CONFORMED COPY
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 and Exchange Act of 1934
For the period ended March 31, 1999
OR
[ ] Transition Report Pursuant to Section 13 of 15(d) of
the Securities and Exchange Act of 1934
For the transition period from to
Commission file number 0-7246
I.R.S. Employer Identification Number 95-2636730
PETROLEUM DEVELOPMENT CORPORATION
(A Nevada Corporation)
103 East Main Street
Bridgeport, WV 26330
Telephone: (304) 842-6256
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 XX No
Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date: 15,737,795 shares of the
Company's Common Stock ($.01 par value) were outstanding as of March 31,
1999.<PAGE>
PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Independent Auditors' Review Report 1
Condensed Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 2
Condensed Consolidated Statements of Income -
Three Months Ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows-Three
Months Ended March 31, 1999 and 1998 5
Notes to Condensed
Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
<PAGE>
PART I - FINANCIAL INFORMATION
Independent Auditors' Review Report
The Board of Directors
Petroleum Development Corporation:
We have reviewed the accompanying condensed consolidated balance
sheet of Petroleum Development Corporation and subsidiaries as of March 31,
1999, and the related condensed consolidated statements of income and cash
flows for the three-month periods ended March 31, 1999 and 1998. These
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 condensed consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Petroleum Development
Corporation and subsidiaries as of December 31, 1998 and the related
consolidated statements of income, stockholders' equity, and cash flows for
the year then ended (not presented herein); and in our report dated March
5, 1999, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1998 is fairly
presented, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
KPMG LLP
Pittsburgh, Pennsylvania
May 13, 1999
<PAGE>
PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31, 1999 and December 31, 1998
<TABLE>
<C> <C>
<C>
ASSETS
1999
1998
(Unaudited)
Current assets:
Cash and cash equivalents $14,353,600 $
34,894,600
Accounts and notes receivable 6,054,600
6,024,100
Inventories 307,000
702,400
Prepaid expenses 1,928,800
2,387,500
Total current assets 22,644,000
44,008,600
Properties and equipment 98,272,600
92,747,300
Less accumulated depreciation, depletion,
and amortization 28,270,000
27,356,700
70,002,600
65,390,600
Other assets 2,264,500
1,901,200
$94,911,100
$111,300,400
</TABLE>
(Continued)
-2-
<PAGE>
PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets, Continued
March 31, 1999 and December 31, 1998
<TABLE>
<C> <C>
<C>
LIABILITIES AND
STOCKHOLDERS' EQUITY
1999
1998
(Unaudited)
Current liabilities:
Accounts payable and accrued expenses $11,750,100 $
13,178,800
Advances for future drilling contracts 10,488,700
28,320,800
Funds held for future distribution 583,500
984,200
Total current liabilities 22,822,300
42,483,800
Other liabilities 2,652,900
2,233,500
Deferred income taxes 3,933,400
3,836,400
Stockholders' equity:
Common stock 157,400
155,100
Additional paid-in capital 32,015,800
31,873,100
Warrants outstanding 46,300
46,300
Retained earnings 33,283,000
30,672,200
Total stockholders' equity 65,502,500
62,746,700
$94,911,100
$111,300,400
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-3-<PAGE>
PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income
Three Months ended March 31, 1999 and 1998
(Unaudited)
<TABLE>
<C> <C>
<C>
1999
1998
Revenues:
Oil and gas well drilling operations $17,745,600
$15,489,200
Oil and gas sales 8,274,700
8,040,000
Well operations and pipeline income 1,156,100
1,066,800
Other income 489,900
651,400
27,666,300
25,247,400
Costs and expenses:
Cost of oil and gas well drilling operations 14,871,400
12,990,400
Oil and gas purchases and production costs 8,030,400
7,454,400
General and administrative expenses 464,400
440,100
Depreciation, depletion, and amortization 935,600
758,500
24,301,800
21,643,400
Income before income taxes 3,364,500
3,604,000
Income taxes 753,700
807,300
Net income $2,610,800
$ 2,796,700
Basic earnings per common share $ .17
$ .18
Diluted earnings per share $ .16
$ .17
</TABLE>
See accompanying notes to condensed consolidated financial statements
-4-
<PAGE>
PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998
(Unaudited)
<TABLE>
<C> <C>
<C>
1999
1998
Cash flows from operating activities:
Net income $ 2,610,800
$2,796,700
Adjustments to net income to reconcile
to cash used in operating activities:
Deferred federal income taxes 97,000
(148,800)
Depreciation, depletion & amortization 935,600
758,500
Leasehold acreage expired or surrendered 192,000
70,500
Amortization of stock award 3,100
3,000
Gain on disposal of assets (8,300)
(5,000)
Decrease in current assets 823,600
211,500
Increase in other assets (226,700)
(118,100)
Decrease in current liabilities (19,661,500)
(15,992,900)
Increase in other liabilities 419,400
531,400
Total adjustments (17,425,800)
(14,689,900)
Net cash used in operating activities (14,815,000)
(11,893,200)
Cash flows from investing activities:
Capital expenditures (6,194,700)
(4,444,600)
Proceeds from sale of leases 460,400
592,600
Proceeds from sale of assets 8,300
5,000
Net cash used in investing activities (5,726,000)
(3,847,000)
Net change in cash and cash equivalents (20,541,000)
(15,740,200)
Cash and cash equivalents, beginning of period 34,894,600
46,561,000
Cash and cash equivalents, end of period $ 14,353,600
$ 30,820,800
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-5-
<PAGE>
PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 1999
(Unaudited)
1. Accounting Policies
Reference is hereby made to the Company's Annual Report on Form 10-K for
1998, which contains a summary of significant accounting policies
followed by the Company in the preparation of its consolidated
financial statements. These policies were also followed in preparing
the quarterly report included herein.
2. Basis of Presentation
The Management of the Company believes that all adjustments (consisting
of only normal recurring accruals) necessary to a fair statement of the
results of such periods have been made. The results of operations for
the three months ended March 31, 1999 are not necessarily indicative of
the results to be expected for the full year.
3. Oil and Gas Properties
Oil and Gas Properties are reported on the successful efforts method.
4. Earnings Per Share
Computation of earnings per common and common equivalent share are as
follows for the three months ended March 31,
<TABLE>
<C> <C> <C>
1999 1998
Weighted average common shares outstanding 15,722,659
15,490,151
Weighted average common and
common equivalent shares outstanding 16,216,020
16,378,383
Net income $ 2,610,800 $
2,796,700
Basic earnings per common share $ .17 $
.18
Diluted earnings per share $ .16 $
.17
</TABLE>
-6-
<PAGE>
5. Business Segments (Thousands)
PDC's operating activities can be divided into three major segments:
drilling and developement, natural gas sales, and well operations. The
Company drills natural gas wells for Company-sponsored drilling
partnerships and retains an interest in each well. The Company also
engages in oil and gas sales to residential, commerical and industrial
end-users. The Company charges Company-sponsored partnerships and other
third parties competitive industry rates for well operations and gas
gathering. Segment information for the three months ended March 31,
1999 and 1998 is as follows:
<TABLE>
<C> <C>
<C>
1999
1998
REVENUES
Drilling and Development $17,746
15,489
Natural Gas Sales 8,275
8,040
Well Operations 1,156
1,067
Unallocated amounts (1) 489
651
Total $27,666
25,247
</TABLE>
(1) Includes interest on investments and partnership management fees
which are not allocated in assessing segment performance.
<TABLE>
<C> <C>
<C>
1999
1998
SEGMENT INCOME BEFORE INCOME TAXES
Drilling and Development $ 2,874
2,499
Natural Gas Sales 208
571
Well Operations 293
350
Unallocated amounts (2)
General and Administrative
expenses (464)
(440)
Interest expense -
-
Other (1) 454
624
Total $ 3,365
3,604
</TABLE>
(2) Items which are not allocated in assessing segment performance.
<TABLE>
<C> <C>
<C>
March 31, 1999 December 31,
1998
SEGMENT ASSETS
Drilling and Development $ 5,912
27,288
Natural Gas Sales 70,133
65,256
Well Operations 6,751
7,136
Unallocated amounts
Cash 6,772
7,814
Other 5,343
3,806
Total $ 94,911
$111,300
</TABLE>
-7-<PAGE>
6. Commitments and Contingencies
The nature of the independent oil and gas industry involves a
dependence on outside investor drilling capital and involves a
concentration of gas sales to a few customers. The Company sells
natural gas to various public utilities and industrial customers. One
customer, Hope Gas, Inc., a regulated public utility, accounted for 5.9
percent of total revenues in the first three months of 1999.
Substantially all of the Company's drilling programs contain a
repurchase provision where Investors may tender their partnership units
for repurchase at any time beginning with the third anniversary of the
first cash distribution. The provision provides that the Company is
obligated to purchase an aggregate of 10% of the initial subscriptions
per calendar year (at a minimum price of three times the most recent
12 months' cash distributions), only if such units are tendered,
subject to the Company's financial ability to do so. The maximum
annual 10% repurchase obligation, if tendered by the investors, is
currently approximately $1.3 million. The Company has adequate capital
to meet this obligation.
The Company is not party to any legal action that would materially
affect the Company's results of operations or financial condition.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Three Months Ended March 31, 1999 Compared With March 31, 1998
Revenues. Total revenues for the three months ended March 31, 1999 were
$27.7 million compared to $25.2 million for the three months ended March 31,
1998, an increase of approximately $2.5 million, or 9.9 percent. Such
increase was primarily a result of increased drilling revenues. Drilling
revenues for the three months ended March 31, 1999 were $17.7 million
compared to $15.5 million for the three months ended March 31, 1998, an
increase of approximately $2.2 million, or 14.2 percent. Such increase
resulted from higher volumes of drilling and completion activities, due to
increased levels of drilling partnership-related financing. Oil and gas
sales for the three months ended March 31, 1999 were $8.3 million compared
to $8.0 million for the three months ended March 31, 1998, an increase of
approximately $300,000, or 3.8 percent. Such increase was due to increased
production from the Company's producing properties offset in part by lower
average sales prices of natural gas. Well operations and pipeline income
for the three months ended March 31, 1999 was $1.2 million compared to $1.1
million for the three months ended March 31, 1998 an increase of
approximately $100,000, or 9.1%. Such increase resulted from an increase
in the number of wells operated by the Company. Other income for the three
months ended March 31, 1999 was $490,000 compared to $651,000 for the three
months ended March 31, 1998, a decrease of approximately $161,000, or 24.7
percent. Such decrease resulted from interest earned on lower average cash
balances.
-8-
<PAGE>
Costs and expenses. Costs and expenses for the three months ended March
31, 1999 were $24.3 million compared to $21.6 million for the three months
ended March 31, 1998, an increase of approximately $2.7 million or 12.5
percent. Oil and gas well drilling operations costs for the three months
ended March 31, 1999 were $14.9 million compared to $13.0 million for the
three months ended March 31, 1998, an increase of approximately $1.9
million, or 14.6 percent. Such increase resulted from additional expenses
resulting from the increased drilling activity. Oil and gas purchases and
production costs for the three months ended March 31, 1999 were $8.0 million
compared to $7.5 million for the three months ended March 31, 1998, an
increase of approximately $500,000, or 6.7%. Such increase was due to
natural gas marketing activities of RNG and production costs associated with
the increased volumes of natural gas produced by the Company's producing
properties. General and administrative expenses for the three months ended
March 31, 1999 increased to $464,000 compared with $440,000 for the three
months ended March 31, 1998. Depreciation, depletion, and amortization
costs for the three months ended March 31, 1999 were $936,000 compared to
$759,000 for the three months ended March 31, 1998, an increase of $177,000
or 23.3 percent. Such increase was due to the increased amount of
investment in oil and gas properties owned by the Company.
Net income. Net income for the three months ended March 31, 1999 was
$2.6 million compared to a net income of $2.8 million for the three months
ended March 31, 1998, a decrease of approximately $200,000 or 7.1 percent.
Year 2000 Issue
State of Readiness
The Year 2000 Issue is the risk that computer programs using two-digit
data fields will fail to properly recognize the year 2000, with the result
being business interruption due to computer system failures by the Company's
software or hardware or that of government entities, service providers and
vendors. The Company has assessed the extent of the Year 2000 Issues
affecting the Company. The Company believes that the new computer system
including operating software installed during 1998 along with modifications
made by the Company's computer technicians have addressed the dating system
flaw inherent in most operating systems. The Company has completed a
remediation plan and believes it is currently fully Year 2000 Compliant.
The Company has initiated formal communications with its significant
suppliers and service providers to determine the extent to which the Company
may be vulnerable to their failure to correct their own Year 2000 issues.
It is expected that full identification will be completed by June 30, 1999.
To the extent that responses to Year 2000 readiness are unsatisfactory, the
Company intends to take appropriate action, including identifying
alternative suppliers and service providers who have demonstrated Year 2000
readiness.
-9-
<PAGE>
Cost of Readiness
Expenditures related to Year 2000 remediation did not exceed $35,000.
These expenditures include costs related to the data processing transition,
a new computer system, purchase of software, modifications and
implementation costs. A portion of these costs were capitalized and will
be amortized over the estimated useful life. The remainder of these costs
have been expensed as incurred. Management believes that the cost to become
Year 2000 Compliant is not material to the Company's financial position or
results of operations.
Risks of Year 2000 Issues
The Company presently believes the Year 2000 Issue will not present a
materially adverse risk to the Company's future consolidated results of
operations, liquidity, and capital resources. However, if the level of
timely compliance by key suppliers or service providers is not sufficient,
the Year 2000 Issue could have a material impact on the Company's operations
including, but not limited to, increased operating costs, loss of customers
or suppliers, loss of accounting functions, including well revenue
distributions, or other significant disruptions to the Company's business.
Contingency Plan
The Company has a contingency plan, and will implement it on systems that
remains non-compliant as of December 31, 1999, if any.
Liquidity and Capital Resources
The Company funds its operations through a combination of cash flow from
operations, capital raised through stock offerings and drilling
partnerships, and use of the Company's credit facility. Operational cash
flow is generated by sales of natural gas from the Company's well interests,
well drilling and operating activities for the Company's investor partners,
natural gas gathering and transportation, and natural gas marketing. Cash
payments from Company-sponsored partnerships are used to drill and complete
wells for the partnerships, with operating cash flow accruing to the Company
to the extent payments exceed drilling costs. The Company utilizes its
revolving credit arrangement to meet the cash flow requirements of its
operating and investment activities.
Sales volumes of natural gas have continued to increase while natural gas
prices fluctuate monthly. The Company's natural gas sales prices are
subject to increase and decrease based on various market-sensitive indices.
A major factor in the variability of these indices is the seasonal variation
of demand for the natural gas, which typically peaks during the winter
months. The volumes of natural gas sales are expected to continue to
increase as a result of continued drilling activities and additional
investment by the Company in oil and gas properties. The Company utilizes
commodity-based derivative instruments (natural gas futures and option
contracts traded on the NYMEX) as hedges to manage a portion of its exposure
to this price volatility. The futures contracts hedge committed and
anticipated natural gas purchases and sales, generally forecasted to occur
within a three to twelve-month period.
-10-
<PAGE>
The Company has a bank credit agreement with First National Bank of
Chicago, which provides a borrowing base of $10.0 million, subject to
adequate oil and natural gas reserves. At the request of the Company, the
bank, at its sole discretion, may increase the borrowing base to $20.0
million. As of March 31, 1999, no balance is outstanding on the line of
credit. Interest accrues at prime, with LIBOR (London Interbank Market
Rate) alternatives available at the discretion of the Company. No principal
payments are required until the credit agreement expires on December 31,
1999. The Company is currently working on an amendment with the bank to
extend the expiration date of the credit agreement.
The Company has commenced sales of units in its fifth partnership in its
registered PDC 2000 public drilling program which has remaining eight
partnerships which are scheduled to close over the next two years. The
fifth partnership is scheduled to close in late May, 1999, with drilling
planned in the second and third quarters of 1999. Additional programs are
scheduled to close in September, November and December of 1999. The Company
generally invests, as its equity contribution to each drilling partnership,
an additional sum approximating 20% of the aggregate subscriptions received
for that particular drilling partnership. As a result, the Company is
subject to substantial cash commitments at the closing of each drilling
partnership. The funds received from these programs are restricted to use
in future drilling operations. No assurance can be made that the Company
will continue to receive this level of funding from these or future
programs.
On January 29, 1999, the Company offered to purchase from Investors their
units of investment in the Company's Drilling Programs formed prior to 1996.
The Company purchased approximately $1.6 million of producing oil and gas
properties in conjunction with this offer, which expired on March 31, 1999.
The Company utilized capital received from its 1997 public stock offering
to fund this purchase.
The Company continues to pursue capital investment opportunities in
producing natural gas properties as well as its plan to participate in its
sponsored natural gas drilling partnerships, while pursuing opportunities
for operating improvements and costs efficiencies. Management believes that
the Company has adequate capital to meet its operating requirements.
New Accounting Standard
Statement of Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS No. 133), was issued by the
Financial Accounting Standards Board in June, 1998. Statement 133
standardized the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts. The Company must adopt
SFAS No. 133 by January 1, 2000; however, early adoption is permitted. On
adoption, the provisions of SFAS No. 133 must be applied prospectively. At
the present time, the Company cannot determine the impact that SFAS No. 133
will have on its financial statements upon adoption, as such impact will be
based on the extent of derivative instruments, such as natural gas futures
and option contracts, outstanding at the date of adoption.
-11-
<PAGE>
CONFORMED COPY
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to any legal actions that would materially
affect the Company's operations or financial statements.
Item 6. Exhibits and Reports on Form 8-K
(a) None.
(b) No reports on Form 8-K have been filed during the quarter ended
March 31, 1999.
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.
Petroleum Development Corporation
(Registrant)
Date: May 13, 1999 /s/ Steven R. Williams
Steven R. Williams
President
Date: May 13, 1999 /s/ Dale G. Rettinger
Dale G. Rettinger
Executive Vice President
and Treasurer
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 14,353,600
<SECURITIES> 0
<RECEIVABLES> 6,054,600
<ALLOWANCES> 274,600
<INVENTORY> 307,000
<CURRENT-ASSETS> 22,644,000
<PP&E> 98,272,600
<DEPRECIATION> 28,270,000
<TOTAL-ASSETS> 94,911,100
<CURRENT-LIABILITIES> 22,822,300
<BONDS> 0
0
0
<COMMON> 157,400
<OTHER-SE> 65,345,100
<TOTAL-LIABILITY-AND-EQUITY> 94,911,100
<SALES> 26,020,300
<TOTAL-REVENUES> 27,666,300
<CGS> 22,901,800
<TOTAL-COSTS> 24,301,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,364,500
<INCOME-TAX> 753,700
<INCOME-CONTINUING> 2,610,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,610,800
<EPS-PRIMARY> .17
<EPS-DILUTED> .16
</TABLE>
