<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the 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 1-10578
---------
VINTAGE PETROLEUM, INC.
--------------------------------------------------
(Exact name of registrant as specified in charter)
Delaware 73-1182669
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4200 One Williams Center Tulsa, Oklahoma 74172
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(918) 592-0101
----------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------------------------------------------------------------------
(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 ___
---
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 7, 1999
- ----------------------------- --------------------------
Common Stock, $.005 Par Value 53,107,066
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<PAGE>
PART I
FINANCIAL INFORMATION
-2-
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
----------------------------
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(IN THOUSANDS, EXCEPT SHARES
AND PER SHARE AMOUNTS)
(UNAUDITED)
ASSETS
------
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,221 $ 5,245
Accounts receivable -
Oil and gas sales 45,970 54,680
Joint operations 3,164 5,905
Prepaids and other current assets 21,530 18,312
----------- ------------
Total current assets 77,885 84,142
----------- ------------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Oil and gas properties, successful efforts method 1,381,317 1,368,914
Oil and gas gathering systems 15,411 14,774
Other 16,504 16,276
----------- ------------
1,413,232 1,399,964
Less accumulated depreciation, depletion and amortization 533,395 501,722
----------- ------------
879,837 898,242
----------- ------------
DEFERRED INCOME TAXES 13,017 2,505
----------- ------------
OTHER ASSETS, net 31,751 29,286
----------- ------------
TOTAL ASSETS $ 1,002,490 $ 1,014,175
=========== ============
</TABLE>
See notes to unaudited consolidated financial statements.
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<PAGE>
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
----------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
<S> <C> <C>
CURRENT LIABILITIES:
Revenue payable $ 13,552 $ 17,382
Accounts payable - trade 15,933 24,812
Other payables and accrued liabilities 32,056 24,731
----------- ------------
Total current liabilities 61,541 66,925
----------- ------------
LONG-TERM DEBT 684,635 672,507
----------- ------------
OTHER LONG-TERM LIABILITIES 477 785
----------- ------------
STOCKHOLDERS' EQUITY per accompanying statement:
Preferred stock, $.01 par, 5,000,000 shares authorized,
zero shares issued and outstanding - -
Common stock, $.005 par, 80,000,000 shares authorized,
53,107,066 shares issued and outstanding 266 266
Capital in excess of par value 230,736 230,736
Retained earnings 24,835 42,956
----------- ------------
255,837 273,958
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,002,490 $ 1,014,175
=========== ============
</TABLE>
See notes to unaudited consolidated financial Statements.
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<PAGE>
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1999 1998
---------- ----------
(Restated)
<S> <C> <C>
REVENUES:
Oil and gas sales $ 53,494 $ 72,647
Gas marketing 10,318 14,255
Oil and gas gathering 1,580 2,679
Other income 612 413
---------- ----------
66,004 89,994
---------- ----------
COSTS AND EXPENSES:
Lease operating, including production taxes 23,847 32,180
Exploratory expenses 5,887 1,998
Gas marketing 9,794 13,601
Oil and gas gathering 1,194 2,253
General and administrative 7,933 7,083
Depreciation, depletion and amortization 32,205 26,867
Interest 14,560 9,291
---------- ----------
95,420 93,273
---------- ----------
Loss before income taxes (29,416) (3,279)
PROVISION (BENEFIT) FOR INCOME TAXES:
Current 28 (442)
Deferred (11,323) (1,255)
---------- ----------
NET LOSS $ (18,121) $ (1,582)
========== ==========
LOSS PER SHARE:
Basic $ (.34) $ (.03)
========== ==========
Diluted $ (.34) $ (.03)
========== ==========
Weighted average common shares outstanding:
Basic 53,107 51,608
========== ==========
Diluted 53,107 51,608
========== ==========
</TABLE>
See notes to unaudited consolidated financial statements.
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<PAGE>
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
---------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 1999
-----------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Capital
In Excess
Common Stock of Par Retained
-------------------------
Shares Amount Value Earnings Total
----------- ------------ ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 53,107 $ 266 $ 230,736 $ 42,956 $ 273,958
Net loss - - - (18,121) (18,121)
----------- ------------ ----------- ---------- ---------
Balance at March 31, 1999 53,107 $ 266 $ 230,736 $ 24,835 $ 255,837
=========== ============ =========== ========== =========
</TABLE>
See notes to unaudited consolidated financial statements.
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<PAGE>
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1999 1998
---------- ----------
(Restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (18,121) $ (1,582)
Adjustments to reconcile net loss
to cash provided by operating activities -
Depreciation, depletion and amortization 32,205 26,867
Exploratory expenses 5,887 1,998
Benefit for deferred income taxes (11,323) (1,255)
---------- ----------
8,648 26,028
Decrease in receivables 11,451 9,094
Decrease in payables and accrued liabilities (1,874) (2,534)
Other (3,283) (3,625)
---------- ----------
Cash provided by operating activities 14,942 28,963
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment -
Oil and gas properties (18,646) (46,919)
Other property and equipment (865) (2,064)
Proceeds from sales of oil and gas properties 63 -
Other 1,082 (962)
---------- ----------
Cash used in investing activities (18,366) (49,945)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock - 70
Sale of 9 3/4% Senior Subordinated Notes 146,000 -
Advances on revolving credit facility and other borrowings 9,624 22,472
Payments on revolving credit facility and other borrowings (148,896) (4,494)
Dividends paid (1,328) (1,031)
---------- ----------
Cash provided by financing activities 5,400 17,017
---------- ----------
Net increase (decrease) in cash and cash equivalents 1,976 (3,965)
Cash and cash equivalents, beginning of period 5,245 5,797
---------- ----------
Cash and cash equivalents, end of period $ 7,221 $ 1,832
========== ==========
</TABLE>
See notes to unaudited consolidated financial statements.
-7-
<PAGE>
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
----------------------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
MARCH 31, 1999 AND 1998
1. GENERAL
The accompanying financial statements are unaudited. The consolidated
financial statements include the accounts of the Company and its wholly- and
majority-owned subsidiaries. In addition, the Company's interests in various
joint ventures have been proportionately consolidated, whereby the Company's
proportionate share of each joint venture's assets, liabilities, revenues and
expenses is included in the appropriate accounts in the consolidated financial
statements. Management believes that all material adjustments (consisting of
only normal recurring adjustments) necessary for a fair presentation have been
made. All significant intercompany accounts and transactions have been
eliminated in consolidation. These financial statements and notes should be read
in conjunction with the 1998 audited financial statements and related notes.
2. SIGNIFICANT ACCOUNTING POLICIES
Change in Accounting Method
Effective January 1, 1998, the Company elected to change its accounting method
for oil and gas properties from the full cost method to the successful efforts
method. Management believes that the successful efforts method of accounting is
preferable and that the accounting change will more accurately present the
results of the Company's exploration and development activities, minimize asset
write-offs caused by temporary declines in oil and gas prices and reflect an
impairment in the carrying value of the Company's oil and gas properties only
when there has been a permanent decline in their fair value.
As a result of this change in accounting, all previously reported financial
statements have been retroactively restated to give effect to this change in
accounting method. The change in accounting method decreased the Company's net
loss for the three months ended March 31, 1998, by $5.0 million ($0.10 per
diluted share).
Oil and Gas Properties
Under the successful efforts method of accounting, the Company capitalizes
all costs related to property acquisitions and successful exploratory wells, all
development costs and the costs of support equipment and facilities. All costs
related to unsuccessful exploratory wells are expensed when such wells are
determined to be non-productive; other exploration costs, including geological
and geophysical costs, are expensed as incurred. The Company recognizes gain or
loss on the sale of properties on a field basis.
Unproved leasehold costs are capitalized and are reviewed periodically for
impairment. Costs related to impaired prospects are charged to expense. If oil
and gas prices decline further in the future, some of these unproved prospects
may not be economic to develop which could lead to increased impairment expense.
-8-
<PAGE>
Costs of development dry holes and proved leaseholds are amortized on the
unit-of-production method based on proved reserves on a field basis. The
depreciation of capitalized production equipment and drilling costs is based on
the unit-of-production method using proved developed reserves on a field basis.
Estimated abandonment costs, net of salvage value, are included in the
depreciation and depletion calculation.
The Company reviews its proved oil and gas properties for impairment on a
field basis. For each field, an impairment provision is recorded whenever events
or circumstances indicate that the carrying value of those properties may not be
recoverable. The impairment provision is based on the excess of carrying value
over fair value. Fair value is defined as the present value of the estimated
future net revenues from production of total proved oil and gas reserves over
the economic life of the reserves, based on the Company's expectations of future
oil and gas prices and costs. No impairment provision was required for the first
three months of 1999 or 1998. Due to the volatility of oil and gas prices, it is
possible that the Company's assumptions regarding oil and gas prices may change
in the future and may result in future impairment provisions.
Statements of Cash Flows
Cash payments for interest totaled $10,733,050 and $7,364,411 for the three
months ended March 31, 1999 and 1998, respectively. Cash payments for U.S.
Federal and state income taxes were $500 during the three months ended March 31,
1998. There were no cash payments made for U.S. income taxes in the first three
months of 1999. During the three months ended March 31, 1999, the Company made
cash payments of $28,366 for foreign income taxes. There were no cash payments
made for foreign income taxes during the three months ended March 31, 1998.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share ("SFAS No. 128"), establishing new standards for
computing and presenting earnings per share. The provisions of SFAS No. 128 are
effective for earnings per share calculations for periods ending after December
15, 1997. The Company adopted SFAS No. 128 effective December 31, 1997, and all
earnings per share amounts disclosed herein have been calculated under the
provisions of SFAS No. 128. Basic earnings (loss) per common share were computed
by dividing net income (loss) by the weighted average number of shares
outstanding during the period. For the three months ended March 31, 1999 and
1998, the computation of diluted loss per share was antidilutive; therefore, the
amounts reported for basic and diluted loss per share were the same. Had the
Company been in a net income position for the three months ended March 31, 1999
or 1998, the Company's diluted weighted average outstanding common shares as
calculated under SFAS No. 128 would have been 55,694,353 and 52,924,073,
respectively. In addition, for the three months ended March 31, 1999 and 1998,
the Company had outstanding stock options for 3,531,322 and 750,000 additional
shares of the Company's common stock, respectively, which were antidilutive.
-9-
<PAGE>
Income Taxes
Deferred income taxes are provided on transactions which are recognized in
different periods for financial and tax reporting purposes. Such temporary
differences arise primarily from the deduction of certain oil and gas
exploration and development costs which are capitalized for financial reporting
purposes and differences in the methods of depreciation. The Company follows the
provisions of Statement of Financial Accounting Standards No.
109 when calculating the deferred income tax provision for financial purposes.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, Reporting Comprehensive Income ("SFAS No. 130"), establishing standards for
reporting and display of comprehensive income and its components in financial
statements. SFAS No. 130 defines comprehensive income as the total of net income
and all other non-owner changes in equity. During the three month periods ended
March 31, 1999 and 1998, the Company had no non-owner changes in equity other
than net losses.
Hedging
The Company periodically uses hedges (swap agreements) to reduce the impact
of oil and natural gas price fluctuations. Gains or losses on swap agreements
are recognized as an adjustment to sales revenue when the related transactions
being hedged are finalized. Gains or losses from swap agreements that do not
qualify for accounting treatment as hedges are recognized currently as other
income or expense. The cash flows from such agreements are included in operating
activities in the consolidated statements of cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement. Companies
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999;
however, beginning June 16, 1998, companies may implement the statement as of
the beginning of any fiscal quarter. SFAS No. 133 cannot be applied
retroactively and must be applied to (a) derivative instruments and (b) certain
derivative instruments embedded in hybrid contracts that were issued, acquired,
or substantively modified after December 31, 1997 (and, at the company's
election, before January 1, 1998). The Company has not yet quantified the impact
of adopting SFAS No. 133 on its financial statements and has not determined the
timing of or method of the adoption of SFAS No. 133.
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<PAGE>
3. CAPITAL STOCK
On March 17, 1999, the Company's Board of Directors adopted a stockholder
rights plan and declared a dividend distribution of one Preferred Share Purchase
Right on each outstanding share of its common stock which was made on April 5,
1999, to stockholders of record on that date. The Rights will expire on April 5,
2009.
The Rights will be exercisable only if a person or group acquires 15
percent or more of the Company's common stock or announces a tender offer the
consummation of which would result in ownership by a person or group of 15
percent or more of the common stock. Each Right will entitle stockholders to buy
one one-thousandth of a share of a new series of junior participating preferred
stock at an exercise price of $60. If the Company is acquired in a merger or
other business combination transaction after a person has acquired 15 percent or
more of the Company's outstanding common stock, each Right will entitle its
holder to purchase, at the Right's then-current exercise price, a number of the
acquiring company's common shares having a market value of twice such price. In
addition, if a person or group acquires 15 percent or more of the Company's
outstanding common stock, each Right will entitle its holder (other than such
person or members of such group) to purchase, at the Right's then-current
exercise price, a number of the Company's common shares having a market value of
twice such price. Prior to the acquisition by a person or group of beneficial
ownership of 15 percent or more of the Company's common stock, the Rights are
redeemable for one cent per Right at the option of the Company's Board of
Directors.
4. SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards No. 131,
Disclosures About Segments of an Enterprise and Related Information, in 1998
which changes the way the Company reports information about its operating
segments.
The Company's reportable business segments have been identified based on
the differences in products or services provided. Revenues for the exploration
and production segment are derived from the production and sale of natural gas
and crude oil. Revenues for the gathering segment arise from the transportation
and sale of natural gas and crude oil. The gas marketing segment generates
revenue by earning fees through the marketing of Company produced gas volumes
and the purchase and resale of third party produced gas volumes. The Company
evaluates the performance of its operating segments based on operating income.
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<PAGE>
Operations in the gathering and gas marketing industries are in the United
States. The Company operates in the oil and gas exploration and production
industry in the United States, South America and in Yemen beginning in 1998.
Summarized financial information for the Company's reportable segments for the
first three months of 1999 and 1998 is shown in the following table:
<TABLE>
<CAPTION>
Exploration and Production
----------------------------------
Other Gas
U.S. Argentina Foreign Gathering Marketing Corporate Total
---------- ---------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1999 - 1st Quarter
- ------------------------------------
Revenues from external customers ... $38,100 $14,657 $1,185 $1,580 $10,317 $165 $66,004
Intersegment revenues .............. - - - 306 524 - 830
Depreciation, depletion and
amortization expense ......... 23,737 6,958 660 275 - 575 32,205
Operating income (loss) ............ (5,709) 2,650 (4,113) 111 524 (386) (6,923)
Total assets ....................... 545,795 249,868 114,828 7,268 7,158 77,573 1,002,490
Capital investments ................ 5,168 539 12,941 637 - 228 19,513
Long-lived assets .................. 521,257 240,944 108,870 4,712 - 4,054 879,837
1998 - 1st Quarter
- ------------------------------------
Revenues from external customers ... $52,603 $18,733 $1,484 $2,679 $14,255 $240 $89,994
Intersegment revenues .............. - - - 235 654 - 889
Depreciation, depletion and
amortization expense ......... 18,789 6,315 803 558 - 402 26,867
Operating income (loss) ............ 6,818 5,842 75 (131) 654 (163) 13,095
Total assets ....................... 567,431 242,131 51,614 7,855 11,995 42,802 923,828
Capital investments ................ 28,342 13,010 5,576 913 - 879 48,720
Long-lived assets .................. 535,250 234,454 48,034 4,544 - 5,285 827,567
</TABLE>
Intersegment sales are priced in accordance with terms of existing
contracts and current market conditions. Capital investments include expensed
exploratory costs. Corporate general and administrative costs and interest costs
are not allocated to segments.
5. COMMITMENTS
Subsequent to March 31, 1999, the Company entered into a new lease
agreement for its corporate headquarters. The future minimum commitments under
all of the Company's long-term non-cancellable leases for office space,
including this new agreement, for the remaining nine months of 1999 and the
calendar years of 2000 through 2004 are $1.1 million, $1.4 million, $1.3
million, $1.4 million, $1.4 million and $1.5 million, respectively, with $3.7
million remaining in years thereafter.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
RESULTS OF OPERATIONS
The Company's results of operations have been significantly affected by its
success in acquiring oil and gas properties and its ability to maintain or
increase production through its exploitation and exploration activities.
Fluctuations in oil and gas prices have also significantly affected the
Company's results. The following table reflects the Company's oil and gas
production and its average oil and gas sales prices for the periods presented:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
-------- -------
<S> <C> <C>
Production:
Oil (MBbls) -
U.S. (1)........................ 2,105 2,474
Argentina....................... 1,551 1,538
Ecuador......................... 118 -
Bolivia......................... 13 35
Total........................... 3,787 4,047
Gas (MMcf) -
U.S............................. 10,131 10,180
Bolivia (2)..................... 683 1,388
Argentina....................... 70 -
Total........................... 10,884 11,568
Total MBOE............................. 5,601 5,975
Average sales prices:
Oil (per Bbl) -
U.S............................. $ 10.07 $ 12.89
Argentina....................... 9.41 12.18
Ecuador......................... 6.10 -
Bolivia......................... 8.60 8.91
Total........................... 9.67 12.59
Gas (per Mcf) -
U.S. (3)........................ $ 1.62 $ 2.02
Bolivia......................... .51 .84
Argentina....................... .97 -
Total (3)....................... 1.55 1.88
</TABLE>
(1) During the three months ended March 31, 1999, the Company elected to
shut-in approximately 335 MBbls of oil production due to historically low
oil prices. During the three months ended March 31, 1998, the Company's
production was reduced by 113 MBbls of oil due to severe weather in
California.
(2) During the three months ended March 31, 1999, the Company's Bolivian gas
production was significantly curtailed due to decreased demand in the
Argentina market for Bolivian gas.
(3) The Company's overall and U.S. average gas prices were reduced by six cents
and seven cents, respectively, as the result of certain natural gas basis
swaps in place during the first quarter of 1999. No natural gas basis swaps
were in place during the same period of 1998.
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<PAGE>
Average U.S. oil prices received by the Company fluctuate generally with
changes in the West Texas Intermediate ("WTI") posted prices for oil. The
Company's Argentina oil production is sold at WTI spot prices less a specified
differential. The Company experienced a 23 percent decrease in its average oil
price in the first quarter of 1999 compared to the first quarter of 1998. The
Company realized an average oil price for the first quarter of 1999 which was
approximately 93 percent of WTI posted prices compared to a realization of 92
percent of WTI posted prices for the year earlier quarter. The Company's average
realized oil price declined to 74 percent of the NYMEX reference price ("NYMEX")
in the first quarter of 1999 compared to 79 percent of NYMEX in the year
earlier.
Average U.S. gas prices received by the Company fluctuate generally with
changes in spot market prices, which may vary significantly by region. The
Company's Bolivia average gas price is tied to a long-term contract under which
the base price is adjusted for changes in specified fuel oil indexes. During the
majority of the first quarter of 1999, these fuel oil indexes were depressed in
conjunction with the low oil price environment. The Company's average gas price
for the first three months of 1999 was 18 percent lower than 1998's first three
months.
The Company has previously engaged in oil and gas hedging activities and
intends to continue to consider various hedging arrangements to realize
commodity prices which it considers favorable. The Company had no hedging
agreements in place covering 1998 oil or gas production. The Company has various
natural gas basis swaps in place for the last nine months of 1999 covering a
total of 82,000 MMBtu of gas per day plus an additional 3,000 MMBtu per day for
the period of April through October 1999. The natural gas basis swaps were used
to reduce the Company's exposure to increases in the basis differential between
the NYMEX reference price and the Company's industry delivery point indexes
under which the gas is sold. During the first quarter of 1999, the Company's
overall and U.S. average gas prices were reduced by six cents and seven cents,
respectively, as a result of these swaps. In the second quarter of 1999, the
Company entered into contracts hedging 20,000 barrels of oil per day for the
1999 months of May, June and July at an average NYMEX reference price of $18.07
per barrel.
Relatively modest changes in either oil or gas prices significantly impact
the Company's results of operations and cash flow. However, the impact of
changes in the market prices for oil and gas on the Company's average realized
prices may be reduced from time to time based on the level of the Company's
hedging activities. Based on first quarter 1999 oil production, a change in the
average oil price realized by the Company of $1.00 per Bbl would result in a
change in net income and cash flow before income taxes on a quarterly basis of
approximately $2.4 million and $3.7 million, respectively. A 10 cent per Mcf
change in the average price realized by the Company for gas would result in a
change in net income and cash flow before income taxes on a quarterly basis of
approximately $0.6 million and $1.1 million, respectively, based on first
quarter 1999 gas production.
-14-
<PAGE>
PERIOD TO PERIOD COMPARISON
PERIOD ENDED MARCH 31, 1999, COMPARED TO PERIOD ENDED MARCH 31, 1998
The Company reported a net loss of $18.1 million for the quarter ended
March 31, 1999, compared to a restated net loss of $1.6 million for the year-
earlier quarter. The increase in the Company's net loss is primarily due to the
significant decreases in commodity prices which reduced oil and gas revenues and
increased the Company's overall average DD&A rate and an increase in interest
expense as a result of significantly higher outstanding debt quarter to quarter.
The Company reduced its lease operating costs for the 1999 first quarter by
shutting-in a number of properties as a result of the historically low oil
prices. This action was largely responsible for the six percent decrease in oil
production quarter to quarter.
Oil and gas sales decreased $19.1 million (26 percent), to $53.5 million
for the first quarter of 1999 from $72.6 for the first quarter of 1998. A 23
percent decrease in average oil prices, accompanied by a six percent decrease in
oil production, accounted for a decrease of $14.5 million. A 18 percent decrease
in average gas prices, coupled with a six percent decrease in gas production,
accounted for an additional $4.6 million decrease in oil and gas sales for the
1999 first quarter as compared to the year earlier first quarter. The six
percent decrease in oil production is primarily as a result of shutting-in
certain domestic properties as a result of the historically low oil prices. The
six percent decrease in gas production primarily related to the natural
production declines in the Company's Galveston Bay properties and the
curtailment of Bolivian production being delivered to Argentina.
Lease operating expenses, including production taxes, decreased $8.4
million (26 percent), to $23.8 million for the first quarter of 1999 from $32.2
million for the first quarter of 1998. The decrease in lease operating expenses
is due primarily to operating cost reductions resulting from the shutting-in of
certain oil properties as a result of historically low oil prices, the rebidding
of operating services and supplies and the restructuring of certain field
operations. The first quarter of 1998 included lease operating costs of
approximately $1.0 million relating to the storm damage clean up and repairs
required as a result of severe weather in California; no similar charges were
incurred in 1999. As a result of the Company's cost reduction efforts, lease
operating expenses per equivalent barrel produced decreased 16 percent to $4.26
in the first quarter of 1999 from $5.09 ($5.39 including the impact of severe
weather in California) for the same period in 1998.
Exploration costs increased $3.9 million (195 percent), to $5.9 million for
the first three months of 1999 from $2.0 million for same period of 1998. During
the first quarter of 1999, the Company's exploration costs included $4.3 million
for the acquisition of 3-D seismic data primarily in Yemen, $0.8 million for
unsuccessful exploratory drilling, $0.4 million for lease impairments and $0.4
million in other geological and geophysical costs. The Company's 1998 first
quarter exploration costs consisted primarily of $1.7 million in 3-D seismic
acquisition costs and $0.3 million in unsuccessful exploratory drilling and
other geological and geophysical costs.
-15-
<PAGE>
General and administrative expenses increased $0.8 million (11 percent), to
$7.9 million for the first quarter of 1999 from $7.1 million for the first
quarter of 1998, due primarily to the addition of costs associated with the
acquisition of the Company's Ecuadorian subsidiary, Elf Hydrocarbures Equateur
("Elf Ecuador"), from Elf Aquitaine in November 1998 and the establishment of an
office in Yemen in mid-1998 to support the exploration efforts begun there in
late 1997. General and administrative expenses per equivalent barrel produced
increased to $1.42 from $1.19 in the year earlier quarter as a result of the 11
percent increase in costs combined with the six percent decrease in equivalent
barrel production.
Depreciation, depletion and amortization increased $5.3 million (20
percent), to $32.2 million for the first quarter of 1999 from $26.9 million for
the first quarter of 1998, due primarily to the 29 percent increase in the
average amortization rate per equivalent barrel of the Company's oil and gas
properties from $4.34 in the first quarter of 1998 to $5.60 in 1999. This
increase is primarily as a result of the dramatic impact historically low oil
and gas prices at year-end 1998 had on the Company's proved oil and gas reserves
used to calculate its first quarter DD&A. This increase was partially offset by
the six percent decrease in the Company's oil and gas production for the first
quarter of 1999.
Interest expense increased $5.3 million (57 percent), to $14.6 million for
the first quarter of 1999 from $9.3 million for the first quarter of 1998, due
primarily to a 48 percent increase in the Company's total average outstanding
debt as a result of the Company's 1998 total capital spending, including
acquisitions, in excess of 1998's cash flow. The Company's overall average
interest rate was 7.84% in the first quarter of 1999 as compared to 7.83% in the
first quarter of 1998. The Company had $8.8 million and $5.3 million of accrued
interest payable at March 31, 1999, and December 31, 1998, respectively,
included in other payables and accrued liabilities.
CAPITAL EXPENDITURES
As a result of the significant decline in the Company's cash flow from
operations resulting from the recent historically low oil and gas prices, the
Company has elected to significantly reduce its capital spending program for
1999 to approximately $56 million. During the first quarter of 1999, the
Company's domestic oil and gas capital expenditures totaled $5.8 million.
Exploratory activities accounted for $3.0 million of these expenditures with
exploitation activities contributing another $2.8 million. During the first
quarter of 1999, the Company's international oil and gas capital expenditures
totaled $13.5 million, including $8.7 million and $4.0 million in Bolivia and
Yemen, respectively, primarily on exploratory drilling in Bolivia and seismic
activity in Yemen.
The Company committed to perform 17,728 work units related to its
concession rights in the Naranjillos field in Santa Cruz Province, Bolivia
awarded in late 1997. The total work unit commitment was guaranteed by the
Company through an $88.6 million letter of credit; however, the Company
anticipated that it would fulfill this three-year work unit commitment through
approximately $50 to $60 million of various seismic and drilling capital
expenditures. During 1998, the Company spent approximately $7.6 million in the
fulfillment of the work unit commitment through the acquisition of seismic data
and the drilling of one well. Of the $24 million (7,500 work units) budgeted by
the Company to be spent in 1999 related to the fulfillment of its Naranjillos
field commitment, approximately $7.3 million was spent during the first quarter
primarily on exploratory drilling activities. Through March 1999, the Company
had completed 3,748 work units of the 17,728 work unit commitment.
-16-
<PAGE>
The Company is also committed to spend approximately $11 million in the
Republic of Yemen over a two and one-half year period which began in July 1998.
The expenditures will include the acquisition and interpretation of 150 square
kilometers of seismic and the drilling of three exploration wells. At the end of
the first two and one-half years, the Company has the option to extend the work
program for a second two and one-half year period with similar work and capital
commitments required. During 1998, approximately $0.6 million of the $11 million
commitment was spent. Of the approximately $5 million budgeted to be spent in
1999 for the acquisition of 3-D seismic data in Yemen, the Company spent
approximately $4 million in the first quarter of 1999.
Except for the commitments discussed above, the timing of most of the
Company's capital expenditures is discretionary with no material long-term
capital expenditure commitments. Consequently, the Company has a significant
degree of flexibility to adjust the level of such expenditures as circumstances
warrant. The Company uses internally generated cash flow, coupled with advances
under its revolving credit facility, to fund capital expenditures other than
significant acquisitions. Because the timing of most of the Company's capital
expenditures is discretionary, should oil and gas prices sustain the
improvements seen in late March and in April 1999, its 1999 capital expenditure
program may be adjusted upward. The Company does not have a specific acquisition
budget since the timing and size of acquisitions are difficult to forecast. The
Company is actively pursuing additional acquisitions of oil and gas properties.
In addition to internally generated cash flow and advances under its revolving
credit facility, the Company may seek additional sources of capital to fund any
future significant acquisitions (see "--Liquidity"), however, no assurance can
be given that sufficient funds will be available to fund the Company's desired
acquisitions.
LIQUIDITY
Internally generated cash flow and the borrowing capacity under its
revolving credit facility are the Company's major sources of liquidity. In
addition, the Company may use other sources of capital, including the issuance
of additional debt securities or equity securities, to fund any major
acquisitions it might secure in the future and to maintain its financial
flexibility. The Company funds its capital expenditures (excluding acquisitions)
and debt service requirements primarily through internally generated cash flows
from operations. Any excess cash flow is used to reduce outstanding advances
under the revolving credit facility.
In the past, the Company has accessed the public markets to finance
significant acquisitions and provide liquidity for its future activities. Prior
to 1999, the Company completed four public equity offerings, as well as two
public debt offerings, which provided the Company with aggregate net proceeds of
approximately $415 million.
On January 26, 1999, the Company issued $150 million of its 9 3/4% Senior
Subordinated Notes Due 2009 (the "9 3/4% Notes"). The 9 3/4% Notes are
redeemable at the option of the Company, in whole or in part, at any time on or
after February 1, 2004. In addition, prior to February 1, 2002, the Company may
redeem up to 33 1/3% of the 9 3/4% Notes with the proceeds of certain
underwritten public offerings of the Company's common stock. The 9 3/4% Notes
mature on June 30, 2009, with interest payable semiannually on June 30 and
December 30 of each year. The net proceeds to the Company from the sale of the 9
3/4% Notes (approximately $146 million) were used to repay a portion of the
existing indebtedness under the Company's revolving credit facility.
The Company's unsecured revolving credit facility under the Amended and
Restated Credit Agreement dated October 21, 1998, as amended (the "Credit
Agreement"), establishes a borrowing base (currently $482.5 million) determined
by the banks' evaluation of the Company's oil and gas reserves. As a result of
the banks' semi-annual borrowing base review, the Company's Agent bank has
recommended the remaining lenders approve a new borrowing base of $400 million
to be effective May 14, 1999; however, no assurance can be given that the banks'
will approve this new borrowing base.
-17-
<PAGE>
Outstanding advances under the Credit Agreement bear interest payable
quarterly at a floating rate based on Bank of Montreal's alternate base rate (as
defined) or, at the Company's option, at a fixed rate for up to six months based
on the eurodollar market rate ("LIBOR"). The Company's interest rate increments
above the alternate base rate and LIBOR vary based on the level of outstanding
senior debt to the borrowing base. As of May 7, 1999, the Company had elected a
fixed rate based on LIBOR for a substantial portion of its outstanding advances,
which resulted in an average interest rate of approximately 6.0 percent per
annum. In addition, the Company must pay a commitment fee ranging from 0.25 to
0.375 percent per annum on the unused portion of the banks' commitment.
On a semiannual basis, the Company's borrowing base is redetermined by the
banks based upon their review of the Company's oil and gas reserves. If the sum
of outstanding senior debt exceeds the borrowing base, as redetermined, the
Company must repay such excess. Any principal advances outstanding under the
Credit Agreement at September 11, 2001, will be payable in eight equal
consecutive quarterly installments commencing December 1, 2001, with maturity at
September 11, 2003.
The unused portion of the Credit Agreement was approximately $183 million
at May 7, 1999. If the $400 million borrowing base is approved, the Company
anticipates that the unused portion of its revolving credit facility would be
approximately $100 million. The unused portion of the Credit Agreement and the
Company's internally generated cash flow provide liquidity which may be used to
finance future capital expenditures, including acquisitions. As additional
acquisitions are made and properties are added to the borrowing base, the banks'
determination of the borrowing base and their commitments may be increased.
The Company's internally generated cash flow, results of operations and
financing for its operations are dependent on oil and gas prices. For the first
quarter of 1999, approximately 68 percent of the Company's production was oil.
Realized oil prices for the quarter decreased by 23 percent as compared to the
year-ago quarter. As a result, the Company's 1999 first quarter earnings and
cash flows have been materially reduced compared to 1998's first quarter.
Although the Company has seen improvements in its commodity prices in recent
weeks, should these improvements not be sustained, its earnings and cash flow
from operations will be adversely impacted. The Company believes that its cash
flows and unused availability under the Credit Agreement are sufficient to fund
its planned capital expenditures for the foreseeable future. However, lower oil
and gas prices may cause the Company to not be in compliance with maintenance
covenants under its Credit Agreement and may negatively affect its credit
statistics and coverage ratios and thereby affect its liquidity.
INFLATION
In recent years, U.S. inflation has not had a significant impact on the
Company's operations or financial condition.
INCOME TAXES
The Company incurred a current provision for income taxes of approximately
$28,000 for the first quarter of 1999 and realized a current benefit of
approximately $442,000 for the same period of 1998. The total provision for U.S.
income taxes is based on the Federal corporate statutory income tax rate plus an
estimated average rate for state income taxes. Earnings of the Company's foreign
subsidiaries are subject to foreign income taxes. No U.S. deferred tax liability
will be recognized related to the unremitted earnings of these foreign
subsidiaries as it is the Company's intention, generally, to reinvest such
earnings permanently.
-18-
<PAGE>
As of December 31, 1998, the Company had estimated net operating loss
("NOL") carryforwards of $44.9 million for Argentina income tax reporting
purposes which can be used to offset future taxable income in Argentina. The
carryforward amount includes certain Argentina NOL carryforwards ($17.3 million)
which were acquired and are recorded at cost ($1.0 million), which is less than
the calculated value for the tax effect of these carryforwards ($6.0 million)
under the provisions of Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes ("SFAS 109"). These unrecorded NOL carryforwards
($14.4 million) will reduce the Company's foreign income tax provision for
financial purposes in future years by approximately $5.0 million if their
benefit is realized.
As a result of the significant decline in oil prices in 1998, primarily in
the fourth quarter, the Company believed that $16.2 million of Argentina NOL
carryforwards would expire in 1999 unutilized and therefore recorded a valuation
allowance against its Argentina deferred tax asset of approximately $5.7 million
in the fourth quarter of 1998 related to these carryforwards. Product prices
recovered substantially in March and April subsequent to the March OPEC meeting.
Should prices continue to improve during the remainder of 1999, it could be
possible for the Company to utilize a portion of or all of the NOL's expiring in
1999 and thereby require a reversal of the valuation allowance established in
1998. The impact of this reversal would be to reduce the Company's deferred tax
provision in the quarter in which any reversal is made. However, no such
reversal was made during the first quarter of 1999 due to current projections of
taxable income and NOL.
The Company has a U.S. Federal alternative minimum tax ("AMT") credit
carryforward of approximately $4.8 million which does not expire and is
available to offset U.S. Federal regular income taxes in future years, but only
to the extent that U.S. Federal regular income taxes exceed the AMT in such
years. The Company incurred a tax NOL for U.S. purposes in 1998 and will be able
to carry back the NOL two years and/or forward 20 years to receive a refund of
prior income taxes paid or to offset future income taxes to be paid.
YEAR 2000 COMPLIANCE
Readers are cautioned that the forward-looking statements contained in the
following Year 2000 discussion should be read in conjunction with the Company's
disclosures under the heading "Forward-Looking Statements." The disclosures also
constitute a "Year 2000 Readiness Disclosure" and "Year 2000 Statement" within
the meaning of the Year 2000 Information and Readiness Disclosure Act of 1998.
The Year 2000 Information and Readiness Disclosure Act of 1998 does not insulate
the Company from liability under the federal securities laws with respect to
disclosures relating to Year 2000 information.
-19-
<PAGE>
Statement of Readiness. The Company has undertaken various initiatives to
ensure that its hardware, software and equipment will function properly with
respect to dates before and after January 1, 2000. For this purpose, the phrase
"hardware, software and equipment" includes systems that are commonly thought of
as Information Technology systems ("IT"), as well as those Non-Information
Technology systems ("Non-IT") and equipment which include embedded technology.
IT systems include computer hardware and software and other related systems.
Non-IT systems include certain oil and gas production and field equipment,
gathering systems, office equipment, telephone systems, security systems and
other miscellaneous systems. The Non-IT systems present the greatest compliance
challenge since identification of embedded technology is difficult and because
the Company is, to a great extent, reliant on third parties for Non-IT
compliance.
The Company has formed a Year 2000 ("Y2K") Project team, which is chaired
by its Manager of Information Services. The team includes corporate staff and
representatives from the Company's business units. The phases of identification,
assessment, remediation and testing make up the Y2K directive.
The following is the Company's targeted Non-IT and IT compliance time line:
Completion
Date
----------------
NON-IT SYSTEMS AND EQUIPMENT:
Identification Phase............... Completed
Compliance......................... August 1999
IT SYSTEMS AND EQUIPMENT:
Identification Phase............... Completed
Compliance......................... August 1999
The identification phase reported minimal non-compliance within the
domestic Non-IT technology and devices. Of the 1,800 components inventoried,
only 157 devices were non-compliant. With the strategy and planning phase for
domestic equipment upgrades or replacement complete, the Company has begun
renovation and testing, with priority placed on plants and units housing the
greater number of non-compliant equipment. Of the 179 components inventoried in
its international operations, 54 devices were categorized as non-compliant. The
strategy and planning phase has begun to renovate and test the equipment.
The Company has inventoried its IT equipment and systems and is currently
undertaking the appropriate corrective action. Critical domestic accounting
equipment and software were replaced or upgraded in mid-1998. The international
accounting systems are in various stages of completion with all systems
scheduled to be compliant by August 1999.
-20-
<PAGE>
Included in the Company's Y2K Project are procedures to determine the
readiness of its business partners, such as service companies, technology
providers, transportation and communication providers, pipeline systems,
materials suppliers and oil and gas product purchasers. By use of
questionnaires, 14,000 notices were distributed which will allow the Company to
determine the extent to which these business partners are addressing their Y2K
issues. Each returned document is examined for a response that may be
detrimental to the Company's operations. To date, approximately 5,600 of the
Company's business partners have responded and those business partners who do
not respond and who are considered key businesses in the support of the
Company's operations will be sent a second request, followed by direct
correspondence, to determine their readiness. Any material adverse responses
will be reviewed to determine an alternate business partner selection or the
need for alternative actions to mitigate the impact on the Company.
The Cost to Address Y2K Issues. The Company believes that the cost of the
Y2K Project will not exceed $4.0 million, excluding costs of Company employees
working on the Y2K Project. Costs incurred for the purchase of new software and
hardware are being capitalized and all other costs are being expensed as
incurred. To date, the Company has incurred Y2K Project costs of approximately
$1.0 million. The expenditures relate primarily to the upgrading and replacement
of existing software and hardware and the use of contract service consultants.
Y2K Worst-Case Scenario. The Company's initial results from its assessment
phase of the Y2K Project is that its internal systems have fewer Y2K compliance
problems than initially anticipated. As the Company plans to have all internal
systems within its control compliant and tested before the year 2000, it
believes its likely worst-case scenario is the possibility of operational
interruptions due to non-compliance by third parties. This non-compliance could
cause operational problems such as temporary disruptions of certain production,
delays in marketing and transportation of production and delays of payments for
oil and gas sales. This risk should be minimized by the Company's efforts to
communicate and evaluate third party compliance.
The Company is currently developing contingency plans in the event that
problems arise due to third party non-compliance or any failures of the
Company's systems. These plans should be completed by the third quarter of 1999
and will include, but are not limited to, backup and recovery procedures,
installations of new systems, replacement of current services with temporary
manual processes, finding non-technological alternatives or sources of
information, and finding alternative suppliers, service companies and
purchasers.
The Risks of Y2K Issues. The Company presently believes that the Y2K issue
will not pose significant operational problems. However, if all significant Y2K
issues are not properly identified, or assessment, remediation and testing are
not effected timely, the Y2K issues may materially and adversely impact the
Company's results of operations, liquidity and financial condition or materially
and adversely affect its relationships with its business partners. Additionally,
the lack of Y2K compliance by other entities may have a material and adverse
impact on the Company's operations or financial condition.
Forward-Looking Statements
This Form 10-Q includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. All statements in this Form 10-Q, other than
statements of historical facts, that address activities, events or developments
that the Company expects, believes or anticipates will or may occur in the
future, including future capital expenditures (including the amount and nature
thereof), the drilling of wells, reserve estimates, future production of oil and
gas, future cash flows, future reserve activity and other such matters are
forward-looking statements. Although the Company believes the expectations
expressed in such forward-looking statements are based on reasonable assumptions
within the bounds of its knowledge of its business, such statement are not
guarantees of future performance and actual results or developments may differ
materially from those in the forward-looking statements.
Factors that could cause actual results to differ materially from those in
forward-looking statements include: oil and gas prices; exploitation and
exploration successes; continued availability of capital and financing; general
economic, market or business conditions; acquisition opportunities (or lack
thereof); changes in laws or regulations; risk factors listed from time to time
in the Company's reports filed with the Securities and Exchange Commission; and
other factors. The Company assumes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
-21-
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's operations are exposed to market risks primarily as a result
of changes in commodity prices, interest rates and foreign currency exchange
rates. The Company does not use derivative financial instruments for speculative
or trading purposes.
Commodity Price Risk
The Company produces, purchases and sells crude oil, natural gas,
condensate, natural gas liquids and sulfur. As a result, the Company's financial
results can be significantly impacted as these commodity prices fluctuate widely
in response to changing market forces. The Company has previously engaged in oil
and gas hedging activities and intends to continue to consider various hedging
arrangements to realize commodity prices which it considers favorable. The
Company has various natural gas basis swaps in place for the last nine months of
1999 covering a total of 82,000 MMBtu of gas per day plus an additional 3,000
MMBtu per day for the period of April through October 1999. These natural gas
basis swaps were used to reduce the Company's exposure to increases in the basis
differential between the NYMEX reference price and the Company's industry
delivery point indexes under which the gas is sold.
In the second quarter of 1999, the Company entered into contracts hedging
20,000 barrels of oil per day for the 1999 months of May, June and July at an
average NYMEX reference price of $18.07 per barrel.
Interest Rate Risk
The Company's interest rate risk exposure results primarily from short-term
rates, mainly LIBOR based borrowings from its commercial banks. To reduce the
impact of fluctuations in interest rates the Company maintains a portion of its
total debt portfolio in fixed rate debt. At March 31, 1999, the amount of the
Company's fixed rate debt was approximately 58 percent of total debt. In the
past, the Company has not entered into financial instruments such as interest
rate swaps or interest rate lock agreements. However, it may consider these
instruments to manage the impact of changes in interest rates based on
management's assessment of future interest rates, volatility of the yield curve
and the Company's ability to access the capital markets in a timely manner.
The following table provides information about the Company's long-term debt
cash flows and weighted average interest rates by expected maturity dates:
<TABLE>
<CAPTION>
FAIR VALUE
THERE- AT
1999 2000 2001 2002 2003 AFTER TOTAL 3/31/99
-------- -------- ---------- ---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LONG-TERM DEBT:
Fixed rate (in thousands).... - - - - - $399,035 $399,035 $400,000
Average interest rate........ - - - - - 8.9% 8.9% -
Variable rate (in thousands). - - $35,700 $142,800 $107,100 - $285,600 $285,600
Average interest rate........ - - (a) (a) (a) - (a) (a)
</TABLE>
(a) LIBOR plus an increment, based on the level of outstanding senior debt to
the borrowing base, up to a maximum increment of 1.5 percent. The increment
above LIBOR at March 31, 1999, was 1 percent.
-22-
<PAGE>
Foreign Currency and Operations Risk
International investments represent, and are expected to continue to
represent, a significant portion of the Company's total assets. The Company has
international operations in Argentina, Bolivia, Ecuador and Yemen. For the first
quarter of 1999, the Company's operations in Argentina accounted for
approximately 22 percent of the Company's revenues and 25 percent of its total
assets. The Company's operations in Argentina produced a net operating profit of
approximately $2,650,000 compared to an overall Company net loss of $6,923,000
for the first three months of 1999. For the first quarter of 1998, the Company's
operations in Argentina accounted for approximately 21 percent of the Company's
revenues, 45 percent of the Company's operating income and 26 percent of its
total assets. During such periods, the Company's operations in Argentina
represented its only foreign operations accounting for more than 10 percent of
its revenues, operating income or total assets. The Company continues to
identify and evaluate international opportunities but currently has no binding
agreements or commitments to make any material international investment. As a
result of such significant foreign operations, the Company's financial results
could be affected by factors such as changes in foreign currency exchange rates,
weak economic conditions or changes in the political climate in these foreign
countries.
The Company believes Argentina offers a relatively stable political
environment and does not anticipate any significant change in the near future.
The current democratic form of government has been in place since 1983 and,
since 1989, has pursued a steady process of privatization, deregulation and
economic stabilization and reforms involving the reduction of inflation and
public spending. Argentina's 12-month trailing inflation rate measure by the
Argentine Consumer Price Index declined from 200.7 percent as of June 1991 to a
negative 6.27 percent (-6.27%) as of March 1999.
All of the Company's Argentine revenues are U.S. dollar based, while a
large portion of its costs are denominated in Argentine pesos. The Argentina
Central Bank is obligated by law to sell dollars at a rate of one Argentine peso
to one U.S. dollar and has sought to prevent appreciation of the peso by buying
dollars at rates of not less than 0.998 peso to one U.S. dollar. As a result,
the Company believes that should any devaluation of the Argentine peso occur,
its revenues would be unaffected and its operating costs would not be
significantly increased. At the present time, there are no foreign exchange
controls preventing or restricting the conversion of Argentine pesos into
dollars.
Since the mid-1980's, Bolivia has been undergoing major economic reform,
including the establishment of a free-market economy and the encouragement of
foreign private investment. Economic activities that had been reserved for
government corporations were opened to foreign and domestic private investments.
Barriers to international trade have been reduced and tariffs lowered. A new
investment law and revised codes for mining and the petroleum industry, intended
to attract foreign investment, have been introduced.
On February 1, 1987, a new currency, the Boliviano ("Bs"), replaced the
peso at the rate of one million pesos to one Boliviano. The exchange rate is set
daily by the Government's exchange house, the Bolsin, which is under the
supervision of the Bolivian Central Bank. Foreign exchange transactions are not
subject to any controls. The US$:Bs exchange rate at March 31, 1999, was US$1:Bs
5.73. The Company believes that any currency risk associated with its Bolivian
operations would not have a material impact on the Company's financial position
or results of operations.
-23-
<PAGE>
Prior to the Company's acquisition of Elf Ecuador in November 1998, its
previous operations in Ecuador were through a farm-in exploration joint venture
with two other companies in Block 19. Since 1992, the Government has generally
sought to reduce its participation in the economy and has implemented certain
macroeconomic reforms which were designed to reduce inflation. The Company
believes the current Government has a favorable attitude toward foreign
investment and has strong international relationships with the U.S.
The economy of Ecuador has been uneven in recent years and has recently
reached a crisis level, due in large part to decreases in oil prices and damage
from El Nino floods. Due to the current economic crisis, the sucre (Ecuador's
monetary unit) has lost approximately 48 percent of its value so far this year
and inflation has reached nearly 55 percent. President Jamil Mahaud announced
March 11, 1999, the freezing of Ecuadorian bank accounts for one year. This
restriction in liquidity has resulted in the improvement in the exchange rate
between sucres and U.S. dollars from 12,675:1 on March 5, 1999, to 9,080:1 on
April 22, 1999. Earlier this year the income tax was replaced by a one percent
tax on all financial transactions. The purpose of the reform is to reduce tax
evasion and increase tax collection by the Government, without increasing the
tax burden on taxpayers. On April 22, 1999, Congress reinstated the income tax,
but kept the one percent tax on transactions as a alternative minimum tax for
1999. Although the Company believes any currency risk associated with its
operations in Ecuador would not have a material impact on its financial position
or results of operations, it has policies in place that will reduce its exposure
to currency risk in Ecuador. These policies include the maintenance of all
excess funds in a U.S. dollar account located in the U.S., the payment of
operating expenses in local currency and the conversion of local currency
denominated receipts into U.S. dollars.
-24-
<PAGE>
PART II
OTHER INFORMATION
-25-
<PAGE>
Item 1. Legal Proceedings
-----------------
For information regarding legal proceedings, see the Company's Form
10-K for the year ended December 31, 1998.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
not applicable
Item 3. Defaults Upon Senior Securities
-------------------------------
not applicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
not applicable
Item 5. Other Information
-----------------
not applicable
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits
The following documents are included as exhibits to this Form 10-
Q. Those exhibits below incorporated by reference herein are
indicated as such by the information supplied in the
parenthetical thereafter. If no parenthetical appears after an
exhibit, such exhibit is filed herewith.
3. Certificate of Designation of Series A Junior Participating
Preferred Stock of the Company (filed as Exhibit 3.3 to the
Company's Registration Statement on Form S-4 (No. 333-
77619)).
4.1. Indenture dated as of January 26, 1999, between The Chase
Manhattan Bank, as Trustee, and the Company (filed as
Exhibit 4.4 to the Company's report on Form 10-K for the
year ended December 31, 1998).
4.2 Rights Agreement, dated March 16, 1999, between the Company
and ChaseMellon Shareholder Services, L.L.C., as Rights
Agent (filed as an Exhibit to the Company's Registration
Statement on Form 8-A, dated March 22, 1999).
27. Financial Data Schedule.
b) Reports on Form 8-K
Form 8-K was filed February 26, 1999, to report under Item 5
the Company's financial and operating results for the 1998 fiscal
year and the 1998 fourth quarter.
Form 8-K was filed March 22, 1999, to report under Item 5 the
Company's adoption of a Stockholder Rights Plan.
********************************************************************************
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<PAGE>
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VINTAGE PETROLEUM, INC.
-----------------------
(Registrant)
DATE: May 10, 1999 /s/ Michael F. Meimerstorf
------------ --------------------------
Michael F. Meimerstorf
Vice President and Controller
(Principal Accounting Officer)
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<PAGE>
EXHIBIT INDEX
The following documents are included as exhibits to this Form 10-Q. Those
exhibits below incorporated by reference herein are indicated as such by the
information supplied in the parenthetical thereafter. If no parenthetical
appears after an exhibit, such exhibit is filed herewith.
Exhibit
Number Description
- ------ -----------
3. Certificate of Designation of Series A Junior
Participating Preferred Stock to the Company (filed as
Exhibit 3.3 of the Company's Registration Statement on
Form S-4 (No. 333-77619)).
4.1 Indenture dated as of January 26, 1999, between The
Chase Manhattan Bank, as Trustee, and the Company
(filed as Exhibit 4.4 to the Company's report on Form
10-K for the year ended December 31, 1998).
4.2 Rights Agreement, dated March 16, 1999, between the
Company and ChaseMellon Shareholder Services, L.L.C.,
as Rights Agent (filed as an Exhibit to the Company's
Registration Statement on Form 8-A, dated March 22,
1999).
27. Financial Data Schedule.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31,
1999 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 7,221
<SECURITIES> 0
<RECEIVABLES> 49,134
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 77,885
<PP&E> 1,413,232
<DEPRECIATION> 533,395
<TOTAL-ASSETS> 1,002,490
<CURRENT-LIABILITIES> 61,541
<BONDS> 684,635
0
0
<COMMON> 266
<OTHER-SE> 255,571
<TOTAL-LIABILITY-AND-EQUITY> 1,002,490
<SALES> 65,392
<TOTAL-REVENUES> 66,004
<CGS> 40,722
<TOTAL-COSTS> 40,722
<OTHER-EXPENSES> 40,138
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,560
<INCOME-PRETAX> (29,416)
<INCOME-TAX> (11,295)
<INCOME-CONTINUING> (18,121)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,121)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> (.34)
</TABLE>
