<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 June 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 0-20125
BASIN EXPLORATION, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1143307
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
370 17TH STREET, SUITE 3400, DENVER, CO 80202
(Address of principal executive offices) (Zip Code)
(303) 685-8000
(Registrant's telephone number, including area code)
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 issuer's classes of
Common stock, as of the latest practicable date.
Outstanding at
Class July 31, 1998
---------------------------- -----------------
Common stock, $.01 par value 13,881,000 shares
<PAGE>
BASIN EXPLORATION, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
December 31, 1997 and June 30, 1998. . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the
three and six months ended June 30, 1997 and 1998. . . . . . . 5
Consolidated Statements of Changes in
Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . 6
Consolidated Statements of Cash Flows for the
six months ended June 30, 1997 and 1998. . . . . . . . . . . . 7
Notes to Consolidated Financial Statements . . . . . . . . . . 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . 10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . 20
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 20
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2
<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND JUNE 30, 1998
ASSETS
<TABLE>
<CAPTION>
(In thousands) December 31, June 30,
1997 1998
------------ --------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 531 $ 1,464
Accounts receivable 8,348 8,043
Prepaids and other 3,805 4,707
-------- --------
12,684 14,214
-------- --------
PROPERTY AND EQUIPMENT, at cost:
Oil and gas properties, under the full
cost method of accounting
Proved 177,704 213,508
Unproved 15,669 35,891
Less accumulated depreciation,
depletion and amortization (46,284) (58,532)
-------- --------
147,089 190,867
Furniture and equipment, net 2,086 1,907
-------- --------
149,175 192,774
-------- --------
OTHER ASSETS 100 38
-------- --------
$161,959 $207,026
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND JUNE 30, 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands, except share data) December 31, June 30,
1997 1998
------------ --------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 8,087 $ 5,130
Accrued liabilities 12,067 12,605
Accrued ad valorem taxes 2,394 2,057
Income taxes payable 19 --
Current portion of long-term debt 153 131
-------- --------
22,720 19,923
-------- --------
LONG-TERM DEBT, net of current portion 11,053 56,500
OTHER LONG-TERM OBLIGATIONS 266 424
DEFERRED INCOME TAXES 6,555 6,986
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per
share; 10,000,000 shares authorized,
no shares issued and outstanding -- --
Common stock, par value $.01 per
share, 50,000,000 shares authorized,
13,833,000 and 14,064,000 shares
issued, respectively 138 141
Additional paid-in capital 110,627 112,595
Retained earnings 12,012 12,997
Common stock held in treasury, at cost,
120,000 and 183,000 shares, respectively (1,412) (2,540)
-------- --------
Total stockholders' equity 121,365 123,193
-------- --------
$161,959 $207,026
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
(In thousands, except per share data) 1997 1998 1997 1998
------ ------ ------ -------
<S> <C> <C> <C> <C>
REVENUE:
Oil sales $1,828 $ 2,697 $3,983 $ 5,387
Gas sales 689 9,219 1,771 16,764
Interest and other, net 49 (8) 224 13
------ ------ ------ -------
2,566 11,908 5,978 22,164
------ ------ ------ -------
COSTS AND EXPENSES:
Lease operating expenses 977 2,450 2,036 4,593
Production taxes 271 204 635 438
Depreciation, depletion and
Amortization 1,236 6,741 2,396 12,727
General and administrative, net 817 990 1,603 2,102
Interest expense 142 375 171 788
------ ------ ------ -------
3,443 10,760 6,841 20,648
------ ------ ------ -------
INCOME (LOSS) BEFORE INCOME TAXES (877) 1,148 (863) 1,516
Income tax benefit (provision) 307 (402) 302 (531)
------ ------ ------ -------
NET INCOME (LOSS) $ (570) $746 (561) $ 985
------ ------ ------ -------
------ ------ ------ -------
EARNINGS (LOSS) PER SHARE:
Basic $(0.05) $0.05 $(0.05) $ 0.07
------ ------ ------ -------
------ ------ ------ -------
Diluted $(0.05) $0.05 $(0.05) $ 0.07
------ ------ ------ -------
------ ------ ------ -------
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 10,701 13,845 10,701 13,814
Diluted 10,701 14,524 10,731 14,381
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
5
<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 1, 1997 THROUGH JUNE 30, 1998
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON STOCK PAID-IN TREASURY STOCK RETAINED STOCKHOLDERS
(In thousands) SHARES AMOUNT CAPITAL SHARES AMOUNT EARNINGS EQUITY
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, January 1, 1997 10,757 $108 $ 59,219 (56) $ (132) $ 9,556 $ 68,751
Issuance of common stock 3,001 30 51,340 - - - 51,370
Common stock offering costs - - (499) - - - (499)
Purchase of treasury stock - - - (64) (1,280) - (1,280)
Issuance and vesting of
restricted stock 75 - 567 - - - 567
Net income - - - - - 2,456 2,456
------------------------------------------------------------------------
BALANCES, December 31, 1997 13,833 138 110,627 (120) (1,412) 12,012 121,365
Issuance of common stock 62 1 305 - - - 306
Purchase of treasury stock - - - (1) (20) - (20)
Issuance and vesting of
restricted stock 90 1 556 - - - 557
Exercise of warrants for
common stock 79 1 1,107 (62) (1,108) - -
Net income - - - - - 985 985
-------------------------------------------------------------------------
BALANCES, June 30, 1998 14,064 $141 $112,595 (183) $(2,540) $12,997 $123,193
-------------------------------------------------------------------------
-------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
(In thousands) 1997 1998
--------- ---------
<C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (561) $ 985
Adjustments to reconcile net income to
net cash provided by operating activities -
Depreciation, depletion and amortization 2,396 12,727
Deferred income tax provision (benefit) (302) 431
Stock compensation expense 127 319
Other (4) 16
Changes in operating assets and liabilities -
Decrease (increase) in
Receivables (2,142) 299
Prepaids and other (1,136) (839)
(Decrease) increase in -
Accounts payable and accrued liabilities 746 (663)
Ad valorem taxes and other 591 (179)
Income taxes payable (958) (19)
-------- --------
Net cash provided by (used in) operating activities (1,243) 13,077
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital additions (34,200) (57,877)
Proceeds from sale of property and equipment 195 22
-------- --------
Net cash used in investing activities (34,005) (57,855)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and long-term debt 14,500 56,000
Principle payments on notes payable and long-term debt (646) (10,575)
Issuance of common stock - 312
Purchase of treasury stock - (20)
Other (4) (6)
-------- --------
Net cash provided by financing activities 13,850 45,711
-------- --------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS (21,398) 933
CASH AND EQUIVALENTS, beginning of period 22,023 531
-------- --------
CASH AND EQUIVALENTS, end of period $ 625 $ 1,464
-------- --------
-------- --------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized $ 56 $ 546
-------- --------
-------- --------
Cash paid for income taxes $ 958 $ 119
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
7
<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) UNAUDITED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring items)
necessary to present fairly the financial position of Basin Exploration, Inc.
and its wholly-owned subsidiaries (collectively, "Basin" or the "Company") as
of June 30, 1998, and the results of operations and cash flows for the three
and six month periods presented. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
Securities and Exchange Commission's rules and regulations. The results of
operations for the periods presented are not necessarily indicative of the
results to be expected for the full year. Management believes the disclosures
made are adequate to ensure that the information is not misleading and suggests
that these financial statements be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
(2) ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement 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. The Statement
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, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
The Company is required to adopt the Statement as of January 1, 2000. The
Company may also implement the Statement as of the beginning of any fiscal
quarter prior to that date. Statement 133 cannot be applied retroactively. The
Company has not yet quantified the impacts of adopting Statement 133 on its
financial statements and has not determined the timing or method of adoption of
Statement 133.
(3) ACCOUNTING FOR OIL AND GAS PROPERTIES
The Company follows the full cost method of accounting for oil and gas
properties. Under this method, all costs associated with the development,
exploration and acquisition of oil and gas properties are capitalized. If
capitalized costs, net of amortization and related deferred taxes, exceed the
full cost ceiling, the excess would be expensed in the period such excess
occurs. Calculation of the full cost ceiling includes an estimate of the
discounted value of future net revenue attributable to proved reserves using
various assumptions and parameters consistent with promulgations of the
Securities and Exchange Commission, and such calculation is sensitive to changes
in prevailing oil and gas sales prices. Oil and gas prices utilized in this
calculation were
8
<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
approximately 11% lower on an equivalent unit basis at June 30, 1998 than at
December 31, 1997. Oil and natural gas prices have declined further subsequent
to June 30, 1998. If prices remain at or below these levels, the Company may be
required to recognize an impairment expense in a future period.
9
<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto.
Basin Exploration, Inc. ("Basin" or the "Company") is a domestic independent
oil and gas company that conducts exploration in the shallow waters of the Gulf
of Mexico ("GOM") and acquisition and exploitation operations in the GOM and
selected areas onshore. Basin's revenue and results of operations are
significantly affected by oil and gas prices. Assuming level production, the
Company's revenues would generally be higher in the first and fourth quarters
due to typically higher natural gas prices resulting from greater demand during
colder months.
The Company commenced operations in 1981 and primarily acquired, developed and
exploited properties in the Denver-Julesberg ("D-J") Basin in eastern Colorado
through 1991. In 1992, the Company began expanding into other areas within the
Rocky Mountain region and initiated exploration activities. In 1996, the
Company sold its D-J Basin properties for $123.5 million (the "D-J Sales") and
initiated operations in the GOM.
The Company began GOM activities in 1996 with no initial property base in the
region and early investments related primarily to acquisitions of three-
dimensional seismic data and exploratory leasehold interests. The Company's
first significant discovery in the GOM was the Eugene Island Block 65 #1 well,
which was drilling at the end of 1996 and completed in 1997. First production
from GOM assets was realized in August 1997 when the Company brought two wells
drilled on Eugene Island Block 65 on-line. The Company added other proved
properties in the GOM in 1997 through both exploratory drilling and acquisitions
and at the beginning of the current year it owned interests in five producing
properties and had nine wells under development on eight lease blocks. During
the first half of 1998, five of these wells established initial production and
produced for portions of the period. The Company participated in drilling nine
GOM exploratory wells during the first half of 1998, of which six were apparent
discoveries and three were dry holes.
RESULTS OF OPERATIONS
The following operating and financial data is provided to assist in
understanding results of operations for the periods presented.
10
<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
- ---------------------------------------------------------------------------------
1997 1998 1997 1998
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRODUCTION:
Oil (MBbl) 103 189 209 372
Gas (MMcf) 399 3,936 802 7,336
Total gas equivalents (MMcfe) 1,017 5,070 2,056 9,568
REVENUE (IN THOUSANDS):
Oil sales $1,828 $ 2,697 $3,983 $ 5,387
Gas sales $ 689 $ 9,219 $1,771 $16,764
Total oil and gas sales $2,517 $11,916 $5,754 $22,151
AVERAGE SALES PRICE:
Oil (PER Bbl) $17.73 $ 14.26 $19.09 $ 14.47
Gas (PER Mcf) $ 1.73 $ 2.34 $ 2.21 $ 2.29
Total gas equivalents (PER Mcfe) $ 2.47 $ 2.35 $ 2.80 $ 2.31
EXPENSES (PER Mcfe):
Lease operating expenses $ 0.96 $ 0.48 $ 0.99 $ 0.48
Production taxes $ 0.27 $ 0.04 $ 0.31 $ 0.05
Depreciation, depletion and amortization $ 1.21 $ 1.33 $ 1.17 $ 1.33
General and administrative, net $ 0.80 $ 0.20 $ 0.78 $ 0.22
</TABLE>
REVENUE. Oil and gas sales for the three months ended June 30, 1998 totaled
$11,916,000, representing an increase of $9,399,000, or 373%, compared to the
second quarter of 1997. A 399% increase in net oil and gas production was
partially offset by a 5% decline in unit prices, based on net equivalent unit
measures. Oil and gas sales for the six months ended June 30, 1998 totaled
$22,151,000, representing an increase of $16,397,000, or 285%, compared to the
first half of 1997. A 365% increase in net oil and gas production was partially
offset by an 18% decline in unit prices, based on net equivalent unit measures.
The significant increases in oil and gas production are attributable to
contributions in 1998 from GOM properties. As noted above, the Company's first
GOM production was realized in August 1997. Due to the addition of GOM
production, which is predominantly natural gas, gas increased from 39% of net
equivalent units produced in the first half of 1997 to 77% of the Company's
total oil and gas production in the first half of 1998. See "Liquidity and
Capital Resources" for additional discussion of oil and gas production.
LEASE OPERATING EXPENSES. Due to increased production levels, lease operating
expenses for the three and six months ended June 30, 1998 increased by
$1,473,000, or 151%, and $2,557,000, or 126%, respectively, from the amounts
reported for the comparable periods in the prior year. However, lease operating
costs per Mcfe produced have declined by approximately 50% from 1997 to $0.48
during the three and six months ended June 30, 1998, because of inclusion in the
current period of production from GOM wells, which typically have significantly
lower average unit operating costs than the Company's Rocky Mountain properties.
11
<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PRODUCTION TAXES. Production taxes for the three and six months ended June 30,
1998 were $204,000, and $438,000, representing decreases of $67,000, or 25%, and
$197,000, or 31%, respectively, from amounts reported for the comparable periods
in 1997. These declines were due to reduced revenues from onshore properties
caused primarily by lower oil and gas prices. Production taxes as a percent of
oil and gas sales for the three and six months ended June 30, 1998 were 1.7 %
and 2.0%, compared to 10.8% and 11.0%, respectively in 1997, due to inclusion of
sales in 1998 from properties in federal waters offshore, which are generally
not subject to production taxes.
DEPRECIATION, DEPLETION AND AMORTIZATION. Depreciation, depletion and
amortization expense for the three and six months ended June 30, 1998 was
$6,741,000 and $12,727,000, representing increases of $5,505,000, or 445%, and
$10,331,000, or 431%, respectively, compared to 1997. The increases were largely
attributable to the nearly 400% increases in production volumes from 1997 to
1998. In addition, the depletion rate of $1.28 per Mcfe produced in the six
months ended June 30, 1998 represented a 35% increase from the $0.95 per Mcfe
average depletion rate during the first half of 1997. The higher rate is due to
proved reserves added at a higher average unit cost than the Company's previous
historical average and to the unfavorable impact on estimated proved reserve
quantities of using lower assumed future oil and gas prices at June 30, 1998
than those used one year earlier. The increased unit cost of additions reflects
the substantial portion of the Company's investments and reserve additions
during the past year that relate to the GOM, where higher unit costs are
generally associated with reserves having a higher value per unit than the
Company's onshore properties due to typically faster recovery rates, lower
production costs, and higher average realizable gas prices.
GENERAL AND ADMINISTRATIVE, NET. General and administrative expenses for the
three and six months ended June 30, 1998 were $990,000 and $2,102,000,
reflecting increases of $173,000, or 21%, and $499,000, or 31%, respectively, as
compared to 1997. The increases resulted primarily from greater stock-based
incentive compensation accruals, reflecting, in part, increases in the price of
the Company's common stock. Percentage increases in general and administrative
expenses were much smaller than increases in production, resulting in declines
in general and administrative expenses per Mcfe produced, from $0.80 and $0.78
during the three and six month periods ended June 30, 1997, to $0.20 and $0.22,
respectively, in the three and six month periods ended June 30, 1998.
INTEREST EXPENSE. Interest expense for the three and six months ended June 30,
1998 totaled $375,000 and $788,000, representing increases of $233,000, or 164%,
and $617,000, or 361%, respectively, as compared to 1997. The increases were
attributable to higher average borrowings partially offset by lower average
interest rates and the capitalization of $377,000 of interest to unproved
property costs in the second quarter of 1998, in accordance with Statement of
Financial Accounting Standard No. 34. Average borrowings and applicable
interest rates for the comparable periods are summarized below:
12
<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Average borrowings
(in thousands) $7,000 $46,600 $3,700 $34,600
Average interest
rate on borrowings 6.8% 6.5% 6.8% 6.7%
</TABLE>
INCOME TAX BENEFIT (PROVISION). The income tax benefits (provisions) for 1997
and 1998 approximate the amounts that would be calculated by applying statutory
income tax rates to income before income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's principal sources of capital have been cash flow
from operations, a revolving line of credit established with a group of banks
(the "Credit Facility"), proceeds from asset sales, and proceeds from sales of
common stock. The Company's principal uses of capital have been for
exploration, acquisition, development and exploitation of oil and gas
properties.
The Company's accrual-basis capital expenditures during the first six months of
1998 totaled approximately $56.4 million. Net cash provided by operations
before changes in working capital totaled $14.5 million during the recent six-
month period. Other funds for investments during the period came from
borrowings under the Credit Facility, which was also utilized during the period
to increase net working capital by approximately $4.3 million. The Company
closed the first half of 1998 with a working capital deficit of approximately
$5.7 million, long-term debt of $56.5 million, and stockholders' equity of
$123.2 million.
The borrowing base under the Credit Facility was increased from $45 million to
$75 million effective as of May 1, 1998, in conjunction with a regular semi-
annual redetermination review. The next regular borrowing base redetermination
review is scheduled to be completed as of November 1, 1998. However, the
Company has requested an interim redetermination to incorporate recent additions
to its proved reserves base and its higher production levels. The Company
anticipates that this review will result in a further increase in its borrowing
base during August 1998, and that the adjusted level will apply until the
regularly scheduled borrowing base review to be completed effective November 1,
1998.
The Company has established a budget of $80 million for anticipated exploration
and development activities in 1998. Acquisitions of properties with proved and
probable reserves are also pursued as an integral part of the Company's overall
business strategy, but are not budgeted. The Company periodically considers
changes to its budget to reflect changes in the general business environment,
variances from assumptions, or specific business opportunities. As more fully
described below, the Company is currently considering an increase to its 1998
budget.
13
<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Factoring in its projections of net oil and gas production and price
realizations, and assuming that the Company receives increases in the borrowing
base under the Credit Facility at levels requested, management believes that
cash flow from operations and borrowing capacity under the Credit Facility will
be sufficient to fund the Company's operations and capital expenditures through
the end of 1998 unless the Company consummates a substantial acquisition during
the period. Sufficiency of these resources to fund capital expenditures at
desired levels in 1999 will depend on a number of factors including, among
others, the Company's future drilling success, oil and gas prices, and the
production performance of the Company's properties (including recent discoveries
currently under development). Each of these factors can significantly influence
both cash flow and the level of the borrowing base established under the Credit
Facility.
The majority of the Company's planned capital expenditures are related to
Company-operated properties, enabling the Company, to a considerable degree, to
control the character and schedule of operations.
PRODUCTION AND CASH FLOW
In each of the four fiscal quarters following the D-J Sales (covering the period
from July 1, 1996 through June 30, 1997), the Company's net oil and gas
production was approximately 1,020 MMcfe, or an average of 11.2 MMcfe per day.
During this period, net cash provided by operations before working capital
changes ranged from $0.4 million to $2.2 million per quarter and averaged $1.3
million per quarter, varying primarily with oil and gas price levels. The flat
oil and gas production during this period reflected modest capital expenditures
on Rocky Mountain exploitation projects that offset natural declines on
producing properties. During this period, the Company also made more
significant investments in GOM exploration, development, and acquisition
activities that did not begin to impact production and cash flow until the
middle of the third quarter of 1997.
During the third quarter of 1997, the Company's average daily net production
increased to 28.0 MMcfe and cash flow from operations increased to $5.0 million,
due to commencement of production in August from two wells on Eugene Island
Block 65 that the Company drilled and completed earlier in the year.
Average daily net production increased to 43.8 MMcfe in the fourth quarter of
1997, as the result of a full period's contribution from Eugene Island Block 65
and a partial period's contribution from four productive GOM properties acquired
in late-November 1997 from the bankruptcy trustee for Midcon Offshore, Inc.
("Midcon"). Cash flow from operations increased to $8.7 million in the final
quarter of 1997, reflecting this increase in production and higher average unit
prices attributable to strength in natural gas markets.
14
<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's average daily net production increased in the first quarter of
1998 to approximately 50.0 MMcfe. This overall 14% increase over the prior
quarter reflected an increased contribution from the Midcon properties and
initial production from a 1997 discovery well on Eugene Island Block 83,
partially offset by a decline in production from Eugene Island Block 65 caused
by natural depletion and mechanical impediments that have since been partially
remediated.
The Company's average daily net production increased to approximately 55.7 MMcfe
in the second quarter of 1998. The overall 13% increase over the first quarter
of 1998 primarily reflected initial contributions from discoveries on West
Cameron Block 56 and Galveston Block 213.
Based on year-end 1997 reserve report estimations and recent developments, the
Company's average daily net production is expected to increase further in 1998.
The primary sources of increases are expected to be initial contributions from
GOM wells with proved nonproducing reserves at the end of June 1998 and
increased contributions from GOM wells that produced for only a portion of the
recent quarter, partially offset by depletion-related declines on existing
producing wells. The Company had three relatively significant GOM wells on-line
for only a portion of the second quarter of 1998 and closed the period with
interests in eight additional GOM wells with proved nonproducing reserves that
were yet to establish sustained initial production, including five apparent
discovery wells drilled during 1998. Production was initiated during July 1998
on two of these properties, South Timbalier Block 146 and Eugene Island Block
49. The Company does not anticipate initial production from any of the other
properties presently under development during the quarter ending September 30,
1998.
The Company expects that its future net cash flow will be determined
substantially by production levels and oil and gas prices. Certain costs per
unit of production have significantly improved as the Company has added
production from GOM wells and are expected to continue to improve as scheduled
increases in GOM production occur. These include: (i) production taxes, which
are not applicable to properties in federal waters; (ii) lease operating
expenses which tend to be significantly lower per unit in the GOM than for the
Company's Rocky Mountain properties, especially for flush production from
relatively new GOM wells; and (iii) general and administrative expenses, which
are not expected to increase proportionately as GOM production increases. As a
result, net cash provided by operations is expected to increase by a greater
percentage than production volumes, given an assumption of constant or rising
oil and gas prices.
MARKETING AND HEDGING TRANSACTIONS
The Company's production is generally sold under month-to-month contracts at
prevailing prices. From time to time, however, as conditions are deemed to
warrant, Basin has entered into hedging transactions or fixed price sales
contracts for a portion of its oil and gas production. The purposes of these
transactions are to limit the Company's exposure to future oil and gas price
declines and achieve a more predictable cash flow, or to seek to enhance
profitability through improved net price
15
<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
realizations. However, such contracts may limit the benefits the Company would
realize if prices increase or expose the Company to losses having the effect of
reducing net price realizations.
Through August 11, 1998, Basin had entered into the following crude oil and
natural gas price swap or collar arrangements covering the period beginning
July 1, 1998:
<TABLE>
<CAPTION>
Average
Bbls or Mcf Average Price
Product Per Day Or Collar Range Time Period
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Crude Oil 333 $ 21.30 7/98-10/98
Crude Oil 1,000 $17.80-19.85 7/98-8/98
Natural Gas 35,000 $ 2.37 7/98-9/98
Natural Gas 30,000 $ 2.49 10/98
Natural Gas 10,000 $ 2.15 1/99-12/01
</TABLE>
In addition the Company periodically enters into spread trades or options
transactions related to oil or natural gas futures markets. Under a spread
trade, fixed prices under a hedging contract are determined in the future by
reference to the price of an underlying contract. Such positions may enable the
Company to lock in favorable fixed prices for future hedging positions, but can
also result in unfavorable fixed price contracts if the reference price
represented by the underlying contract declines. As of August 11, 1998, the
Company had entered into spread trades for natural gas providing for a fixed
price for 40,000 Mcf per day for calendar 1999 to be established in the future
upon an election by the Company by reference to the underlying NYMEX January
1999 contract price less $0.275. The Company also had sold call options for
10,000 Mcf of natural gas per day for the period from January 1999 through
December 2001 that have an average strike price of $2.50 per Mcf.
CREDIT FACILITY
The Credit Facility with a bank group led by NationsBank of Texas, N.A. provides
for the interest rate on the Company's borrowings to be determined by reference
to either NationsBank's prime rate or LIBOR, at the Company's election. A
varying spread of 0% to 0.5% is added to the prime rate, or 0.625% to 1.25% is
applied to LIBOR, based upon the Company's debt-to-capitalization ratio at the
time. The Credit Facility provides for borrowings to be revolving loans through
October 31, 2001, at which time the outstanding balance will be converted into a
four-year amortizing term loan unless the Credit Facility has been amended to
extend the revolving period. The borrowing base under the Credit Facility,
established at $75 million as of May 1, 1998, is scheduled to be redetermined as
of November 1, 1998 and generally at six-month intervals thereafter until
converted into a term loan. As noted above, an interim borrowing base
redetermination has been initiated, with the expectation that the borrowing base
will be increased from the current level of $75 million during August 1998.
16
<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
At June 30, 1998, the principal balance outstanding under the facility was $56.5
million, with a weighted average interest rate of 6.4%. The Credit Facility
contains various covenants, including ones that could limit the Company's
ability to incur other debt, dispose of assets, pay dividends, or repurchase
stock. Pursuant to the agreement governing the Credit Facility, certain of the
Company's onshore properties are subject to mortgages in favor of the banks and
the Company's remaining properties are subject to a negative pledge and the
bank's right to secure mortgages in certain circumstances.
CAPITAL EXPENDITURES
Since the beginning of 1996, Basin has focused its exploration activities in the
shallow waters of the GOM, primarily off the coast of Louisiana. The Company's
acquisition, development, and exploitation activities target opportunities in
the vicinity of the Company's GOM exploration operations, in the Rocky Mountain
region where Basin has a substantial existing base of proved reserves and
producing wells, and in certain other major domestic producing basins where
Basin believes significant upside potential exists.
The Company's capital expenditures are generally discretionary and activity
levels are determined by a number of factors, including oil and gas prices,
availability of funds, quantity and character of identified investment projects,
availability of service providers, and competition.
The Company's budget for anticipated capital expenditures for exploration and
development in 1998 is currently established at approximately $80 million. This
budget primarily provides for: participation in an estimated 15 to 20 (nine net)
exploratory wells in the GOM; development of six GOM prospect discoveries made
in the second half of 1997; exploitation and development of five GOM properties
acquired last year, including two wells drilled in 1997 that were under
development at year-end; development of projected 1998 prospect discoveries; and
investments in prospect leaseholds and seismic data.
During the first half of 1998, the Company's accrual-basis capital expenditures
totaled approximately $56.4 million, including $34.6 million for exploration and
development, $20.6 million for acquisition of 12 (11.25 net) leases through the
March 1998 Central Gulf of Mexico lease sale and $1.2 million for acquisitions
of proved property interests. The expenditures on exploration and development
were primarily for participation in nine (4.0 net) GOM exploratory wells,
related completion costs on six (2.8 net) of these, development of several GOM
properties acquired or discovered during the prior year, and acquisitions of
additional GOM three-dimensional seismic data and leasehold interests.
During the first half of 1998, the Company participated in six (2.8 net)
apparent exploratory discoveries. The Company's drilling success rate and the
average size of these discoveries were greater than assumed early in the year
for purposes of budget preparation. Primarily to provide
17
<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
additional development capital for these discoveries, the Company is presently
considering an increase in its budget. Such increase may also provide for a
modest increase in exploratory drilling activity to take advantage of recent
declines in drilling rig rates and other service sector costs.
In addition to these budgeted capital expenditures, the Company intends to
continue to pursue acquisitions of properties with proved and probable reserves
as an integral part of its overall business strategy, with the expectation that
such efforts will periodically result in significant investment activity.
The amount and allocation of the Company's future capital expenditures will
depend on a number of factors that are not entirely within the Company's control
or ability to forecast, including drilling results, scheduling of activities by
other operators, availability of service providers, success in acquiring
prospect leaseholds, and success in consummating acquisitions of proved
properties. As a result, actual capital expenditures may vary significantly
from current expectations. Under certain circumstances, in order to prudently
fund its planned investments, the Company may consider raising additional
capital through issuance of debt and/or equity securities.
18
<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Statements that are not historical facts contained in this report are
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ from projected results. Such statements address
activities, events or developments that the Company expects, believes, projects,
intends or anticipates will or may occur, including such matters as future
accessibility of capital, development and exploration expenditures (including
the amount, nature and timing thereof), drilling of wells, timing and amount of
future production of oil and gas, business strategies, cash flow and anticipated
liquidity, borrowing base increases, prospect development and property
acquisition, marketing of oil and gas, and the impact on the Company of Year
2000 compliance requirements both internally and externally. Factors that could
cause actual results to differ materially ("Cautionary Disclosures") are
described, among other places, in the Company's prospectus dated October 2, 1997
and prospectus supplement dated October 24, 1997 and in the Marketing,
Competition, and Regulation sections of the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, all as filed with the Securities and
Exchange Commission, and under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included herewith. Without
limiting the Cautionary Disclosures so described, Cautionary Disclosures
include, among others: general economic conditions, the market price of oil and
gas, the risks associated with exploration, the Company's ability to find,
acquire, market, develop and produce new properties, operating hazards attendant
to the oil and gas business especially in the harsh operating environment of the
Gulf of Mexico, downhole drilling and completion risks that are generally not
recoverable from third parties or insurance, the Company's relative inexperience
in the GOM, uncertainties in the estimation of proved reserves and in the
projection of future rates of production and timing of development expenditures,
potential mechanical failure or underperformance of individually significant
productive wells, the strength and financial resources of the Company's
competitors, the Company's ability to find and retain skilled personnel,
climatic conditions, labor relations, availability and cost of material and
equipment, delays in anticipated start-up dates, environmental risks, the
results of financing efforts, actions or inactions of third-party operators of
the Company's properties, regulatory developments, and third-party Year 2000
compliance actions. All written and oral forward-looking statements attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Disclosures. The Company disclaims any obligation to
update or revise any forward-looking statement to reflect events or
circumstances occurring hereafter or to reflect the occurrence of anticipated or
unanticipated events.
19
<PAGE>
BASIN EXPLORATION, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Proxies for the Company's annual meeting of shareholders held on May 5, 1998,
were solicited pursuant to Regulation 14A during the quarter ended June 30,
1998. There was no solicitation in opposition to the nominees listed in the
proxy statement and all such nominees were elected. The following is a summary
of the matters voted upon at such meeting and the number of votes cast for,
against and absententions:
<TABLE>
<CAPTION>
Number of Votes Cast
---------------------------------------
For Against Abstain
--------- --------- -------
<S> <C> <C> <C>
Election of Directors
Donald H. Anderson 9,961,723 - 636,808
Michael S. Smith 9,961,723 - 636,808
Larry D. Unruh 9,961,723 - 636,808
Amend Equity Incentive Plan 7,104,045 3,489,230 5,256
Ratify selection of Arthur
Andersen LLP as auditors 10,574,018 21,457 3,056
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
2.1 -- Agreement and Plan of Merger between Sterling Energy
Corporation, Basin Energy, Inc. and Basin Exploration, Inc.
dated October 13, 1994(5)
2.2 -- Plan of Merger between Basin Sterling, Inc. and Basin
Exploration, Inc. dated November 22, 1994(5)
2.3 -- Plan of Merger between Basin Operating Company and Basin
Exploration, Inc. dated December 14, 1994(8)
3.1 -- Restated Certificate of Incorporation of Basin.(2)
3.2 -- Restated Bylaws of Basin.(2)
4.1 -- Common Stock Certificate of Basin.(2)
10.1 -- Equity Incentive Plan as amended February 2, 1998.(17)
10.3 -- Key Employee Participation Plan.(2)
10.4 -- Employment Agreement dated March 31, 1992 by and between
Basin and Michael S. Smith.(3)
10.5 -- Gulf Coast Geoscientist Overriding Royalty Interest Plan
dated November 30, 1995.(10)
10.6 -- Form of Rights Agreement dated as of February 24, 1996,
between Basin Exploration, Inc. and Corporate Stock
Transfer, Inc. as Rights Agent.(9)
10.7 -- Performance Shares Plan approved February 4, 1997.(12)
10.8 -- Change of Control Employment Agreement dated October 13,
1995 between Basin Exploration, Inc. and Howard L. Boigon.(10)
10.9 -- Employment Agreement dated August 28, 1995 between Basin
Exploration, Inc. and Samuel D. Winegrad.(10)
10.10 -- Employment Agreement dated June 28, 1995 between Basin
Exploration, Inc. and Neil L. Stenbuck.(10)
20
<PAGE>
10.11 -- Employment Agreement dated November 10, 1995 between Basin
Exploration, Inc. and David A. Pustka.(10)
10.12 -- Employment Agreement dated February 23, 1996 between Basin
Exploration, Inc. and Thomas J. Corley.(12)
10.13 -- Assignment and Assumption of Lease dated December 18, 1995
by and between Team, Inc., as original Tenant, Basin
Exploration, Inc., as New Tenant, and FC Tower Property
Partners, L.P., as Landlord.(9)
10.16 -- Agreement for Purchase and Sale of Assets (Monetization)
dated February 24, 1996 by and between Basin Exploration,
Inc., HS Resources, Inc. and Orion Acquisition, Inc.(7)
10.17 -- Agreement for Purchase and Sale of Assets (Wattenberg),
dated February 24, 1996 by and between Basin Exploration,
Inc., HS Resources, Inc. and Orion Acquisition, Inc.(7)
10.18 -- Lease of Office Space dated September 25, 1992, between
Brookfield Republic Inc. and Basin Operating Company, as
amended(4)(#)
10.19 -- First Lease of Additional Office Space dated as of December
1, 1994, between Brookfield Republic, Inc. and Basin
Operating Company.(6)(#)
10.20 -- Amended and Restated Credit Agreement dated August 6, 1996
between the Company and Colorado National Bank, Union Bank
of California, N.A. and NationsBank of Texas, N.A.(11)
10.21 -- Purchase and Sale Agreement dated February 13, 1997, between
Hall-Houston Oil Company et al as Sellers and Basin
Exploration, Inc. as Buyer.(12)(#)
10.22 -- First Amendment of Amended and Restated Credit Agreement
dated August 6, 1996 between the Company and Colorado
National Bank, Union Bank of California, N.A. and
NationsBank of Texas, N.A. dated June 11, 1997(14)
10.23 -- Order of the United States Bankruptcy Court for the Southern
District of Texas Corpus Christi Division, dated November
18, 1997, with exhibits, including the Agreement of Purchase
and Sale.(15)
10.24 -- Second Amendment of Amended and Restated Credit Agreement
dated August 6, 1996 between the Company and Colorado
National Bank, Union Bank of California, N.A. and
NationsBank of Texas, N.A. dated November 1, 1997(16)
10.25 -- Third Amendment of Amended and Restated Credit Agreement
dated August 6, 1996 between the Company and U.S. Bank
National Association, Union Bank of California, N.A. and
NationsBank of Texas, N.A. dated April 30, 1998(17).
21 -- Subsidiaries.(16)
27 -- Financial Data Schedule(1)
- ------------
(1) Filed herewith.
(2) Filed as an Exhibit to Basin's Registration Statement on
Form S-1 as filed on March 17, 1992, Registration No.
33-46486, and incorporated herein by reference.
(3) Filed as an Exhibit to Amendment No. 1 to Basin's
Registration Statement on Form S-1 as filed on April 21,
1992, Registration No. 33-46486, and incorporated herein by
reference.
(4) Filed as an Exhibit to Basin's Registration Statement on
Form S-1 as filed on October 25, 1993, Registration No.
33-70802, and incorporated herein by reference.
(5) Filed as an Exhibit to Form 8-K filed on December 10, 1994,
and incorporated herein by reference.
(6) Filed as an Exhibit to Form 10-K/A-1 filed on June 26, 1995
and incorporated herein by reference.
(7) Filed as an Exhibit to Form 8-K filed on March 6, 1996, and
incorporated herein by reference.
(8) Filed as an Exhibit to Form 10-K filed on March 28, 1995,
and incorporated herein by reference.
(9) Filed as an Exhibit to Form 8-K filed on February 26, 1996,
and incorporated herein by reference.
(10) Filed as an Exhibit to Form 10-K filed on March 28, 1996,
and incorporated herein by reference.
(11) Filed as an Exhibit to Form 10-Q filed on August 14, 1996,
and incorporated herein by reference.
(12) Filed as an Exhibit to Form 10-K filed on March 31, 1997,
and incorporated herein by reference.
21
<PAGE>
(13) Filed as an Exhibit to Form 10-Q filed on May 15, 1997, and
incorporated herein by reference.
(14) Filed as an Exhibit to Form 10-Q filed on August 12, 1997,
and incorporated herein by reference.
(15) Filed as an Exhibit to Form 8-K filed on December 11, 1997,
and incorporated herein by reference.
(16) Filed as an Exhibit to Form 10-K filed on March 31, 1998,
and incorporated herein by reference.
(17) Filed as an Exhibit to Form 10-Q filed on May 14, 1998, and
incorporated herein by reference.
(#) Confidential treatment has been granted for portions of
these Exhibits.
(b) Reports on Form 8-K
None
22
<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.
BASIN EXPLORATION, INC.
(Registrant)
Date: August 11, 1998 By: /s/ Neil L. Stenbuck
------------------------------------
Neil L. Stenbuck
Chief Financial Officer
Date: August 11, 1998 By: /s/ James A Tuell
------------------------------------
James A. Tuell
Controller
(Principal Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED
JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,464
<SECURITIES> 0
<RECEIVABLES> 8,043
<ALLOWANCES> 0
<INVENTORY> 458
<CURRENT-ASSETS> 14,214
<PP&E> 255,677
<DEPRECIATION> 62,903
<TOTAL-ASSETS> 207,026
<CURRENT-LIABILITIES> 19,923
<BONDS> 56,500
0
0
<COMMON> 141
<OTHER-SE> 123,052
<TOTAL-LIABILITY-AND-EQUITY> 207,026
<SALES> 22,151
<TOTAL-REVENUES> 22,164
<CGS> 5,031
<TOTAL-COSTS> 19,860
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 788
<INCOME-PRETAX> 1,516
<INCOME-TAX> 531
<INCOME-CONTINUING> 985
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 985
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
