UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended September 30, 1998
Commission file number 1-9735
BERRY PETROLEUM COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 77-0079387
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
28700 Hovey Hills Road, P.O. Bin X, Taft, California 93268
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (805) 769-8811
Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report:
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 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 ( )
The number of shares of each of the registrant's classes of capital
stock outstanding as of September 30, 1998 was 21,109,756 shares of Class A
Common Stock ($.01 par value) and 898,892 shares of Class B Stock ($.01 par
value). All of the Class B Stock is held by a shareholder who owns in
excess of 5% of the outstanding stock of the registrant.
<PAGE> 2
BERRY PETROLEUM COMPANY
SEPTEMBER 30, 1998
INDEX
PART I. Financial Information Page No.
Report of Independent Accountants . . . . . . . . . . . . . . 3
Item 1. Financial Statements
Condensed Balance Sheets at
September 30, 1998 and December 31, 1997 . . . . . . . . . . 4
Condensed Statements of
Operations for the Three Month Periods
Ended September 30, 1998 and 1997 . . . . . . . . . . . . 5
Condensed Statements of
Operations for the Nine Month Periods
Ended September 30, 1998 and 1997 . . . . . . . . . . . . 6
Condensed Statements of
Cash Flows for the Nine Month Periods
Ended September 30, 1998 and 1997 . . . . . . . . . . . . 7
Notes to Condensed Financial Statements . . . . . . . . . . . 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations . . . . . . 9
PART II. Other Information
Item 5. Stockholder Proposals and Business . . . . . . . . .13
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . .13
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . .14
2
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Berry Petroleum Company
We have reviewed the accompanying condensed balance sheet of Berry
Petroleum Company as of September 30, 1998, the condensed statements of
income for the three and nine month periods ended September 30, 1998 and
1997, and the condensed statements of cash flows for the nine month periods
ended September 30, 1998 and 1997. These interim financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express
such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet as of December 31, 1997, and the related
statements of income, retained earnings and cash flows for the year then
ended (not presented herein); and in our report dated February 20, 1998, we
expressed an unqualified opinion on those financial statements. In our
opinion, the information set forth in the accompanying condensed balance
sheet as of December 31, 1997 is fairly stated, in all material respects,
in relation to the balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
October 30, 199
3
<PAGE> 4
BERRY PETROLEUM COMPANY
Part I. Financial Information
Item 1. Financial Statements
Condensed Balance Sheets
(In Thousands, Except Share Information)
September 30, December 31,
1998 1997
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 6,068 $ 7,756
Short-term investments available for sale 711 718
Accounts receivable 5,940 8,990
Prepaid expenses and other 1,334 1,979
_________ _________
Total current assets 14,053 19,443
Oil and gas properties (successful efforts
basis), buildings and equipment, net 158,976 157,441
Other assets 959 840
_________ _________
$ 173,988 $ 177,724
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,952 $ 4,432
Accrued liabilities 2,676 2,459
Federal and state income taxes payable 2,094 1,053
_________ _________
Total current liabilities 7,722 7,944
Long-term debt 30,000 32,000
Deferred income taxes 26,078 25,909
Shareholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares
authorized; no shares outstanding - -
Capital stock, $.01 par value:
Class A Common Stock, 50,000,000 shares authorized;
21,109,756 shares issued and outstanding at
September 30, 1998 (21,094,494 at
December 31, 1997) 211 211
Class B Stock, 1,500,000 shares authorized;
898,892 shares issued and outstanding
(liquidation preference of $899) 9 9
Capital in excess of par value 53,378 53,422
Retained earnings 56,590 58,229
_________ _________
Total shareholders' equity 110,188 111,871
_________ _________
$ 173,988 $ 177,724
========= =========
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
BERRY PETROLEUM COMPANY
Part I. Financial Information
Item 1. Financial Statements
Condensed Statements of Operations
Three Month Periods Ended September 30, 1998 and 1997
(In Thousands, Except Per Share Data)
(Unaudited)
1998 1997
Revenues:
Sales of oil and gas $ 10,117 $ 16,775
Gain on disposition of assets 36 768
Interest and other income (expense), net (33) 115
________ ________
10,120 17,658
________ ________
Expenses:
Operating costs 4,767 5,599
Depreciation, depletion and amortization 2,508 2,578
General and administrative 980 1,262
Interest 479 607
________ ________
8,734 10,046
________ ________
Income before income taxes 1,386 7,612
Provision for income taxes 8 2,476
________ ________
Net income $ 1,378 $ 5,136
======== ========
Basic net income per share $ .06 $ .23
======== ========
Diluted net income per share $ .06 $ .23
======== ========
Cash dividends per share $ .10 $ .10
======== ========
Weighted average number of shares of
capital stock outstanding used to
calculate basic net income per share 22,009 21,978
======== ========
Effect of dilutive securities:
Stock options 15 203
Other 1 21
________ ________
Weighted average number of shares of
capital stock used to calculate
diluted net income per share 22,025 22,202
======== ========
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
BERRY PETROLEUM COMPANY
Part I. Financial Information
Item 1. Financial Statements
Condensed Statements of Operations
Nine Month Periods Ended September 30, 1998 and 1997
(In Thousands, Except Per Share Data)
(Unaudited)
1998 1997
Revenues:
Sales of oil and gas $ 31,204 $ 49,788
Gain on disposition of assets 64 1,198
Interest and other income (expense), net (116) 493
________ ________
31,152 51,479
________ ________
Expenses:
Operating costs 13,284 16,105
Depreciation, depletion and amortization 7,554 7,549
General and administrative 3,112 4,209
Interest 1,464 1,763
________ ________
25,414 29,626
________ ________
Income before income taxes 5,738 21,853
Provision for income taxes 775 7,248
________ ________
Net income $ 4,963 $ 14,605
======== ========
Basic net income per share $ .23 $ .66
======== ========
Diluted net income per share $ .23 $ .66
======== ========
Cash dividends per share $ .30 $ .30
======== ========
Weighted average number of shares of
capital stock outstanding used to
calculate basic net income per share 22,007 21,973
======== ========
Effect of dilutive securities:
Stock options 36 140
Other 1 12
________ ________
Weighted average number of shares of
capital stock used to calculate
dilutive net income per share 22,044 22,125
======== ========
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
BERRY PETROLEUM COMPANY
Part I. Financial Information
Item 1. Financial Statements
Condensed Statements of Cash Flows
Nine Month Periods Ended September 30, 1998 and 1997
(In Thousands)
(Unaudited)
1998 1997
Cash flows from operating activities:
Net income $ 4,963 $ 14,605
Depreciation, depletion and amortization 7,554 7,549
Increase in deferred income tax liability 169 3,396
Gain on disposition of assets (64) (1,198)
Other, net (113) (294)
________ ________
Net working capital provided by operating
activities 12,509 24,058
Decrease in accounts receivable, prepaid
expenses and other 3,695 898
Decrease in current liabilities (222) (325)
________ ________
Net cash provided by operating activities 15,982 24,631
Cash flows from investing activities:
Property acquisitions (3,136) -
Capital expenditures (6,051) (15,772)
Proceeds from sale of assets 339 1,982
Return of restricted cash - 2,570
Other, net (240) (52)
________ ________
Net cash used in investing activities (9,088) (11,272)
Cash flows from financing activities:
Dividends paid (6,603) (6,592)
Payment of short-term notes payable - (6,900)
Proceeds from issuance of long-term debt - 3,000
Payment of long-term debt (2,000) (5,000)
Other, net 21 64
________ ________
Net cash used in financing activities (8,582) (15,428)
________ ________
Net decrease in cash and cash
equivalents (1,688) (2,069)
Cash and cash equivalents, beginning of year 7,756 9,970
________ ________
Cash and cash equivalents, end of period $ 6,068 $ 7,901
======== ========
Supplemental disclosures of cash flow:
Income taxes (refunded) paid $ (610) $ 3,510
======== ========
Interest paid $ 1,457 $ 1,763
======== ========
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 8
BERRY PETROLEUM COMPANY
Part I. Financial Information
Item 1. Financial Statements
Notes to Condensed Financial Statements
September 30, 1998
(Unaudited)
1. All adjustments which are, in the opinion of Management, necessary for
a fair presentation of the Company's financial position at September 30,
1998 and December 31, 1997, results of operations and cash flows for the
nine month periods ended September 30, 1998 and 1997 and results of
operations for the three month periods ended September 30, 1998 and 1997
have been included. All such adjustments are of a recurring nature. The
results of operations and cash flows are not necessarily indicative of the
results for a full year.
2. The accompanying unaudited financial statements have been prepared on
a basis consistent with the accounting principles and policies reflected in
the December 31, 1997 financial statements. The December 31, 1997 Form 10-
K and the Form 10-Q's for the periods ended June 30 and March 31, 1998
should be read in conjunction herewith. The year-end condensed balance
sheet was derived from audited financial statements, but does not include
all disclosures required by generally accepted accounting principles.
8
<PAGE> 9
BERRY PETROLEUM COMPANY
Part I. Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
For the first nine months of 1998, the Company had net income of $5.0
million, or $.23 per share, down 66% from $14.6 million, or $.66 per share,
for the first nine months of 1997. For the third quarter, the Company had
net income of $1.4 million, or $.06 per share, down 73% from $5.1 million,
or $.23 per share, in the third quarter of 1997.
Three Months Ended Nine Months Ended
Sept 30, June 30, Sept 30, Sept 30, Sept 30,
1998 1998 1997 1998 1997
Net production - BOE*/day 12,011 11,973 12,854 12,205 12,272
Per BOE data:
Average sales price $ 9.17 $ 8.81 $14.15 $ 9.35 $14.82
Operating costs 3.79 3.05 4.04 3.36 4.16
Production taxes .53 .66 .69 .63 .65
Total operating costs 4.32 3.71 4.73 3.99 4.81
Depreciation/Depletion
(DD&A) 2.27 2.31 2.18 2.27 2.25
General & administrative
expenses (G&A) .89 .86 1.07 .93 1.26
*Barrel of oil equivalent
Operating income was $2.9 million for the third quarter of 1998, down
67% from $8.7 million earned in the third quarter of 1997. Similarly,
operating income for the nine months ended September 30, 1998 of $10.6
million was down 60% from $26.4 million earned in the nine months ended
September 30, 1997.
The decreases in operating income in these 1998 periods compared to
1997 were due to significantly lower oil prices. Oil prices/BOE in the
third quarter of 1998 of $9.17 were slightly higher than the $8.81 received
in the second quarter of 1998. However, they were down 35% from $14.15
received in the third quarter of 1997. For the nine months ended September
30, 1998, oil prices averaged $9.35, which was 37% lower than $14.82
received in the same 1997 nine month period. The prices received in the
third quarter and the first nine months of 1998 included benefits of
$.51/BOE and $.66/BOE, respectively, from a crude oil hedge contract with a
California refiner which expired on August 31, 1998.
Operating costs/BOE for the three months ended September 30, 1998 of
$4.32 were down from $4.73 in the same 1997 three month period, but up from
$3.71 in the second quarter of 1998. Late in the second quarter of 1998,
the Company increased the quantity of steam available from conventional
sources and also increased the number of well service rigs in an effort to
eliminate the production decline trend which occurred in the first half of
1998.
9
<PAGE> 10
With the decline in oil prices which began in late 1997, the Company
reduced its steam injection volumes, shut-in a number of marginal wells and
reduced certain remedial operations in early 1998. Due primarily to these
factors, production volumes declined to 12,011 BOE/day in the third quarter
of 1998 from 12,854 BOE/day in the third quarter of 1997. Similarly,
production volumes in the first nine months of 1998 of 12,205 BOE/day were
down from 12,272 produced in the first nine months of 1997. However,
production of 12,011 BOE/day in the third quarter of 1998 was up slightly
from 11,973 BOE/day produced in the second quarter of 1998.
The Company began to increase its steam injection volume in the latter
part of the second quarter. The number of available service rigs was also
increased on a selective basis to improve production. These actions
stopped the decline in production on several of the Company's leases. The
other factor, adversely affecting production, is the effect of shut-in
wells. The Company continues to evaluate its shut-in wells (totaling
production of as much as 350 Bbls/day) and intends to bring these wells
back on production upon achieving favorable economics. In conjunction with
the purchase of four small properties adjacent to the Company's core South
Midway-Sunset properties in July 1998, Berry was assigned a contract for
the purchase of 2,000 barrels per day of high quality, low cost steam. It
is anticipated that this steam, connected to the Company's main steam
system in October will provide a more efficient use of steam and help
maintain current production levels in the fourth quarter.
In the second quarter of 1998, the Company won a judgment for
approximately $1 million against Windsor Energy Corporation and Rincon
Island Limited Partnership, the purchaser of the Company's Rincon
properties in 1995. In the third quarter of 1998, Rincon Island Limited
Partnership and its General Partner, Windsor Energy U.S. Corporation, filed
bankruptcy. While the Company is continuing to pursue its collection
efforts, ultimate collectibility is uncertain at this time. The portion of
the judgment recorded as a receivable at June 30, 1998 of $.3 million was
written off in the third quarter.
The Company is continuing to achieve relatively low G&A expense on a
per BOE basis in 1998. G&A in the third quarter of 1998 was $1.0 million,
or $.89/BOE, down 23% from $1.3 million, or $1.07/BOE, incurred in the
third quarter of 1997 and comparable to $.9 million, or $.86/BOE, incurred
in the second quarter of 1998. The Company took numerous measures to
reduce costs in early 1998 in reaction to the severe decline in oil prices
and continues to monitor costs closely. G&A/BOE for the first nine months
of 1998 of $.93/BOE was down 26% from $1.26 in the first nine months of
1997.
The Company's effective tax rate of 14% for the nine-month period
ending September 30, 1998 was down from 33% for the same period in 1997.
This substantial decrease was primarily due to the continuation of the
Company's significant investment in qualifying enhanced oil recovery
projects and applying the respective credits to lower earnings. In
addition, the Company resolved past years through 1993 with both the
federal and state tax authorities, collecting refunds and interest totaling
$1.2 million. The Company expects its effective tax rate to increase upon
a recovery in oil prices.
On July 31, 1998, the Company purchased oil and gas properties,
representing approximately 280 acres, for $3.1 million in cash. The
properties are adjacent to the Company's core South Midway-Sunset
10
<PAGE> 11
properties and have estimated proved reserves of 1.3 million barrels. The
acquisition cost, therefore, represented approximately $2.38 per BOE of
proved reserves. As mentioned above, this acquisition also included the
assignment of a contract calling for delivery of a minimum of 2,000 B/D of
steam to the Company.
Year 2000 (Y2k) Compliance Status
In 1997, the Company began a review of its computer hardware, software
applications and process control equipment with embedded semiconductor
chips to determine which components, if any, would not function correctly
in the years 2000 and beyond. In the third quarter of 1998, the Company
created a Y2k team to monitor the results of the review on an ongoing basis
to better ensure that the Company's operations will not experience any
material adverse effects when the year 2000 arrives.
As part of the review, the Company determined that its accounting
software would have to be modified or replaced. The Company has identified
new software that is represented to be Y2k compliant. Two modules were
replaced in the first half of 1998. The remaining modules are scheduled to
be replaced during the first half of 1999. The total cost of the software
and hardware purchased to complete the installation is estimated to be
approximately $.6 million. If, for some reason, the software cannot be
purchased and installed by the year 2000, the Company intends to modify its
existing software to handle Y2k. These modifications would be made by the
Company's in-house Information Systems personnel. The Company has
evaluated all of its other software, which is predominantly purchased from
third party providers, and determined that they are either Y2k compliant,
or are scheduled to be Y2k compliant before the end of 1998.
The Company has performed an evaluation of its computer hardware and
determined that with only a few minor exceptions, it is Y2k compliant at
this time. Minor upgrades were completed on some of the equipment to make
them compliant at no material cost to the Company.
The Company is working with the operator of the Company's two
cogeneration facilities and third party equipment manufacturers to ensure
that all equipment is Y2k compliant. These facilities provide over two-
thirds of the Company's steam, which is necessary to produce the Company's
heavy oil reserves. It is estimated that the analysis will be completed in
the fourth quarter of 1998. If any of the equipment needs to be modified
or replaced, the Company plans to make the changes by the end of the second
quarter of 1999. It is not known at this time what the estimated cost is,
if any, to make these facilities Y2k compliant. If, by the year 2000, the
cogeneration facilities are not compliant, it could have a material adverse
effect on the Company's production volumes and results of operations. If
the plants were shut down, the Company would fire its conventional
generators, which would result in a lower volume of steam at a higher cost
to the Company. However, the Company believes such action will not be
necessary and is confident that the facilities will be compliant by the
year 2000.
The Company's customers are predominantly major oil companies or large
independent refiners. If any of these customers were not Y2k compliant by
the end of 1999 and could not buy our crude oil, it could have a material
impact on the Company's operations. The Company's operations could also be
impacted if any of the utility providers of natural gas, electricity, etc.
were not Y2k compliant by the year 2000 and could not provide their
11
<PAGE> 12
products and services to the Company. However, Management anticipates that
these companies will be ready and, therefore, the Company's operations will
not be materially impacted when the year 2000 arrives. The Company has
communicated with the financial institutions that are business partners of
the Company. It is anticipated that they will be Y2k compliant by the year
2000 resulting in no material impact to the Company. If any of the other
business partners of the Company are not Y2k compliant by the year 2000,
Management does not believe it will have a material impact on the Company's
operations.
Liquidity and Capital Resources
Working capital at September 30, 1998 was $6.3 million, down $2.6
million from $8.9 million at June 30, 1998 and down $5.2 million from $11.5
million at December 31, 1997. Net cash provided by operations was $16.0
million for the first nine months of 1998, down 35% from $24.6 million
generated in the first nine months of 1997. The Company purchased oil and
gas properties adjacent to its core South Midway-Sunset for $3.1 million in
July 1998. Cash was also used for property development and other capital
projects of $6.1 million, to pay dividends of $6.6 million, and to reduce
its long-term debt by $2.0 million.
Forward-Looking Statements
"Safe harbor under the Private Securities Litigation Reform Act of
1995": With the exception of historical information, the matters
discussed in this Form 10-Q are forward-looking statements that involve
risks and uncertainties. Although the Company believes that its
expectations are based on reasonable assumptions, it can give no assurance
that its goals will be achieved. Important factors that could cause actual
results to differ materially from those in the forward-looking statements
herein include the timing and extent of changes in commodity prices for oil
and gas, environmental risks, drilling and operating risks, uncertainties
about the estimates of reserves, Y2K non-compliance by key vendors,
customers, the Company, etc. and government regulation.
12
<PAGE> 13
Part II. Other Information
Item 5. Stockholder Proposals and Business
Stockholders of the Company are entitled to submit proposals on
matters appropriate for stockholder action consistent with regulations of
the Securities and Exchange Commission (SEC) and the Company's bylaws.
Should a stockholder wish to have a proposal considered for inclusion in
the proxy statement for the Company's 1999 annual meeting, under the
regulations of the SEC, such proposal must be received by the Company on or
before December 4, 1998.
In connection with the Company's 1999 annual meeting and pursuant to
recently amended SEC Rule 14(a)4, if the stockholder's notice is not
received by the Company on or before February 17, 1999, the Company
(through management proxy holders) may exercise discretionary voting
authority when the proposal is raised at the annual meeting without any
reference to the matter in the proxy statement.
The above summary, which sets forth only the procedures by which
business may be properly brought before and voted upon at the Company's
annual meeting, is qualified in its entirety by reference to Section 1 of
Article I of the Company's bylaws, which do not in any way grant additional
rights to stockholders beyond those currently afforded them by law.
All stockholder proposals and notices should be directed to the
Company's Corporate Secretary at P.O. Bin X, Taft, California 93268.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 15 - Accountants' Awareness Letter
13
<PAGE> 14
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.
BERRY PETROLEUM COMPANY
/s/ Jerry V. Hoffman
Jerry V. Hoffman
Chairman, President and
Chief Executive Officer
/s/ Ralph J. Goehring
Ralph J. Goehring
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ Donald A. Dale
Donald A. Dale
Controller
(Principal Accounting Officer)
Date: November 2, 1998
14
EXHIBIT 15. ACCOUNTANTS AWARENESS LETTER
PricewaterhouseCoopers LLP
350 South Grand Avenue
Los Angeles, CA 90071-3405
telephone (213) 356-6000
facsimile (213) 356-6363
October 30, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington D.C. 20549
Re: Berry Petroleum Company
Commission File No. 1-9735
We are aware that our report dated October 30, 1998 on our review of the
interim condensed financial statements of Berry Petroleum Company for the
three and nine month periods ended September 30, 1998, and included in the
Company's quarterly report on Form 10-Q for the quarter then ended, is
incorporated by reference in the registration statements on Form S-8 (File
No. 33-61337, 333-62799 and 333-62873). Pursuant to Rule 436(c) under the
Securities Act of 1933, this report should not be considered a part of the
registration statements prepared or certified by us within the meaning of
Sections 7 and 11 of that Act.
/s/ PricewaterhouseCoopers LLP
15
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<NAME> BERRY PETROLEUM COMPANY
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
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