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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A1
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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
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VINTAGE PETROLEUM, INC.
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(Exact name of registrant as specified in charter)
Delaware 73-1182669
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4200 One Williams Center Tulsa, Oklahoma 74172
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(Address of principal executive offices) (Zip Code)
(918) 592-0101
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(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
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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 November 10, 1998
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Common Stock, $.005 Par Value 53,103,066
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PART I
FINANCIAL INFORMATION
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
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OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Change in Accounting Method
Effective January 1, 1998, the Company elected to convert from the full
cost method to the successful efforts method of accounting for its investments
in oil and gas properties. The Company believes that the successful efforts
method of accounting is preferable, as it more accurately presents the results
of the Company's exploration and development activities, minimizes asset write-
offs caused by temporary downward oil and gas price movements and reflects an
impairment in the carrying value of its oil and gas properties only when there
has been a permanent decline in their fair value. Accordingly, the December 31,
1997, consolidated balance sheet, the consolidated statements of income for the
three months and nine months ended September 30, 1997, and the consolidated
statement of cash flows for the nine months ended September 30, 1997, included
in this Form 10-Q have been restated to conform with successful efforts
accounting. (See the Company's Form 8-K dated August 18, 1998, for the restated
financial statements and notes thereto for the years ended December 31, 1997,
1996 and 1995, and selected financial data for the three months ended March 31,
1998.) The effect, net of income taxes, was to reduce December 31, 1997,
retained earnings by $46.0 million. For the statements of income for the three
months and nine months ended September 30, 1997, the effect of the accounting
change was to decrease net income by $1.7 million ($.03 per diluted share) and
$8.2 million ($.15 per diluted share), respectively.
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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 prices for the periods presented:
Three Months Ended Nine Months Ended
September 30, September 30,
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1998 1997 1998 1997
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Production:
Oil (MBbls) -
U.S. (1)........... 2,500 2,560 7,509 7,090
Argentina.......... 1,552 1,430 4,637 4,157
Bolivia............ 30 39 99 98
Total.............. 4,082 4,029 12,245 11,345
Gas (MMcf) -
U.S. (1)........... 10,386 10,020 31,530 26,202
Bolivia............ 1,372 1,711 4,036 4,554
Total.............. 11,758 11,731 35,566 30,756
Total MBOE (1)......... 6,042 5,984 18,172 16,471
Average prices:
Oil (per Bbl) -
U.S................ $ 11.08 $ 16.10 $ 11.64 $ 17.47
Argentina.......... 10.43 16.29 11.18 17.11
Bolivia............ 10.24 13.81 11.49 16.18
Total.............. 10.83 16.15 11.46 17.33
Gas (per Mcf) -
U.S................ $ 1.91 $ 2.21 $ 2.01 $ 2.16
Bolivia............ .73 1.02 .81 1.12
Total.............. 1.77 2.03 1.87 2.01
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(1) First nine months of 1998 production was reduced by approximately 167 MBbls
of oil and 877 MMcf of gas, or 313 MBOE, due to severe weather conditions
in California and the Gulf of Mexico. Third quarter 1998 production was
reduced by approximately 8 MBbls of oil and 391 MMcf of gas, or 73 MBOE,
due to severe weather conditions in California and the Gulf of Mexico.
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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 34 percent decrease in its average oil
price in the first nine months of 1998 compared to the first nine months of
1997. During the first nine months of 1997, the impact of Argentina oil hedges
reduced the Company's overall average oil price 23 cents to $17.33 per Bbl and
its average Argentina oil price was reduced 64 cents to $17.11 per Bbl. The
Company was not a party to any oil hedges in the first nine months of 1998. The
Company realized an average oil price for the first nine months of 1998 which
was approximately 92 percent of WTI posted prices compared to a realization of
93 percent (before the impact of oil hedges) of WTI posted prices for the year
earlier nine months. However, due to an increase in the differential between
WTI posted prices and the NYMEX reference price ("NYMEX"), the Company's average
realized prices (before hedges) declined to 77 percent of NYMEX in the first
nine months of 1998 compared to 84 percent of NYMEX in the first nine months of
1997.
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
1998, these fuel oil indexes have decreased in conjunction with the current low
oil price environment. The Company's average gas price for the first nine
months of 1998 was seven percent lower than 1997's first nine 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. Currently, there are no oil or
gas hedges in place related to 1998 production. In September 1998, the Company
entered into ten natural gas basis swaps for the calender year 1999 covering a
total of 82,000 MMBtu of gas per day. These natural gas basis swaps were used to
hedge the basis differential between the NYMEX reference price and industry
delivery point indexes under which the gas is sold..
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 third quarter 1998 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 $2.5 million and $4.0 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 $0.7 million and $1.1 million, respectively, based on third
quarter 1998 gas production.
Period to Period Comparison
Three months ended September 30, 1998, Compared to three months ended September
30, 1997
The Company reported a net loss of $9.9 million for the quarter ended
September 30, 1998, compared to net income of $13.5 million for the same period
in 1997. An increase in the Company's oil and gas production of one percent on
an equivalent barrel basis was more than offset by a 33
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percent decrease in average oil prices and a 13 percent decrease in average gas
prices.
Oil and gas sales decreased $23.8 million (27 percent), to $65.1 million
for the third quarter of 1998 from $88.9 for the third quarter of 1997. A 33
percent decrease in average oil prices, partially offset by a one percent
increase in oil production, accounted for a decrease of $20.8 million. A 13
percent decrease in average gas prices accounted for an additional decrease of
$3.0 million.
Oil and gas gathering net margins decreased $0.6 million (80 percent), to
$0.1 million for the third quarter of 1998 from $0.7 million for the third
quarter of 1997, due primarily to the sale by the Company of its two largest
gathering systems in December 1997 and June 1998.
Lease operating expenses, including production taxes, decreased $1.0
million (3 percent), to $29.5 million for the third quarter of 1998 from $30.5
million for the third quarter of 1997. The decrease in lease operating expenses
is due primarily to the Company's continued efforts to reduce operating costs.
Third quarter 1998 costs included estimated costs of $225,000 related to storm
damage repair and cleanup as a result of the severe weather in the Gulf of
Mexico. Lease operating expenses per equivalent barrel produced decreased to
$4.88 ($4.84 before the effects of the severe weather in the Gulf of Mexico) in
the third quarter of 1998 from $5.09 for the same period in 1997.
Exploration costs increased $4.2 million (173 percent), to $6.6 million for
the third quarter of 1998 from $2.4 million for the third quarter of 1997.
During the third quarter of 1998, the Company's exploration costs included $2.8
million for the acquisition of 3-D seismic data primarily in the U.S. Gulf Coast
area and Bolivia, $2.2 million for unsuccessful exploratory drilling, $1.2
million for lease expirations and $0.4 million in other geological and
geophysical costs. The Company's third quarter 1997 exploration costs consisted
primarily of $1.5 million in 3-D seismic acquisition costs in the U.S. and South
America and $0.9 million related to unsuccessful exploratory drilling.
General and administrative expenses increased $1.3 million (20 percent), to
$7.8 million for the third quarter of 1998 from $6.5 million for the third
quarter of 1997. General and administrative expenses increased primarily due to
the Company's increased emphasis on exploration activities, and additional costs
associated with international acquisition and business development activities.
Depreciation, depletion and amortization increased $1.7 million (7
percent), to $26.8 million for the third quarter of 1998 from $25.1 million for
the third quarter of 1997. The Company's average DD&A rate per equivalent barrel
produced for the third quarter of 1998 was $4.23 compared to $4.07 in the year
earlier period.
Interest expense increased $2.0 million (21 percent), to $11.5 million for
the third quarter of 1998 from $9.5 million for the third quarter of 1997, due
primarily to a 21 percent increase in the Company's total average outstanding
debt and costs of $0.5 million related to the restructuring of the Company's
unsecured revolving credit facility. The increase in interest expense was
partially offset by a decrease in the Company's overall average interest rate
from 7.99% in the third quarter of 1997 to 7.74% in the third quarter of 1998.
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Nine months ended September 30, 1998, Compared to nine months ended September
30, 1997
The Company reported a net loss of $21.0 million for the nine months ended
September 30, 1998, compared to net income of $42.3 million for the same period
in 1997. An increase in the Company's oil and gas production of 10 percent on
an equivalent barrel basis was more than offset by a 34 percent decrease in
average oil prices and a seven percent decrease in average gas prices. The
production increases primarily relate to the acquisition of certain oil and gas
properties from Burlington Resources Inc. (the "Burlington Properties") in April
1997, the exploitation activities in Argentina and the exploration activities in
the Galveston Bay area in the Gulf of Mexico. The production increases were
reduced by the impact of the severe weather in California during the first
quarter of 1998 and the Gulf of Mexico in the third quarter of 1998. The
resulting mudslides and flooding in California and the presence of various
hurricanes in the Gulf of Mexico forced the Company to temporarily shut-in some
of its oil and gas properties for portions of the first three quarters lowering
production for the first nine months of 1998 by approximately 167,000 barrels of
oil and 877,000 Mcf of gas.
Oil and gas sales decreased $51.2 million (20 percent), to $207.1 million
for the first nine months of 1998 from $258.3 million for the first nine months
of 1997. A 34 percent decrease in average oil prices, partially offset by an
eight percent increase in oil production, accounted for a decrease of $56.2
million. A 16 percent increase in gas production, partially offset by a seven
percent decrease in average gas prices, reduced by $5.0 million the negative
impact of the decline in average oil prices.
Oil and gas gathering net margins decreased $1.2 million (56 percent), to
$1.0 million for the first nine months of 1998 from $2.2 million for the first
nine months of 1997, due primarily to the sale by the Company of its two largest
gathering systems in December 1997 and June 1998.
Lease operating expenses, including production taxes, increased $7.9
million (9 percent), to $91.7 million for the first nine months of 1998 from
$83.8 million for the first nine months of 1997. The increase in lease operating
expenses is in line with the 10 percent increase in production and is due
primarily to operating costs associated with the Burlington Properties and
estimated costs of $2.2 million for the first nine months of 1998 related to
storm damage repair and cleanup as a result of the severe weather in California
and the Gulf of Mexico. Lease operating expenses per equivalent barrel produced
decreased to $5.05 ($4.95 before the effects of the severe weather in California
and the Gulf of Mexico) in the first nine months of 1998 from $5.09 for the same
period in 1997.
Exploration costs increased $10.6 million (128 percent), to $18.9 million
for the first nine months of 1998 from $8.3 million for the comparable period in
1997. During the first nine months of 1998, the Company's exploration costs
included $12.8 million for the acquisition of 3-D seismic data primarily in the
U.S. Gulf Coast area and Bolivia, $2.7 million for unsuccessful exploratory
drilling, $1.9 million for lease expirations and $1.5 million in other
geological and geophysical costs. The Company's first nine months 1997
exploration costs consisted primarily of $5.3 million in 3-D seismic acquisition
costs, $1.5 million related to the abandonment of a non-commercial discovery in
Ecuador, and $1.5 million in other unsuccessful exploratory drilling costs.
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General and administrative expenses increased $4.2 million (21 percent), to
$23.9 million for the first nine months of 1998 from $19.7 million for the first
nine months of 1997, due primarily to the addition of personnel as a result of
the acquisition of the Burlington Properties and the Company's increased
emphasis on exploration activities, and additional costs associated with
international acquisition and business development activities and unsuccessful
acquisition activities.
Depreciation, depletion and amortization increased $9.5 million (13
percent), to $80.3 million for the first nine months of 1998 from $70.8 million
for the first nine months of 1997, due primarily to the 10 percent increase in
production on an equivalent barrel basis. The Company's average DD&A rate per
equivalent barrel produced for the first nine months of 1998 was $4.25 compared
to $4.18 for the year earlier period.
Interest expense increased $3.3 million (12 percent), to $30.8 million for
the first nine months of 1998 from $27.5 million for the first nine months of
1997, due primarily to a 17 percent increase in the Company's total average
outstanding debt as a result of the acquisition of the Burlington Properties in
April 1997 and increased capital spending in the Company's exploitation and
exploration programs. The increase in interest expense was partially offset by
a decrease in the Company's overall average interest rate from 8.04% in the
first nine months of 1997 to 7.80% in the first nine months of 1998.
Capital Expenditures
During the first nine months of 1998, the Company's domestic oil and gas
capital expenditures totaled $94.1 million. Exploratory activities accounted
for $50.1 million of the domestic capital expenditures with exploitation
activities contributing $44.0 million. During the first nine months of 1998,
the Company's international oil and gas capital expenditures totaled $60.0
million, including $38.2 million in Argentina, primarily on exploitation
activities, and $16.9 million in Bolivia, primarily on exploration activities.
Subsequent to September 30, 1998, the Company announced that it had made
three separate acquisitions of producing oil and gas properties. Two were in
the form of asset acquisitions and the third was a stock acquisition. All three
acquisitions will be accounted for using the purchase method.
On October 29, 1998, producing oil and gas properties located in East Texas
were purchased from Western Gas Resources, Inc. for $47.4 million in cash (the
"Western Acquisition"). On November 10, 1998, producing oil and gas properties
located in northern California were purchased from Texaco Exploration and
Production, Inc. and an affiliate for $28.7 million in cash (the "Texaco
Acquisition"). Funds for both acquisitions were provided through advances on
the Company's revolving credit facility and both acquisitions included
provisions for post-closing adjustments to the purchase prices.
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On November 4, 1998, the Company, through a wholly-owned subsidiary,
purchased from Elf Aquitaine 100 percent of the outstanding shares of its French
subsidiary, Elf Hydrocarbures Equateur, S.A. ("EHE"). EHE has producing oil and
gas operations, along with substantial undeveloped acreage, in Ecuador. The
acquisition price for EHE was $39.7 million, including working capital of $7.2
million, and was funded through a cash payment of $13.2 million provided through
an advance on the Company's revolving credit facility and the issuance of
1,325,000 shares of common stock of the Company valued at a guaranteed amount of
$20 per share, or $26.5 million. If the prevailing share price is not equal to
at least $20 per share after two years, then the Company will be required to
deliver additional consideration under the price guarantee provisions of the
agreement. Such additional consideration, if any, is payable, at the Company's
option, in cash or additional shares of the Company's common stock. The legal
transfer of the stock of EHE to the Company is subject to the prior approval by
the Ecuadorian government.
The Company is 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 work unit commitment is guaranteed by the Company
through an $88.6 million letter of credit; however, the Company anticipates that
it will fulfill this three-year work unit commitment through approximately $50
to $60 million of various seismic and drilling capital expenditures. In
addition, the Company's commitment to perform 1,400 work units related to an
exploration program within the Chaco Block in Bolivia was fulfilled during 1998
through acquisitions of 3-D seismic and the drilling of two wells. Under the
Company's exploration contract on Block 19 in Ecuador, the Company is required
to participate in the drilling of one additional well. The Company expects to
drill the well during 1999 at a cost of approximately $4.0 million.
The Company is also committed to spend approximately $11.0 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.
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 to fund capital
expenditures other than significant acquisitions and anticipates that its cash
flow, net of debt service obligations, coupled with advances under its revolving
credit facility, will be sufficient to fund its planned $185 million of non-
acquisition capital expenditures during 1998. The Company's planned 1998 non-
acquisition capital expenditure budget is allocated approximately 60 percent to
exploitation activities, including development and infill drilling, and
approximately 40 percent to exploration activities. In addition, the Company
recently announced a preliminary capital budget for 1999 of $115 million,
exclusive of acquisitions. 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
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its revolving credit facility, the Company may seek additional sources of
capital to fund any future significant acquisitions (see "--Liquidity").
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.
In the past, the Company has accessed the public markets to finance
significant acquisitions and provide liquidity for its future activities. In
conjunction with the purchase of substantial oil and gas assets in 1990, 1992
and 1995, the Company completed three public equity offerings, as well as a
public debt offering in 1995, which provided the Company with aggregate net
proceeds of approximately $272 million.
On February 5, 1997, the Company completed a public offering of 3,000,000
shares (after giving effect to the Company's two-for-one common stock split
effected on October 7, 1997) of common stock, all of which were sold by the
Company. Net proceeds to the Company of approximately $47 million were used to
repay a portion of existing indebtedness under the revolving credit facility.
Concurrently with the common stock offering, the Company issued $100 million of
its 8 5/8% Senior Subordinated Notes Due 2009. Net proceeds to the Company of
approximately $96 million were used to repay a portion of existing indebtedness
under the revolving credit facility.
The Company's unsecured revolving credit facility under the Amended and
Restated Credit Agreement dated October 21, 1998 (the "Credit Agreement"),
establishes a borrowing base (currently $550 million including the impact of the
Western Acquisition and the Texaco Acquisition) determined by the banks'
evaluation of the Company's oil and gas reserves.
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 November 4, 1998, 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 6.5
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 8 equal consecutive
quarterly installments commencing December 1, 2001, with final maturity at
September 11, 2003.
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At November 10, 1998, the unused portion of the Credit Agreement was
approximately $115 million based on the current borrowing base established in
October 1998. 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
impact of continued lower oil and gas prices on the banks' next borrowing base
determination is unknown at this time.
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
nine months of 1998, approximately 67 percent of the Company's production was
oil. Realized oil prices for the period decreased by 34 percent as compared to
the same period in 1997. As a result, although total production on a BOE basis
increased by 10 percent, the Company's earnings and cash flows have been
materially reduced compared to 1997. 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, a
continuation of low oil prices may adversely affect the Company's cash flows,
borrowing base and other loan covenants to the extent that planned capital
expenditures, dividends, and other disbursements may be reduced.
Inflation
In recent years inflation has not had a significant impact on the Company's
operations or financial condition.
Income Taxes
The Company incurred a current benefit for income taxes of approximately
$0.6 million for the first nine months of 1998 and a current provision of $3.3
million for the first nine months of 1997. 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
subsidiary, Vintage Petroleum Boliviana, Ltd., are subject to Bolivia income
taxes. Earnings of the Company's foreign subsidiary, Vintage Oil Argentina,
Inc., are subject to Argentina income taxes.
As of December 31, 1997, the Company had estimated net operating loss
carryforwards of $35.4 million for Argentina income tax reporting purposes which
can be used to offset future taxable income in Argentina. The carryforward
amount includes certain Argentina net operating loss carryforwards which were
acquired in a purchase business combination and are recorded at cost, which is
less than the calculated value under the provisions of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. These unrecorded net
operating loss carryforwards will reduce the Company's foreign income tax
provision for financial purposes in future years by approximately $4.5 million
when their benefit is realized. 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.
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The Company has a U.S. Federal alternative minimum tax ("AMT") credit
carryforward of approximately $2.9 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 expects to incur a tax net operating loss ("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.
Foreign Operations
A significant portion of the Company's foreign operations are located in
Argentina. 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 the 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 measured by the
Argentine Consumer Price Index declined from 200.7 percent as of June 1991 to a
negative 4.04 percent (-4.04%) as of September 1998.
The Company believes that its Argentine operations present minimal currency
risk. 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 September 30, 1998, was
US$1:Bs5.58. 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.
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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.
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 timeline:
Non-IT Systems Identification Phase Completion-February 1999
and Equipment Compliance Completion-June 1999
IT Systems and Equipment Identification Phase Completion-January 1999
Compliance Completion-June 1999
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,
material 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 a 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.
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<PAGE>
The Cost to Address Y2K Issues
The Company believes that the cost of the Y2K Project will not exceed $3
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 $480,000. The expenditures relate
primarily to 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 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 statements are not
guarantees of future performance and actual
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<PAGE>
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.
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<PAGE>
Signatures
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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: February 12, 1999 \s\ Michael F. Meimerstorf
------------------ -------------------------------
Michael F. Meimerstorf
Vice President and Controller
(Principal Accounting Officer)
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