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 June 30, 2000
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: 16,241,364 shares of the
Company's Common Stock ($.01 par value) were outstanding as of June 30,
2000.
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 -
June 30, 2000 and December 31, 1999 2
Condensed Consolidated Statements of Income - Three
Months and Six Months Ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows- Six
Months Ended June 30, 2000 and 1999 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
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 June 30,
2000, and the related condensed consolidated statements of income for the
three-month and six-month periods ended June 30, 2000 and 1999 and the
related condensed consolidated statements of cash flows for the six-month
periods ended June 30, 2000 and 1999. 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 auditing standards
generally accepted in the United States of America, 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 accounting
principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards
generally accepted in the United States of America, the consolidated balance
sheet of Petroleum Development Corporation and subsidiaries as of December
31, 1999 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 6, 2000, 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, 1999 is fairly presented, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
KPMG LLP
Pittsburgh, Pennsylvania
August 1, 2000
PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 2000 and December 31, 1999
<TABLE>
<C> <C> <C>
ASSETS
2000 1999
(Unaudited)
Current assets:
Cash and cash equivalents $ 5,456,900 $ 29,059,200
Accounts and notes receivable 16,430,300 10,263,200
Inventories 525,200 577,600
Prepaid expenses 6,280,000 2,360,100
Total current assets 28,692,400 42,260,100
Properties and equipment 129,987,300 118,349,100
Less accumulated depreciation, depletion,
and amortization 34,345,400 31,207,300
95,641,900 87,141,800
Other assets 2,808,300 2,681,700
$127,142,600 $132,083,600
</TABLE>
(Continued)
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PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets, Continued
June 30, 2000 and December 31, 1999
<TABLE>
<C> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY
2000 1999
(Unaudited)
Current liabilities:
Accounts payable and accrued expenses $ 20,646,800 $ 17,599,000
Advances for future drilling contracts 4,897,500 25,137,400
Funds held for future distribution 2,594,100 2,027,600
Total current liabilities 28,138,400 44,764,000
Long-term debt 14,000,000 9,300,000
Other liabilities 3,695,100 3,160,600
Deferred income taxes 4,530,900 4,134,100
Stockholders' equity:
Common stock 162,400 157,400
Additional paid-in capital 32,930,100 32,071,000
Retained earnings 43,685,700 38,496,500
Total stockholders' equity 76,778,200 70,724,900
$127,142,600 $132,083,600
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income
Three and Six Months ended June 30, 2000 and 1999
(Unaudited)
<TABLE>
<C> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
Revenues:
Oil and gas well drilling operations $ 7,648,200 $ 9,030,600 $25,406,000 $26,776,200
Oil and gas sales 19,835,500 10,614,300 35,157,500 18,889,000
Well operations and pipeline income 1,291,800 1,215,700 2,579,600 2,371,800
Other income 287,700 203,400 424,500 693,300
29,063,200 21,064,000 63,567,600 48,730,300
Costs and expenses:
Cost of oil and gas well drilling
operations 6,012,600 7,525,900 20,416,300 22,397,300
Oil and gas purchases
and production costs 17,548,400 9,928,200 31,255,900 17,958,600
General and administrative expenses 1,032,300 595,800 1,711,500 1,060,200
Depreciation, depletion, and
amortization 1,664,800 957,100 3,154,500 1,892,700
Interest 275,400 - 290,000 -
26,533,500 19,007,000 56,828,200 43,308,800
Income before income taxes 2,529,700 2,057,000 6,739,400 5,421,500
Income taxes 581,900 460,700 1,550,200 1,214,400
Net income $ 1,947,800 $ 1,596,300 $ 5,189,200 $ 4,207,100
Basic earnings per common share $ .12 $ .10 $ .32 $ .27
Diluted earnings per common and
common equivalent share $ .12 $ .10 $ .32 $ .26
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999
(Unaudited)
<TABLE>
<C> <C> <C>
2000 1999
Cash flows from operating activities:
Net income $5,189,200 $ 4,207,100
Adjustments to net income to reconcile
to cash used in operating activities:
Deferred federal income taxes 396,800 184,100
Depreciation, depletion & amortization 3,154,500 1,892,700
Leasehold acreage expired or surrendered 196,100 321,200
Amortization of stock award 2,700 6,100
Gain on disposal of assets (6,700) (9,800)
Increase in current assets (9,887,900) (1,773,600)
Increase in other assets (62,700) (606,100)
Decrease in current liabilities (16,625,600) (21,190,800)
Increase in other liabilities 534,500 496,100
Total adjustments (22,298,300) (20,680,100)
Net cash used in operating activities (17,109,100) (16,473,000)
Cash flows from investing activities:
Capital expenditures (11,688,000) (9,909,600)
Proceeds from sale of leases 392,500 531,500
Proceeds from sale of assets 6,700 9,800
Net cash used in investing activities (11,288,800) (9,368,300)
Cash flows from financing activities:
Proceeds from exercise of stock options 95,600 -
Net proceeds from revolving credit agreement 4,700,000 -
Net cash provided from financing activities 4,795,600 -
Net change in cash and cash equivalents (23,602,300) (25,841,300)
Cash and cash equivalents, beginning of period 29,059,200 34,894,600
Cash and cash equivalents, end of period $ 5,456,900 $ 9,053,300
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2000
(Unaudited)
1. Accounting Policies
Reference is hereby made to the Company's Annual Report on Form 10-K
for 1999, 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 six months ended June 30, 2000 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 and six months ended June 30, 2000 and
1999:
<TABLE>
<C> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
Weighted average common
shares outstanding 16,174,331 15,737,795 16,070,290 15,730,269
Weighted average common and
common equivalent shares outstanding 16,436,754 16,297,833 16,313,108 16,253,240
Net income $ 1,947,800 $ 1,596,300 $ 5,189,200 $ 4,207,100
Basic earnings per common share $ .12 $ .10 $ .32 $ .27
Diluted earnings per common and
common equivalent share $ .12 $ .10 $ .32 $ .26
</TABLE>
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5. Business Segments (in Thousands)
PDC's operating activities can be divided into three major segments:
drilling and development, 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, commercial 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 and six months ended June
30, 2000 and 1999 is as follows:
<TABLE>
<C> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
REVENUES
Drilling and Development $ 7,648 $ 9,030 $25,406 $26,776
Natural Gas Sales 19,835 10,614 35,157 18,889
Well Operations 1,292 1,216 2,580 2,372
Unallocated amounts (1) 288 204 425 693
Total $29,063 $21,064 $63,568 $48,730
(1) Includes interest on investments and partnership management fees
which are not allocated in assessing segment performance.
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
SEGMENT INCOME BEFORE INCOME TAXES
Drilling and Development $1,635 $1,505 $4,990 $4,379
Natural Gas Sales 1,556 563 2,732 771
Well Operations 397 423 673 716
Unallocated amounts (2)
General and Administrative
expenses (1,032) (596) (1,712) (1,060)
Interest expense (275) - (290) -
Other (1) 249 162 346 616
Total $ 2,530 $ 2,057 $ 6,739 $ 5,422
(2) Items which are not allocated in assessing segment performance.
June 30, 2000 December 31, 1999
SEGMENT ASSETS
Drilling and Development $ 6,557 $ 23,957
Natural Gas Sales 106,535 93,073
Well Operations 7,292 7,977
Unallocated amounts
Cash 135 1,967
Other 6,624 5,110
Total $127,143 $132,084
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</TABLE>
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.
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 four 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 $900,000. 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 June 30, 2000 Compared With June 30, 1999
Revenues. Total revenues for the three months ended June 30, 2000 were
$29.1 million compared to $21.1 million for the three months ended June 30,
1999, an increase of approximately $8.0 million, or 37.9 percent. Such
increase was primarily a result of increased oil and gas sales. Drilling
revenues for the three months ended June 30, 2000 were $7.6 million compared
to $9.0 million for the three months ended June 30, 1999, a decrease of
approximately $1.4 million, or 15.6 percent. Such decrease resulted from
lower volumes of drilling and completion activities as a result of the
decreased levels of drilling partnership-related financing. Oil and gas
sales for the three months ended June 30, 2000 were $19.8 million compared
to $10.6 million for the three months ended June 30, 1999, an increase of
approximately $9.2 million, or 86.8 percent. Such increase was due
primarily to the natural gas marketing activities of Riley Natural Gas
(RNG), the Company's marketing subsidiary, along with increased production
from the Company's producing properties along with higher average sales
prices of natural gas. Well operations and pipeline income for the three
months ended June 30, 2000 was $1.3 million compared to $1.2 million for the
three months ended June 30, 1999 an increase of approximately $100,000, or
8.3 percent. Such increase resulted from an increase in the number of wells
operated by the Company. Other income for the three months ended June 30,
2000 was $288,000 compared to $203,000 for the three months ended June 30,
1999, an increase of approximately $85,000, or 41.9 percent. Such increase
resulted from interest earned on higher average cash balances.
Costs and expenses. Costs and expenses for the three months ended June
30, 2000 were $26.5 million compared to $19.0 million for the three months
ended June 30, 1999, an increase of approximately $7.5 million or 39.5
percent. Oil and gas well drilling operations costs for the three months
ended June 30, 2000 were $6.0 million compared to $7.5 million for the three
months ended June 30, 1999, a decrease of approximately $1.5 million, or
20.0 percent. Such decrease resulted from lower expenses resulting from the
decreased drilling activity. Oil and gas purchases and production costs for
the three months ended June 30, 2000 were $17.5 million compared to $9.9
-8-
million for the three months ended June 30, 1999, an increase of
approximately $7.6 million or 76.8 percent. Such increase was due primarily
to the 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 June 30, 2000 increased to $1.0 million compared
with $596,000 for the three months ended June 30, 1999, an increase of
approximately $404,000 or 67.8%. Such increase was due to higher corporate
expenses as a result of the significant growth and geographic
diversification of the Company's drilling and production operations.
Depreciation, depletion, and amortization costs for the three months ended
June 30, 2000 were $1.7 million compared to $957,000 for the three months
ended June 30, 1999, an increase of approximately $743,000 or 77.6 percent.
Such increase was due to the increased amount of investment in oil and gas
properties owned by the Company. Interest costs were $275,000 for the three
months ended June 30, 2000 as the Company utilized its line-of-credit for
the development of oil and gas properties.
Net income. Net income for the three months ended June 30, 2000 was $1.9
million compared to $1.6 million for the three months ended June 30, 1999,
an increase of approximately $300,000 or 18.8 percent.
Six Months Ended June 30, 2000 Compared with June 30, 1999
Revenues. Total revenues for the six months ended June 30, 2000 were
$63.6 million compared to $48.7 million for the six months ended June 30,
1999, an increase of approximately $14.9 million, or 30.6 percent. Such
increase was primarily a result of increased oil and gas sales. Drilling
revenues for the six months ended June 30, 2000 were $25.4 million compared
to $26.8 million for the six months ended June 30, 1999, a decrease of
approximately $1.4 million, or 5.2 percent. Such decrease resulted from
lower volumes of drilling and completion activities as a result of decreased
levels of drilling partnership-related financing. Oil and gas sales for the
six months ended June 30, 2000 were $35.2 million compared to $18.9 million
for the six months ended June 30, 1999, an increase of approximately $16.3
million, or 86.2 percent. Such increase was due to the natural gas
marketing activities of Riley Natural Gas (RNG), the Company's marketing
subsidiary and increased production from the Company's producing properties,
along with higher average sales prices of oil and natural gas. Well
operations and pipeline income for the six months ended June 30, 2000 was
$2.6 million compared to $2.4 million for the six months ended June 30,
1999, an increase of approximately $200,000, or 8.3 percent. Such increase
resulted from an increase in the number of wells operated by the Company.
Other income for the six months ended June 30, 2000 was $424,000 compared
to $693,000 for the six months ended June 30, 1999, a decrease of
approximately $269,000, or 38.8 percent. Such decrease resulted from
interest earned on lower average cash balances.
Costs and expenses. Costs and expenses for the six months ended June 30,
2000 were $56.8 million compared to $43.3 million for the six months ended
June 30, 1999, an increase of approximately $13.5 million or 31.2 percent.
Oil and gas well drilling operations costs for the six months ended June 30,
2000 were $20.4 million compared to $22.4 million for the six months ended
June 30, 1999, a decrease of approximately $2.0 million, or 8.9 percent.
Such decrease resulted from lower expenses from decreased drilling activity
and an improved gross profit margin on the Company's drilling activity. Oil
and gas purchases and production costs for the six months ended June 30,
2000 were $31.3 million compared to $18.0 million for the six months ended
June 30, 1999, an increase of approximately $13.3 million, or 73.9 percent.
Such increase was due primarily to the natural gas marketing activities of
RNG along with increased production costs associated with the increased
production from the Company's producing properties. General and
administrative expenses for the six months ended June 30, 2000 increased to
$1.7 million compared with $1.1 million for the six months ended June 30,
1999, an increase of $600,000 or 54.5 percent.
-9-
Such increase was due to higher corporate expenses as a result of the
significant growth and geographic diversification of the Company's drilling
and production operations. Depreciation, depletion, and amortization costs
for the six months ended June 30, 2000 were $3.2 million compared to $1.9
million for the six months ended June 30, 1999, an increase of approximately
$1.3 million or 68.4 percent. Such increase was due to the increased amount
of investment in oil and gas properties owned by the Company. Interest
costs were $290,000 for the six months ended June 30, 2000 as the Company
utilized its line-of-credit for the development of oil and gas properties.
Net income. Net income for the six months ended June 30, 2000 was $5.2
million compared to $4.2 million for the six months ended June 30, 1999, an
increase of approximately $1.0 million or 23.8 percent.
Year 2000 Issue
The Company experienced no known disruptions as a result of the year date
change and intends to continue monitoring its critical systems at various
other date changes during the Year 2000.
The Company expenditures for addressing Year 2000 issues were not
material, nor does the Company expect to incur any significant costs
addressing Year 2000 issues in the future.
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.
The Company has a bank credit agreement with First National Bank of
Chicago, which provides a borrowing base of $20.0 million, subject to
adequate oil and natural gas reserves. As of June 30, 2000, the outstanding
balance was $14.0 million. 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, 2002. The Company is currently working with the
First National Bank of Chicago to increase its borrowing base to $30.0
million. This is expected to be effective in the third quarter of 2000.
-10-
The Company closed its first drilling program of 2000 in the second
quarter and has drilled the wells in the second and third quarters of 2000.
The Company will close its second drilling program of 2000 in September,
2000 and will drill the wells during the third and fourth quarters of 2000.
Additional programs are scheduled to close in November and December of 2000.
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 June 6, 2000 the Company purchased all of the working interest in 168
producing wells in Colorado for $5,650,000. The transaction was effective
April 1, 2000. The wells have net remaining reserves of 560,000 barrels of
oil and 4.9 billion cubic feet of natural gas. The Company utilized its
bank credit agreement to finance 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. SFAS No. 133
standardized the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts. SFAS No. 133 is
effective for years beginning after June 15, 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.
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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 3. Quantitative and Qualitative Disclosure About Market Risk
There have been no material changes in reported market risks faced
by the Company since December 31, 1999.
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
June 30, 2000.
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: August 7, 2000 /s/ Steven R. Williams
Steven R. Williams
President
Date: August 7, 2000 /s/ Dale G. Rettinger
Dale G. Rettinger
Executive Vice President
and Treasurer
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