 7,500 8,000
Interest income ................... 7,115 34,029
Other ............................. 24,543 34,956
----------- -----------
2,650,010 3,577,445
EXPENSES
Operating costs ................... 1,286,158 1,648,930
Depreciation, depletion and
amortization .................... 1,100,000 1,250,000
3D Seismic ........................ -- 409,743
Exploration ....................... 374,253 390,128
Equity loss in
Symskaya Exploration ............ 43,425 83,498
General and administrative ........ 428,270 438,578
Interest .......................... 298,327 279,534
----------- ------------
3,530,433 4,500,411
Loss before income taxes ................... (880,423) (922,966)
Benefit from income taxes .................. (307,724) (280,960)
----------- ------------
NET LOSS ................................... $ (572,699) $ (642,006)
=========== ============
Basic and diluted net
loss per common share ............. $ (.05) $ (.05)
=========== ============
Cash dividends per share declared .......... $ .00 $ .00
=========== ============
Weighted average shares outstanding ........ 12,629,440 12,610,179
The accompanying notes are an integral part of these statements.
2
<PAGE>
EQUITY OIL COMPANY
Balance Sheet
as of March 31, 1999 and December 31, 1998
March 31, December 31,
ASSETS 1999 1998
------------- -------------
(Unaudited)
Current assets:
Cash and cash equivalents .................. $ 453,673 $ 444,476
Accounts and advances receivable ........... 2,288,326 2,696,160
Income taxes receivable .................... 219,302 291,597
Deferred income taxes ...................... 19,417 19,417
Other current assets ....................... 305,579 318,904
------------- -------------
3,286,297 3,770,554
Property and equipment ....................... 104,580,646 104,407,815
Less accumulated depreciation,
depletion and amortization .................. 62,291,368 61,191,368
------------- -------------
42,289,278 43,216,447
Other assets:
Investment in Raven Ridge
Pipeline Partnership ..................... 228,497 220,997
Other assets ............................... 52,642 63,170
------------- -------------
281,139 284,167
------------- -------------
TOTAL ASSETS ................................. $ 45,856,714 $ 47,271,168
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................... $ 1,132,533 $ 1,675,758
Accrued liabilities ........................ 261,151 254,576
Income taxes payable ....................... 215,878 212,583
------------- -------------
1,609,562 2,142,917
Revolving credit facility .................... 16,500,000 16,500,000
Deferred income taxes ........................ 1,334,300 1,642,700
------------- -------------
17,834,300 18,142,700
Stockholders' Equity:
Common stock ............................... 12,794,040 12,794,040
Paid in capital ............................ 3,714,493 3,714,493
Less cost of treasury stock ................ (528,302) (528,302)
Retained earnings .......................... 10,432,621 11,005,320
------------- -------------
26,412,852 26,985,551
------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ....................... $ 45,856,714 $ 47,271,168
============= =============
The accompanying notes are an integral part of these statements.
3
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EQUITY OIL COMPANY
Statement of Cash Flows
For the three months ended March 31, 1999 and 1998
(Unaudited)
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................... $ (572,699) $ (642,006)
Adjustments
Depreciation, depletion and
amortization ............................ 1,100,000 1,250,000
Property dispositions ..................... -- --
Common stock issued for services ...... -- 47,350
Change in other assets ................ 10,528 --
Equity loss in Symskaya Exploration ... 43,425 83,498
Decrease in deferred income taxes ......... (308,400) (405,386)
-------- --------
272,854 388,137
Increase (decrease) from changes in:
Accounts and advances receivable ......... 407,834 179,887
Other current assets ..................... 13,325 (96,482)
Accounts payable and accrued
liabilities ........................... (536,650) (358,674)
Income taxes receivable/payable .......... 75,590 142,296
----------- -----------
Net cash provided
by operating activities ................... 232,953 255,164
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ......................... (172,831) (1,025,486)
Partnership distributions
in excess of income ....................... (7,500) 54,681
Advances to Symskaya Exploration ............. (43,425) (83,498)
Sale of temporary cash investments ........... -- --
----------- -----------
Net cash used in investing activities ........ (223,756) (1,108,984)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facility ...... -- 800,000
Net cash provided by
financing activities ................. -- 800,000
----------- -----------
NET INCREASE (DECREASE) IN CASH ................ 9,197 (53,820)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD ....................... 444,476 378,801
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD ............................. $ 453,673 $ 324,981
=========== ===========
The accompanying notes are an integral part of these statements.
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Interim Financial Statements
The accompanying consolidated financial statements of Equity Oil Company
(the Company) have not been audited by independent accountants, except for the
Balance Sheet at December 31, 1998. In the opinion of the Company's management,
the financial statements reflect the necessary adjustments, all of which are of
a normal and recurring nature, to present fairly the financial position of the
Company as of March 31, 1999, and the results of its operations and its cash
flows for the three month periods ended March 31, 1999 and 1998.
The financial statements and the accompanying notes to financial statements
have been prepared according to rules and regulations of the Securities and
Exchange Commission. Accordingly, certain notes and other information have been
condensed or omitted from the interim financial statements presented in this
Quarterly Report on Form 10-Q. These financial statements should be read in
conjunction with the Company's 1998 Annual Report on Form 10-K.
The results for the three month period ended March 31, 1999 are not
necessarily indicative of future results.
Note 2. Net Loss Per Share
Loss per share for all periods presented reflects the adoption of Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128")
SFAS 128 requires companies to present basic earnings per share, and if
applicable, diluted earnings per share, instead of primary and fully diluted
earnings per share. Basic earnings per share excludes dilution and is computed
by dividing net earnings available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if options to issue
common stock were exercised into common stock.
Options to purchase approximately 1,024,000 shares of common stock at
prices of $2.50 to $6.00 per share were outstanding during the first three
months of 1999. Options to purchase approximately 985,000 shares of common stock
at prices of $3.56 to $6.00 per share were outstanding during the first three
months of 1998. The outstanding options were not included in the computation of
diluted earnings per share because the effects of their inclusion would be
anti-dilutive. Basic and diluted loss per share are the same for each of the
periods presented.
Note 3. Reclassifications
Certain balances in the March 31, 1998 financial statements have been
reclassified to conform to the current year presentation. These changes had no
effect on the previously reported net loss, total assets, liabilities or
stockholders' equity.
5
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PART I
ITEM 2
Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Ongoing lower oil and gas prices combined with decreases in oil and gas
production to produce a 25% decline in oil and gas sales for the first quarter
of 1999. Total revenues for the period were $2,650,010, compared to $3,577,445
during the first quarter of 1998. Reduced operating costs and an absence of 3D
Seismic expenses enabled the Company to reduce total expenses by 22% in the
first quarter of 1999. As a result, the Company recorded a net loss for the 1999
first quarter of $(572,699), or $(.05) per share. This compares to a net loss
for the first quarter of 1998 of $(642,006), or $(.05) per share.
With much of its low-margin oil production shut-in due to low oil prices,
oil production decreased in the first quarter of 1999. Oil production of 154,000
barrels was down 9% from 170,000 barrels in 1998. Reduced exploratory drilling
in 1998, combined with natural production declines, resulted in lower gas
production for the 1999 quarter. Gas production decreased from 620,000 Mcf
produced in 1998 to 550,000 Mcf produced during the first quarter of 1999, a
decrease of 11%.
Oil prices continued to decline during much of the first quarter of 1999
before rebounding slightly during the latter part of March. Average prices
received for oil during the first quarter of 1999 declined 15% from first
quarter 1998 levels. Average crude prices received in 1999 were $11.29 per
barrel, compared to $13.25 per barrel received during the same period of 1998.
Gas prices also decreased 19% during the first quarter of 1999, averaging $1.58
per Mcf, compared to $1.95 per Mcf received during the first quarter of 1998.
Total expenses in 1999 decreased 22% over 1998 first quarter levels. Lower
production levels contributed to lower lease operating costs and depreciation,
depletion, and amortization (DD&A) charges. Lease operating costs decreased 13%
on a per BOE basis, declining from $6.03 per BOE to $5.24 per BOE, a further
reflection of high-cost, low margin oil properties being shut in during 1999.
DD&A per unit charges decreased slightly from $4.57 per BOE in 1998 to
$4.50 per BOE in 1999. The primary reason for the per unit decrease was that the
Company eliminated approximately $4 million from its depletable base through a
property impairment charge in the fourth quarter of 1998.
6
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The Company incurred 3D seismic charges of $409,743 in 1998 associated with
its Sequoia project in the San Joaquin Basin of California. The Company did not
participate in any 3D seismic programs during the first quarter of 1999.
General and administrative expenses decreased slightly from 1998 first
quarter levels. The decrease was due to reduced compensation and other
administrative expenses. Higher interest costs in 1999 reflect the higher amount
of debt outstanding under the Company's credit facility.
During the first quarter of 1999, the Company participated in the drilling
of 3 wells, 2 of which are being completed as producing wells. Included in the
1999 successful well count is an exploratory well drilled in California on the
Company's Merlin 3D seismic project. The Equity P51B tested at a rate of 1.8
million cubic feet per day from the Kione formation at a depth of 3,800 feet.
Equity operates and has a 50% working interest in the well and the Merlin
project.
Another exploratory well successfully completed in 1999 was the #1-30
Wallace well drilled at the Moon Bend 3D survey in the Sacramento Basin. The
well is currently awaiting completion. The Company has a 18.75% working interest
in the well, which is operated by Slawson Exploration. A third well, a Forbes
test on the Merlin survey, was dry.
The Company began drilling the Davis Unit #2-9, a Forbes test on its
Davis Ranch prospect, in late April of 1999. In addition, the Company and its
partners are waiting for a rig to begin drilling the first well at the Sequoia
prospect in the San Joaquin Basin.
The Company recorded an equity loss in Symskaya of $43,425 during the first
quarter of 1999, down from $83,498 in the first quarter of 1998. The 1998
expense included a dry hole contribution that was not repeated in 1999. Costs
associated with the Symskaya project are expected to be minimal during 1999,
with expenses being lower than those incurred in 1998.
CAPITAL RESOURCES AND LIQUIDITY
Cash and cash equivalents were $453,673 at March 31, 1999, up from $444,476
at year-end 1998. Working capital at March 31, 1999 was $1,676,736, compared to
working capital of $1,627,636 at December 31, 1998. For the first three months
of 1999, net cash provided by operating activities decreased by 11% over the
same period of 1998.
Investment in property and equipment for the first three months of 1999
totaled $172,831, an 83% decrease from the amount recorded during the
corresponding three months of 1998. As a result of the severely depressed oil
prices, and their negative effects on cash flows, the Company has reduced its
1999 capital
7
<PAGE>
budget to ensure that the bulk of its projects will be funded by discretionary
cash flows. The Company's current revised budget includes 9 exploratory wells, 1
development well, and 9 recompletions. The bulk of the Company's drilling should
occur during the third and fourth quarters of the year.
The Company borrowed $800,000 on its credit facility during the first
quarter of 1998, primarily for working capital purposes. The Company did not
draw down any funds on its credit facility during the first quarter of 1999. The
Company's current commitment under its credit facility is $17 million.
Accordingly, as of March 31, 1999, the Company had $500,000 of remaining
availability on the facility.
In April of 1999, the Company notified its bank that it anticipated a
violation of its first quarter EBITDA to interest covenant due to the low oil
and gas prices received during the quarter. Shortly thereafter, the Company
received a waiver letter from the bank for the covenant in question. The Company
is in compliance will all other covenants in the facility, and expects to be in
compliance for the remainder of 1999.
The Company believes that existing cash balances, cash flow from operating
activities, and funds available under the Company's credit facility will provide
adequate resources to meet its capital and exploration spending objectives for
1999, which have been significantly curtailed due to low oil prices. Should the
low oil price environment continue for an extended period of time, the Company
may have difficulty in meeting its ongoing exploration and development drilling
objectives. The Company has adequate liquidity to maintain its operations as
they currently exist.
OTHER ITEMS
The Company has reviewed all recently issued, but not yet adopted,
accounting standards in order to determine their effects, if any, on the results
of operations or financial position of the Company. Based on that review, the
Company believes that none of these pronouncements will have a significant
effect on current or future earnings or operations.
YEAR 2000.
In 1998 the Company began a project to ensure that its computer systems
were year 2000 compliant. The Company identified this project as a priority and
has allocated personnel and financial resources to it in an effort to minimize
the impact of year 2000 date related problems. An officer of the Company is
supervising the project. In addition, the Company is conducting a year 2000
compliance assessment of those of its vendors and customers whose relationship,
in the Company's business judgment, is material. Although the Company's
assessment of its year 2000 issues is not complete, the Company has made a
preliminary determination of its mission-critical and non-mission-critical
items.
8
<PAGE>
The Company's mission-critical items include its financial accounting,
engineering, and lease/land software. Each of these items has either been
certified by the vendor as year 2000 compliant, or the vendor has certified that
a compliant version of the software will be in place before June 30, 1999. All
nonmission-critical systems have been certified as being compliant. The Company
is conducting tests to support these claims.
The Company does not anticipate incurring any significant expense to ensure
compliance. Although the Company is undertaking this project, no assurance can
be given that such a program will be able to solve the year 2000 issues
applicable to the Company or that failure to solve will not have a material
adverse effect on the Company.
Forward looking statements
The preceding discussion and analysis should be read in conjunction with
the consolidated financial statements, including the notes thereto, appearing in
the Company's annual report on Form 10-K. Except for the historical information
contained herein, the matters discussed in this report contain forward-looking
statements within the meaning of Section 27a of the Securities Act of 1933, as
amended, and Section 2le of the Securities Exchange Act of 1934, as amended,
that are based on management's beliefs and assumptions, current expectations,
estimates, and projections. Statements that are not historical facts, including
without limitation statements which are preceded by, followed by or include the
words "believes," "anticipates," "plans," "expects," "may," "should" or similar
expressions are forward-looking statements. Many of the factors that will
determine the Company's future results are beyond the ability of the Company to
control or predict. These statements are subject to risks and uncertainties and,
therefore, actual results may differ materially. The Company disclaims any
obligation to update any forward-looking statements whether as a result of new
information, future events or otherwise.
Important factors that may effect future results include, but are not
limited to: the risk of a significant natural disaster, the inability of the
Company to insure against certain risks, fluctuations in commodity prices, the
inherent limitations in the ability to estimate oil and gas reserves, changing
government regulations, as well as general market conditions, competition and
pricing, and other risks detailed from time to time in the Company's SEC
reports, copies of which are available upon request from the Company's investor
relations department.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The answers to items listed under Item 3 are inapplicable or negative.
9
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PART II
OTHER INFORMATION
The answers to items listed under Part II are inapplicable or negative.
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 there unto duly authorized.
EQUITY OIL COMPANY
(Registrant)
DATE: May 13, 1999 By /s/ Paul M. Dougan
---------------------- ---------------------
Paul M. Dougan, President
DATE: May 13, 1999 By /s/ Clay Newton
----------------------- ---------------------
Clay Newton, Treasurer
10
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 453,673
<SECURITIES> 0
<RECEIVABLES> 2,288,326
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<PP&E> 104,580,646
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0
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<COMMON> 12,794,040
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<SALES> 2,610,852
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<INCOME-PRETAX> (880,423)
<INCOME-TAX> (307,724)
<INCOME-CONTINUING> (572,699)
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<EXTRAORDINARY> 0
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