<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 September 30, 2000
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.)
1670 BROADWAY, SUITE 2800, 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 October 31, 2000
---------------------------- ------------------
Common stock, $.01 par value 18,516,000 shares
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BASIN EXPLORATION, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
December 31, 1999 and September 30, 2000...................... 3
Consolidated Statements of Operations for the
three and nine months ended September 30, 1999 and 2000....... 5
Consolidated Statements of Changes in
Stockholders' Equity.......................................... 6
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 2000................. 7
Notes to Consolidated Financial Statements.................... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk.... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 18
Item 2. Changes in Securities and Use of Proceeds..................... 18
Item 3. Defaults Upon Senior Securities............................... 18
Item 4. Submission of Matters to a Vote of Security Holders........... 18
Item 5. Other Information............................................. 18
Item 6. Exhibits and Reports on Form 8-K.............................. 18
SIGNATURES .............................................................. 20
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BASIN EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
(In thousands)
December 31, September 30,
1999 2000
--------- ---------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 3,777 $ 4,519
Accounts receivable 20,332 25,234
Prepaids and other 4,739 3,825
--------- ---------
28,848 33,578
--------- ---------
PROPERTY AND EQUIPMENT, at cost:
Oil and gas properties, under the full
cost method of accounting
Proved 343,872 411,117
Unproved 26,567 36,972
Less accumulated depreciation,
depletion and amortization (152,234) (183,595)
--------- ---------
218,205 264,494
Furniture and equipment, net 1,354 1,385
--------- ---------
219,559 265,879
--------- ---------
OTHER ASSETS 498 714
--------- ---------
$ 248,905 $ 300,171
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
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BASIN EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands, except share data) December 31, September 30,
1999 2000
--------- --------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 12,187 $ 20,517
Accrued liabilities 27,039 19,900
--------- --------
39,226 40,417
--------- --------
LONG-TERM DEBT, net of current portion 34,000 48,000
OTHER LONG-TERM OBLIGATIONS 516 779
DEFERRED INCOME TAXES -- 10,852
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,
18,460,000 and 18,507,000 shares
issued, respectively 185 185
Additional paid-in capital 179,430 179,903
Retained earnings (accumulated deficit) (4,452) 20,035
--------- --------
175,163 200,123
--------- --------
$ 248,905 $300,171
========= ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
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BASIN EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
(In thousands, except per share data) September 30, September 30,
1999 2000 1999 2000
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUE:
Oil sales $ 3,651 $ 8,154 $ 9,145 $22,080
Gas sales 15,776 28,575 43,605 61,927
Interest and other, net 39 49 83 167
------- ------- ------- -------
19,466 36,778 52,833 84,174
------- ------- ------- -------
COST AND EXPENSES:
Lease operating expenses 2,874 3,860 8,352 10,081
Production taxes 270 460 537 1,367
Depreciation, depletion and amortization 9,951 12,264 29,130 31,869
General and administrative, net 1,296 1,481 3,756 4,309
Stock compensation, net 558 335 1,397 623
Interest expense 100 242 2,195 586
------- ------- ------- -------
15,049 18,642 45,367 48,835
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 4,417 18,136 7,466 35,339
Income tax provision -- 6,348 -- 10,852
------- ------- ------- -------
NET INCOME $ 4,417 $11,788 $ 7,466 $24,487
======= ======= ======= =======
BASIC:
Earnings per share $ 0.24 $ 0.64 $ 0.48 $ 1.32
======= ======= ======= =======
Weighted average shares outstanding 18,393 18,507 15,600 18,497
======= ======= ======= =======
DILUTED:
Earnings per share $ 0.23 $ 0.62 $ 0.47 $ 1.30
======= ======= ======= =======
Weighted average shares outstanding 19,009 18,920 15,943 18,826
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
5
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BASIN EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL TREASURY STOCK EARNINGS TOTAL
------------------ PAID-IN ------------------ (ACCUMULATED STOCKHOLDERS'
(In thousands) SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT) EQUITY
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, January 1, 1999 14,151 $ 142 $ 113,136 (186) $(2,571) $(16,488) $ 94,219
Issuance of common stock 4,433 44 67,939 -- -- -- 67,983
Common stock offering costs -- -- (465) -- -- -- (465)
Exercise of warrants for common
stock 123 1 1,715 (86) (1,716) -- --
Issuance and vesting of restricted
stock 55 1 2,058 -- -- -- 2,059
Stock surrendered in conjunction with
vesting of restricted stock or
exercise of stock options -- -- -- (30) (669) -- (669)
Retirement of treasury stock (302) (3) (4,953) 302 4,956 -- --
Net income -- -- -- -- -- 12,036 12,036
----------------------------------------------------------------------------------
BALANCES, December 31, 1999 18,460 185 179,430 -- -- (4,452) 175,163
Issuance of common stock 11 -- 70 -- -- -- 70
Issuance and vesting of restricted
stock 78 1 1,051 -- -- -- 1,052
Stock surrendered in conjunction with
vesting of restricted stock -- -- -- (42) (649) -- (649)
Retirement of treasury stock (42) (1) (648) 42 649 -- --
Net income -- -- -- -- -- 24,487 24,487
----------------------------------------------------------------------------------
BALANCES, September 30, 2000 18,507 $ 185 $ 179,903 -- -- $ 20,035 $ 200,123
==================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
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BASIN EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
(In thousands) 1999 2000
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,466 $ 24,487
Adjustments to reconcile net income to
Net cash provided by operating activities -
Depreciation, depletion and amortization 29,130 31,869
Deferred income tax expense -- 10,852
Stock compensation expense 1,397 623
Amortization of debt issuance costs and other 22 125
-------- --------
38,015 67,956
Changes in operating assets and liabilities -
Decrease (increase) in -
Receivables (6,630) (4,401)
Prepaids and other (1,426) 705
(Decrease) increase in -
Accounts payable and accrued liabilities (939) 2,895
-------- --------
Net cash provided by operating activities 29,020 67,155
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital additions (54,728) (83,573)
Proceeds from sale of property and equipment 10,608 3,807
Deposits on offshore leases (65) (68)
-------- --------
Net cash used in investing activities (44,185) (79,834)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and long-term debt 47,500 59,000
Principle payments on notes payable and long-term debt (98,738) (45,000)
Proceeds from sale or surrender of stock, net 67,046 (579)
Debt issuance costs and other (440) --
-------- --------
Net cash provided by financing activities 15,368 13,421
-------- --------
INCREASE IN CASH AND EQUIVALENTS 203 742
CASH AND EQUIVALENTS, beginning of period 331 3,777
-------- --------
CASH AND EQUIVALENTS, end of period $ 534 $ 4,519
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized $ 2,465 $ 415
======== ========
Cash paid for income taxes $ -- $ --
======== ========
</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 as of September 30, 2000, and the results of
operations and cash flows for the three- and nine-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 Basin's Annual Report on Form 10-K for the year
ended December 31, 1999.
(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." SFAS 133 establishes accounting and reporting standards
requiring that, unless specific hedge accounting criteria are met, every
derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded on the balance sheet as either an asset or
liability measured at its fair market value and that changes in the derivative's
fair market value be recognized currently in earnings.
We will adopt SFAS 133 effective January 1, 2001. We expect our oil and gas swap
contracts to qualify for special hedge accounting treatment under SFAS 133,
whereby changes in fair value will be recognized in other comprehensive income
(a component of stockholders' equity) until settled, when the resulting gains
and losses will be recorded in earnings. Any hedge ineffectiveness will be
charged currently to earnings; however, we believe that any ineffectiveness will
be immaterial. The effects on our earnings and other comprehensive income
resulting from the adoption of SFAS 133 will vary from period to period and will
be dependent upon prevailing oil and gas prices, the volatility of forward
prices for such commodities, the volumes of production we hedge and the time
periods covered by such hedges.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion is intended to assist you in understanding our results
of operations and our present financial condition. Basin's consolidated
financial statements and the accompanying notes contain additional detailed
information that should be referred to when reviewing this material.
Statements in this discussion may be forward-looking. Such forward-looking
statements involve risks and uncertainties that could cause actual results to
differ significantly from those expressed. See "Forward-Looking Statements."
HISTORY AND OVERVIEW
Basin Exploration, Inc. is a domestic independent oil and gas company that
conducts exploration, acquisition and production activities in the shallow
waters of the Gulf of Mexico and selected areas onshore.
We commenced operations in 1981 and completed an initial public offering of
common stock in 1992. From our inception through 1991, we primarily acquired and
developed properties in the Denver- Julesberg Basin in eastern Colorado. In
1992, we began expanding into other areas within the Rocky Mountain region and
initiated exploration activities. In 1996, we sold our D-J Basin properties,
which represented approximately two-thirds of our oil and gas properties at that
time, for $123.5 million and initiated operations in the Gulf of Mexico.
Since that time, our principal activities have related to property acquisitions,
exploratory drilling and property development in the shallow waters of the Outer
Continental Shelf in the Gulf of Mexico. To a lesser extent, we have conducted
similar activities in the Rocky Mountain region, primarily in the Green River
and Powder River Basins in Wyoming, and, beginning in 1999, in the onshore Gulf
Coast areas of Louisiana and Texas.
During the first nine months of 2000, we participated in the drilling or
deepening of 32 wells, including 22 in the Gulf of Mexico and ten onshore.
Results in the Gulf of Mexico included twelve successful exploratory wells, five
successful development wells, and five unsuccessful exploratory wells. Onshore
results included nine successful development wells, and one unsuccessful
exploratory well.
MERGER AGREEMENT WITH STONE ENERGY CORPORATION
Basin and Stone Energy Corporation entered into a definitive merger agreement
dated October 28, 2000, under which the companies would be combined in a
tax-free, stock-for-stock transaction. Stone Energy Corporation is a company
traded on the New York Stock Exchange and headquartered in Lafayette, Louisiana.
The merger agreement provides for Basin stockholders to receive 0.3974 shares of
Stone common stock for each Basin common share they own. The transaction is
conditioned upon the approval of the stockholders of both companies, pooling of
interest accounting treatment and other customary terms. Stockholders of Basin
holding approximately 14.6% of Basin's outstanding stock and stockholders of
Stone holding approximately 15.7% of Stone's outstanding stock have
9
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entered into voting agreements, pursuant to which such stockholders have agreed
to vote for the merger. Reference is also made to the Report on Form 8-K filed
by Basin on November 8, 2000, in which certain aspects of the transaction are
described in more detail.
RESULTS OF OPERATIONS
The following operating and financial data is provided to assist in
understanding results of operations for the periods presented.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------------------------------------------------------- ---------------------------
1999 2000 1999 2000
-------------------------------------------------------------------- ---------------------------
<S> <C> <C> <C> <C>
PRODUCTION:
Oil (MBBL) 236 269 624 778
Gas (MMCF) 7,036 7,559 20,772 19,338
Total gas equivalents (MMCFE) 8,452 9,173 24,516 24,006
AVERAGE REALIZED SALES PRICE:
Oil (PER BBL) $ 15.52 $ 30.32 $ 14.67 $ 28.37
Gas (PER MCF) $ 2.24 $ 3.78 $ 2.10 $ 3.20
Total gas equivalents (PER MCFE) $ 2.30 $ 4.00 $ 2.15 $ 3.50
REVENUE (IN THOUSANDS):
Oil sales $ 3,651 $ 8,154 $ 9,145 $ 22,080
Gas sales $ 15,776 $ 28,575 $ 43,605 $ 61,927
Total oil and gas sales $ 19,427 $ 36,729 $ 52,750 $ 84,007
EXPENSES (PER MCFE):
Lease operating expenses $ 0.34 $ 0.42 $ 0.34 $ 0.42
Production taxes $ 0.03 $ 0.05 $ 0.02 $ 0.06
Depreciation, depletion and amortization $ 1.18 $ 1.34 $ 1.19 $ 1.33
General and administrative, net $ 0.15 $ 0.16 $ 0.15 $ 0.18
</TABLE>
REVENUE. Oil and gas sales for the three months ended September 30, 2000 totaled
$36.7 million, which represented an increase of $17.3 million, or 89%, over
sales in the third quarter of 1999. This growth was achieved on a 74% increase
in unit prices and a 9% increase in net oil and gas production, based on net
equivalent unit measures. Oil and gas sales for the nine months ended September
30, 2000 totaled $84.0 million, which represented an increase of $31.3 million,
or 59%, compared to the first nine months of 1999. This growth was achieved on a
63% increase in unit prices, offset by a 2% decline in net oil and gas
production, based on net equivalent unit measures.
The higher production in the third quarter of 2000 as compared to the prior
year was attributable to production from new wells brought on-line during the
past year, partially offset by lower production rates on older wells due
primarily to natural depletion. During the second and third quarters of 2000,
sustained production was commenced on fifteen Gulf of Mexico wells in which
Basin owns working interests that range from 8% to 100% and average
approximately 40%. The 2% decline in production during the nine months ended
September 30, 2000 was attributable to the relatively small number of new wells
brought on-line during the first few months of 2000, resulting in insufficient
additions to offset declines related to depletion and the under-performance of
wells on our West Delta Block 61 and Eugene Island Block 65 properties. On an
energy equivalent basis, gas accounted for 81% of our production in the first
nine months of 2000, as compared to 85% of our production in the first nine
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months of 1999. See "Liquidity and Capital Resources" for additional discussion
regarding our oil and gas production.
Oil and gas prices have been significantly higher in 2000 than in 1999, in
response to generally tighter supplies relative to demand. Including the effects
of hedging, we realized approximately $4.00 and $3.50, respectively, per Mcfe of
production during the three- and nine-month periods ended September 30, 2000,
compared to $2.30 and $2.15, respectively, in the comparable periods of 1999.
Hedging transactions reduced our oil and gas sales in the three- and nine-month
periods ended September 30, 2000 by $4.1 million, or $0.44 per Mcfe, and $6.4
million, or $0.26 per Mcfe, respectively. Hedging transactions reduced our oil
and gas sales in the three- and nine-month periods ended September 30, 1999 by
$3.7 million, or $0.44 per Mcfe, and $3.2 million, or $0.13 per Mcfe,
respectively. See "Liquidity and Capital Resources" for additional discussion
regarding our hedging transactions.
LEASE OPERATING EXPENSES. Due to an increased number of producing properties,
increased workover activity, and higher costs for oilfield goods and services
during 2000, lease operating expenses for the three- and nine-month periods
ended September 30, 2000 increased by $1.0 million, or 34%, and $1.7 million, or
21%, respectively, from amounts reported for the comparable periods in 1999.
Lease operating expenses per Mcfe produced increased from $0.34 in the three and
nine months ended September 30, 1999 to $0.42 during the three and nine months
ended September 30, 2000.
PRODUCTION TAXES. Our production taxes generally vary with the amount of revenue
generated from onshore oil and gas production. Revenue attributable to Gulf of
Mexico properties located in federal waters offshore is generally not subject to
production taxes. Our production taxes for the three and nine months ended
September 30, 2000 increased to $0.5 million and $1.4 million, respectively,
from $0.3 million and $0.5 million in the comparable periods of 1999, due
primarily to higher oil and gas prices. Production taxes as a percentage of our
total oil and gas sales were 1.3% and 1.6% for the three- and nine-month periods
ended September 30, 2000, compared to 1.4% and 1.0% in the comparable prior-year
periods. The higher rate in the first nine months of 2000 was due to a greater
portion of our revenues being derived from Rocky Mountain properties than in the
comparable period last year.
DEPRECIATION, DEPLETION AND AMORTIZATION. Depreciation, depletion and
amortization expense for the three and nine months ended September 30, 2000
totaled $12.3 million and $31.9 million, respectively. These amounts represented
increases of $2.3 million, or 23%, for the three-month period and $2.7 million,
or 9%, for the nine-month period. Depletion expense per Mcfe produced in 2000
averaged $1.32 in the third quarter and $1.31 in the first nine months.
Comparable depletion rates in 1999 were $1.16 per Mcfe in the third quarter and
$1.17 per Mcfe in the first nine months. The higher depletion rates applicable
in 2000 are attributable to average costs for reserve additions that exceeded
our adjusted historical average, which reflected the effects of a property
impairment charge recorded in the fourth quarter of 1998. Depreciation,
depletion and amortization expense for the three and nine months ended September
30, 2000 also reflected production volumes that were 9% higher and 2% lower,
respectively, than the comparable periods of 1999.
GENERAL AND ADMINISTRATIVE, NET. General and administrative expenses totaled
$1.5 million for the three months and $4.3 million for the nine months ended
September 30, 2000. These amounts represented increases of $0.2 million, or 14%,
and $0.6 million, or 15%, respectively, compared to the same periods of 1999.
The increases were primarily attributable to expanded operations in the Gulf of
Mexico, the commencement of higher-cost office leases in both Denver and
Houston, and inflation-related increases in labor costs.
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STOCK COMPENSATION, NET. Stock compensation expense relates to annual grants to
employees of restricted stock, including shares awarded to senior management
that will be earned only if certain performance measures are achieved by Basin.
Expense is recognized based on vesting schedules, projections of performance,
and changes in the price of our common stock during applicable vesting periods.
Net of amounts capitalized, stock compensation expense for the three- and
nine-month periods ended September 30, 2000 totaled $0.3 million and $0.6
million, respectively. These amounts represented decreases of $0.2 million and
$0.8 million compared to such periods in 1999. The reductions are attributable
to less appreciation in Basin's common stock price during the three- and
nine-month periods ended September 30, 2000 than during the comparable periods
of 1999.
INTEREST EXPENSE. Interest expense for the three and nine months ended September
30, 2000 totaled $0.2 million and $0.6 million, respectively. These amounts
reflected a $0.1 million increase for the three-month period and a $1.6 million
decrease for the nine-month period, as compared to the prior year. The variances
were attributable to changes in average borrowings and higher effective interest
rates. During the three months ended September 30, 2000, our outstanding debt
balance averaged $48.6 million and our effective interest rate averaged 7.9%. In
the comparable period of 1999, we had average debt of $33.0 million and an
average interest rate of 6.3%. During the nine months ended September 30, 2000,
our average debt and interest rate were $43.0 million and 7.6%, compared to
$71.8 million and 6.6% in the prior-year period. Interest expense reported for
the three and nine months ended September 30, 2000 excludes $0.8 million and
$2.0 million, respectively, of interest capitalized to unproved property costs
in accordance with Statement of Financial Accounting Standards No. 34. For the
comparable three- and nine-month periods of 1999, capitalized interest totaled
$0.4 million and $1.5 million, respectively.
INCOME TAX BENEFIT (PROVISION). No income tax provision was recorded in 1999 due
to the partial utilization of a previously established deferred tax asset
valuation allowance. The provision for income taxes recorded for the first nine
months of 2000 benefited from utilization in the first quarter of this year of
the $1.5 million deferred tax asset valuation allowance that remained at
December 31, 1999. Provisions for income taxes recorded after the first quarter
of 2000 approximate the amounts that would be calculated by applying a statutory
income tax rate of 35% to our income before income taxes.
12
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LIQUIDITY AND CAPITAL RESOURCES
Historically, Basin's principal sources of capital have been cash flow from
operations, borrowings under a revolving line of credit, proceeds from asset
sales, and proceeds from sales of common stock. Our principal uses of capital
have been for the exploration, acquisition, and development of oil and gas
properties.
Our gross accrual-basis capital expenditures during the first nine months of
2000 totaled approximately $82.0 million. Net capital expenditures totaled
approximately $78.2 million, after reflecting recoupments of $3.8 million from
sales of partial interests in prospects. Our principal sources of funds in the
first nine months of 2000 were $68.0 million of net cash provided by operations
before working capital changes and $14.0 million of additional net borrowings
under our revolving line of credit, offset by a $3.5 million increase in net
working capital. At the end of September 2000, we had a working capital deficit
of approximately $6.8 million and long-term debt outstanding under our revolving
line of credit of $48.0 million. The borrowing base currently established under
our revolving line of credit is $90 million.
PRODUCTION AND CASH FLOW. Our cash flow from operations is generally determined
primarily by our oil and gas production volumes and price realizations. During
the first nine months of 2000, we produced 24,006 MMcfe of oil and gas and our
realized prices averaged $3.50 per Mcfe. In the third quarter of 2000, our net
production totaled 9,173 MMcfe and our realized prices averaged $4.00 per Mcfe.
Based on our recent production levels and the anticipated timing and results of
planned operations during the period, we estimate that our total production in
the fourth quarter of 2000 will be approximately the same as in the quarter
ended September 30, 2000. We also estimate that our operating costs and expenses
in the fourth quarter of 2000 will approximate such costs and expenses reported
for the third quarter of 2000, excluding non-recurring general and
administrative expenses incurred in connection with our proposed merger with
Stone Energy Corporation. Although we believe that these projections are
reasonable, there is no assurance that they will be met. See "Forward-Looking
Statements" for a description of certain risks that may impact our ability to
achieve projected levels of production, costs and expenses.
As summarized under "Marketing and hedging transactions" below, we have certain
gas price hedging contracts in effect. These include hedges for 20,000 MMBtu of
gas per day in the fourth quarter of 2000, at an average NYMEX price of $2.50
per MMBtu. This represents a total of approximately 1,840 MMcf, or approximately
20% of our projected oil and gas production, for the quarter. We will receive
prevailing market prices at the time of sale for the remainder of our production
during the period, subject to entering into any additional hedging arrangements
in the future.
MARKETING AND HEDGING TRANSACTIONS. We generally sell our production under
month-to-month contracts at prevailing prices. From time-to-time, however, as we
think conditions warrant, we have entered into hedging transactions or fixed
price sales contracts for a portion of our oil and gas production. The purposes
of these transactions are to limit Basin's exposure to future oil and gas price
declines and achieve a more predictable cash flow, and to take advantage of
prices that we view as attractive. However, such contracts can also limit the
benefits we realize if prices increase, as they generally have during the past
two years.
13
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The following table summarizes Basin's fixed price swap and collar arrangements
for natural gas effective for the period beginning October 1, 2000, for
transactions entered into through November 10, 2000 (one MMBtu is equivalent to
approximately one Mcf ):
<TABLE>
<CAPTION>
---------------------------- ---------------------- ----------------------
DailyVolume NYMEX
Time Period (MMBtu) Price/MMBtu
---------------------------- ---------------------- ----------------------
<S> <C> <C>
10/01/00-12/31/00 20,000 2.50
---------------------------- ---------------------- ----------------------
01/01/01-12/31/01 20,000 2.33
---------------------------- ---------------------- ----------------------
01/01/02-12/31/03 10,000 2.15
---------------------------- ---------------------- ----------------------
</TABLE>
We presently have no hedging contracts in effect relating to future oil
production.
We will adopt SFAS 133 effective January 1, 2001. We expect our oil and gas swap
contracts to qualify for special hedge accounting treatment under SFAS 133,
whereby changes in fair value will be recognized in other comprehensive income
(a component of stockholders' equity) until settled, when the resulting gains
and losses will be recorded in earnings. Any hedge ineffectiveness will be
charged currently to earnings; however, we believe that any ineffectiveness will
be immaterial. The effects on our earnings and other comprehensive income
resulting from the adoption of SFAS 133 will vary from period to period and will
be dependent upon prevailing oil and gas prices, the volatility of forward
prices for such commodities, the volumes of production we hedge and the time
periods covered by such hedges.
REVOLVING LINE OF CREDIT. Effective January 1, 1999, and as subsequently
amended, we entered into a credit agreement with our bank group that provides
for borrowings of up to $150 million. The maximum amount that we can draw is
limited to a borrowing base that is periodically established by the bank group.
Interest rates applied to borrowings under the credit agreement are determined
by reference to the prime rate or LIBOR, at our election. A varying spread of 0%
to 0.25% is added to the prime rate, and a spread of 0.75% to 1.5% is applied to
LIBOR, based upon our facility usage ratio. Our credit agreement contains
various covenants, including restrictions on our ability to incur other debt,
dispose of assets, pay dividends, or repurchase stock. Pursuant to our credit
agreement, substantially all of our producing properties are subject to
mortgages in favor of the banks and our remaining properties are subject to a
negative pledge.
Our credit agreement provides for borrowings to be revolving loans until
November 30, 2002, at which time the outstanding balance will be converted into
a four-year amortizing term loan unless the credit agreement is amended. The
borrowing base under the credit agreement is scheduled to be re-determined at
six-month intervals until the revolving loan is converted into a term loan. Our
borrowing base is currently set at $90 million, and the next re-determination is
scheduled to occur as of December 1, 2000. Borrowing base re-determinations
conducted by the bank group reflect a number of estimates and assumptions
including, but not limited to, future production from Basin's proved properties,
risk factors for estimates of proved reserves, future oil and gas prices, future
operating and development costs, and future interest rates. Changes in such
estimates and assumptions can significantly impact the size of the borrowing
base established by the banks. Because these factors will be influenced by
future events, which cannot be forecast with certitude, we cannot predict what
level of borrowing base will be established at any future determination date.
The weighted average interest rate on borrowings outstanding under the credit
agreement at September 30, 2000 was 7.6%. Our annual interest costs will
fluctuate based upon changes in short-term interest rates and borrowings
outstanding. Assuming debt outstanding remained unchanged from the amount
outstanding at September 30, 2000, the annual impact on interest
14
<PAGE>
expense of a ten percent change in the average interest rate would be
approximately $0.3 million, before amounts capitalized. As the interest rate is
variable and is reflective of current market conditions, the carrying value of
Basin's debt approximates its fair value.
Positive or negative changes in the borrowing base during 2000 could impact the
level of our capital expenditures during the year. Increases, supported by
performance of our properties, drilling results, and/or higher oil and gas
prices, could improve our ability to grow. Decreases would adversely affect our
liquidity and capital resources, potentially resulting in a reduction of planned
capital expenditures, the sale of assets, or the issuance of securities.
CAPITAL EXPENDITURES. Our capital expenditures are generally discretionary. We
determine our activity levels based upon 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. Since
the beginning of 1996, we have largely focused our exploration activities in the
shallow waters of the Gulf of Mexico, primarily off the coast of Louisiana.
During the second half of 1998 we began to direct a relatively small portion of
our exploration budget toward onshore projects. In addition to our exploration
activities, we also pursue property acquisition opportunities in the vicinity of
our Gulf of Mexico exploration operations, in the Rocky Mountain region where we
have an existing base of proved reserves and producing wells, and in certain
other major domestic producing basins where we believe significant upside
potential exists.
Basin's gross capital expenditures during the nine months ended September 30,
2000 totaled approximately $82.0 million. Our net capital expenditures totaled
approximately $78.2 million, after reflecting $3.8 million of proceeds from
asset sales.
Gulf of Mexico operations have accounted for approximately 84% of our aggregate
gross capital investments during the nine months ended September 30, 2000. These
investments principally related to the ongoing development of six properties
with productive wells drilled in earlier periods, participation in the drilling
of 22 wells, development costs related to seventeen of the wells that were
successful, and costs related to identification and acquisition of exploratory
prospects. These investments included the acquisition of ten leases at the March
2000 federal Central Gulf of Mexico lease sale, for a total of $5.4 million. The
remainder of our capital investments during the first nine months of 2000 have
been associated with onshore operations, including participation in the drilling
or deepening of ten wells, development costs related to nine of the wells that
were successful, and investments in seismic data and leaseholds for future
exploration.
Basin has established an exploration and development budget for 2000 that
provides for net capital investments of approximately $100 million. This budget
primarily provides for:
- development of six Gulf of Mexico properties with one or more wells
at the beginning of 2000 that had not yet commenced sustained
production;
- participation in approximately 30 gross (15 net) wells in the Gulf of
Mexico, mostly exploratory wells;
- participation in approximately four gross (two net) onshore
exploration prospects and twelve gross (five net) onshore development
wells;
- development of year 2000 exploratory discoveries, including assumed
discoveries for a portion of the wells drilled in the future;
15
<PAGE>
- continued exploitation of our other offshore and onshore properties;
and
- acquisitions of seismic data and exploratory leaseholds, both in the
Gulf of Mexico and onshore.
Demand for drilling rigs and related products and services has significantly
increased during 2000, resulting in cost increases and increased delays in
obtaining materials and services. Current conditions have been factored into our
planning and investment decisions and we do not anticipate that they will have a
material adverse impact on our planned operations unless there is significant
further deterioration in the cost, availability or quality of such goods and
services.
Basin plans to participate in drilling approximately seventeen wells during the
fourth quarter of 2000, including nine in the Gulf of Mexico and eight onshore.
We estimate that our capital expenditures in the current quarter will
approximate $25 million. Subject to realization of our projections with respect
to net oil and gas production volumes and price realizations, we anticipate
being able to fund such investments with a portion of our cash flow from
operations during the period. See "Production and cash flow."
We also pursue acquisitions of properties with proved and probable reserves as
an integral part of our overall business strategy. We expect these efforts to
result in significant investment activity over time, but have not specifically
allocated any portion of our 2000 budget for proved property acquisitions. If
such a transaction is executed, our capital budget for the year would likely be
increased, and external financing would likely be required. We presently do not
anticipate that any significant acquisition transactions will be consummated in
the near term.
Pursuant to our merger agreement with Stone Energy Corporation, we have
agreed to certain limitations on our investment activities prior to the
merger. These include limits on aggregate investments in drilling and
development activities and for acquisitions of seismic data and leasehold
interests. Restrictions also apply with respect to which drilling and
development projects we will undertake and which property interests may be
sold or acquired. The agreement's provisions for capital investments are
generally in accord with our past practices and previously-established budget
for the current quarter and the first half of 2001, including our planned
participation in the Central Gulf of Mexico lease sale scheduled for March
2001.
The amount and allocation of future capital expenditures will depend on a
number of additional factors that are not entirely within our 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. Basin's planned capital expenditures are also based on estimates
regarding availability of capital that depend on assumptions and projections
regarding production, oil and gas prices, and borrowing base
re-determinations under our revolving line of credit. Due to these
uncertainties, and other matters described under "Forward-Looking
Statements", actual capital expenditures may vary significantly from current
expectations.
16
<PAGE>
FORWARD-LOOKING STATEMENTS
Some of the information in this report contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These statements express, or are based
on, expectations about future events, activities, or developments that we
expect, believe, project, intend, estimate, plan or anticipate will, should,
could or may occur. These include such matters as:
- business strategies;
- amount and nature of capital expenditures;
- estimated oil and gas reserves;
- timing and amount of future production of oil and gas;
- operating costs and other expenses;
- cash flow and anticipated liquidity;
- marketing of oil and gas;
- drilling of wells and results therefrom; and
- prospect development and property acquisitions.
There are many factors that could cause these forward-looking statements to be
incorrect, including, but not limited to, the risks described in the foregoing
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Basin's Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 29, 2000. These factors include, among others:
- general economic conditions;
- oil and gas price volatility;
- our ability to find, acquire, market, develop and produce new
properties;
- the risks associated with acquisitions and exploration;
- operating hazards attendant to the oil and gas business especially in
the difficult environment offshore;
- downhole drilling and completion risks that are generally not
recoverable from third parties or insurance;
- uncertainties in the estimation of proved reserves and in the
projection of future rates of production and timing of development
expenditures;
- relatively short reserve life of Gulf of Mexico properties;
- potential mechanical failure or underperformance of significant
wells;
- concentration of value in a relatively small number of properties
offshore;
- the strength and financial resources of Basin's competitors;
- Basin's ability to find and retain skilled personnel;
- climatic conditions;
- availability of capital;
- availability and cost of material and equipment;
- delays in anticipated start-up dates;
- environmental risks;
- actions or inactions of third-party operators of Basin's properties;
and
- regulatory developments.
When you consider these forward-looking statements, you should keep in mind
these risk factors and the other cautionary statements in this report. Our
forward-looking statements speak only as of the date made. Neither Basin nor any
person acting on Basin's behalf undertakes any obligation to update any
forward-looking statements in this report or any statement incorporated by
reference.
17
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's exposure to interest rate risk and commodity price risk is
discussed in Management's Discussion and Analysis of Financial Condition and
Results of Operations under the headings "Liquidity and Capital Resources -
Marketing and hedging transactions" and "Liquidity and Capital Resources -
Revolving line of credit". The Company has no exposure to foreign currency
exchange rate risks.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None
(b) None
(c) None
(d) None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------ -----------------------
<S> <C>
2.1 Agreement and Plan of Merger between Sterling Energy Corporation,
Basin Energy, Inc. and Basin Exploration, Inc. dated October 13,
1994(4)
2.2 Plan of Merger between Basin Sterling, Inc. and Basin Exploration,
Inc. dated November 22, 1994(4)
2.3 Plan of Merger between Basin Operating Company and Basin
Exploration, Inc. dated December 14, 1994.(5)
2.4 Agreement and Plan of Merger dated as of October 28, 2000, by and
among Stone Energy Corporation, a Delaware corporation, Partner
Acquisition Corp., a Delaware corporation and a direct, wholly-owned
subsidiary of Stone Energy Corporation, and Basin Exploration,
Inc.(14)
3.1 Restated Certificate of Incorporation of Basin.(2)
3.2 Restated Bylaws of Basin, as amended February 23, 2000.(13)
4.1 Common Stock Certificate of Basin.(2)
</TABLE>
18
<PAGE>
<TABLE>
<S> <C>
10.1 Equity Incentive Plan as amended May 12, 1999.(11)
10.2 Employment Agreement dated March 31, 1992 by and between Basin
Exploration, Inc. and Michael S. Smith.(3)
10.3 Gulf Coast Geoscientist Overriding Royalty Interest Plan as amended
November 10, 1999.(12)
10.4 Onshore Geoscientist Overriding Royalty Interest Plan dated August
24, 1999.(12)
10.5 Form of Rights Agreement dated as of February 24, 1996, between
Basin Exploration, Inc. and Corporate Stock Transfer, Inc. as Rights
Agent.(6)
10.6 First Amendment to Rights Agreement dated as of October 28, 2000,
between Basin Exploration, Inc. and Corporate Stock Transfer,
Inc.(1)
10.7 Performance Shares Plan approved February 4, 1997.(8)
10.8 Change of Control Employment Agreement dated October 13, 1995
between Basin Exploration, Inc. and Howard L. Boigon.(7)
10.9 Amendment to Change of Control Employment Agreement dated June 2,
1999 between Basin Exploration, Inc. and Howard L. Boigon.(11)
10.10 Change of Control Employment Agreement dated August 28, 1997 between
Basin Exploration, Inc. and Samuel D. Winegrad.(11)
10.11 Change of Control Employment Agreement dated August 1, 1997 between
Basin Exploration, Inc. and Neil L. Stenbuck.(12)
10.12 Employment Agreement dated February 1, 1999, between Basin
Exploration, Inc. and David A. Pustka.(10)
10.13 Change of Control Employment Agreement dated March 24, 1999 between
Basin Exploration, Inc. and Thomas J. Corley.(13)
10.14 Employment Agreement dated January 28, 1999, between Basin
Exploration, Inc. and Patrick A. Jackson.(10)
10.15 Amendment to Employment Agreement dated May 12, 1999, between Basin
Exploration, Inc. and Patrick A. Jackson.(1)
10.16 Change of Control Employment Agreement dated May 12, 1999 between
Basin Exploration, Inc. and Dalton F. Polasek.(13)
10.17 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.(9)
10.18 Amended and Restated Credit Agreement dated January 1, 1999 among
the Company and NationsBank, N.A., U.S. Bank National Association
and Union Bank of California, N.A.(10)
10.19 First Amendment of Amended and Restated Credit Agreement dated July
1, 1999 among the Company, NationsBank, N.A., U.S. Bank National
Association and Union Bank of California, N.A.(11)
10.20 Second Amendment of Amended and Restated Credit Agreement dated
October 15, 1999 among the Company and U.S. Bank National
Association, Union Bank of California, Toronto Dominion (Texas),
Inc. and Bank of America National Trust and Savings
Association.(12)
10.21 Third Amendment of Amended and Restated Credit Agreement dated
December 1, 1999, among Basin Exploration, Inc. and U.S. Bank
National Association, Union Bank of California, Toronto Dominion
(Texas), Inc. and Bank of America National Trust and Savings
Association.(12)
27 Financial Data Schedule(1)
</TABLE>
(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 Form 8-K filed on December 10, 1994, and
incorporated herein by reference.
(5) Filed as an Exhibit to Form 10-K filed on March 28, 1995, and
incorporated herein by reference.
(6) Filed as an Exhibit to Form 8-K filed on February 26, 1996, and
incorporated herein by reference.
(7) Filed as an Exhibit to Form 10-K filed on March 28, 1996, and
incorporated herein by reference.
(8) Filed as an Exhibit to Form 10-K filed on March 31, 1997, and
incorporated herein by reference.
(9) Filed as an Exhibit to Form 8-K filed on December 11, 1997, and
incorporated herein by reference.
(10) Filed as an Exhibit to Form 10-K filed on March 30, 1999, and
incorporated herein by reference.
(11) Filed as an Exhibit to Form 10-Q filed on August 16, 1999, and
incorporated herein by reference.
(12) Filed as an Exhibit to Form 10-Q filed on November 15, 1999 and
incorporated herein by reference.
(13) Filed as an Exhibit to Form 10-K filed on March 29, 2000, and
incorporated herein by reference.
(14) Filed as an Exhibit to Form 8-K filed on November 8, 2000, and
incorporated herein by reference.
(b) Reports on Form 8-K
Basin filed no Reports on Form 8-K during the quarter for
which this report is filed. We did, however, file a Report
on Form 8-K on November 8, 2000, under item numbers 5 and 7,
relating to the proposed merger between Basin and Stone
Energy Corporation.
19
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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: November 14, 2000 By:/s/ Neil L. Stenbuck
--------------------
Neil L. Stenbuck
Chief Financial Officer
Date: November 14, 2000 By:/s/ James A Tuell
-----------------
James A. Tuell
Controller and
Chief Accounting Officer
20
