<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
Quarterly Report Under Section 13 or 15(d)
[X] of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1996 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 NO. 1-10762
BENTON OIL AND GAS COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 77-0196707
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1145 EUGENIA PLACE, SUITE 200
CARPINTERIA, CALIFORNIA 93013
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (805) 566-5600
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
--- ---
At November 12, 1996, 27,673,956 shares
of the Registrant's Common Stock were
outstanding.
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2
BENTON OIL AND GAS COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Page
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at September 30, 1996
and December 31, 1995 (Unaudited)......................................................3
Consolidated Statements of Income for the Three
Months Ended September 30, 1996 and 1995 (Unaudited)...................................4
Consolidated Statements of Income for the Nine
Months Ended September 30, 1996 and 1995 (Unaudited)...................................5
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1996 and 1995 (Unaudited)...................................6
Notes to Consolidated Financial Statements..................................................8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................................................14
PART II. OTHER INFORMATION
Signatures................................................................................................................22
</TABLE>
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3
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BENTON OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 22,646,654 $ 6,179,998
Restricted cash (Note 4) 1,064,000 20,314,000
Marketable securities 74,129,687
Accounts receivable:
Accrued oil and gas revenue 36,736,502 22,069,217
Joint interest and other 7,279,383 2,869,962
Prepaid expenses and other 335,463 214,622
------------- -------------
TOTAL CURRENT ASSETS 142,191,689 51,647,799
RESTRICTED CASH (Notes 3 and 8) 68,000,000
OTHER ASSETS 5,859,614 3,434,760
PROPERTY AND EQUIPMENT (Notes 3 and 5):
Oil and gas properties (full cost method - costs of
$18,490,581 and $17,925,371 excluded from
amortization in 1996 and 1995, respectively) 209,496,028 177,110,550
Furniture and fixtures 3,554,079 2,539,233
------------- -------------
213,050,107 179,649,783
Accumulated depletion and depreciation (41,130,610) (19,982,244)
------------- -------------
171,919,497 159,667,539
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$ 387,970,800 $ 214,750,098
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable:
Revenue distribution $ 317,591 $ 2,692,751
Trade and other 27,063,350 19,777,018
Accrued interest and other liabilities (Note 3) 8,274,953 1,687,648
Income taxes payable 13,804,507 1,039,166
Short term borrowings (Note 4) 1,108,507 21,905,480
Current portion of long term debt (Note 3) 1,453,709 7,433,339
------------- -------------
TOTAL CURRENT LIABILITIES 52,022,617 54,535,402
LONG TERM DEBT (Note 3) 175,031,464 49,486,306
MINORITY INTEREST (Note 8) 14,324,822 7,047,791
COMMITMENTS AND CONTINGENCIES (Notes 3, 5, 7 and 9)
STOCKHOLDERS' EQUITY (Note 3):
Preferred stock, par value $0.01 a share;
authorized 5,000,000 shares; outstanding, none
Common stock, par value $0.01 a share;
authorized 40,000,000 shares; issued and
outstanding 27,660,805 and 25,508,605 shares at
September 30, 1996 and December 31, 1995, respectively 276,608 255,086
Additional paid-in capital 121,697,281 97,745,794
Retained earnings 24,618,008 5,679,719
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TOTAL STOCKHOLDERS' EQUITY 146,591,897 103,680,599
------------- -------------
$ 387,970,800 $ 214,750,098
============= =============
</TABLE>
See notes to consolidated financial statements.
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4
BENTON OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
1996 1995
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REVENUES
Oil and gas sales $38,045,636 $16,987,239
Gain (loss) on exchange rates 370,895 654,242
Investment earnings and other 2,484,188 648,390
----------- -----------
40,900,719 18,289,871
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EXPENSES
Lease operating costs and production taxes 6,017,003 2,957,667
Depletion, depreciation and amortization 8,010,723 4,722,583
General and administrative 3,646,047 2,700,198
Interest 5,135,028 2,354,167
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22,808,801 12,734,615
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INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST 18,091,918 5,555,256
INCOME TAXES (Note 6) 6,400,861 1,308,192
----------- -----------
INCOME BEFORE MINORITY INTEREST 11,691,057 4,247,064
MINORITY INTEREST (Note 8) 2,877,766 1,342,690
----------- -----------
NET INCOME $ 8,813,291 $ 2,904,374
=========== ===========
INCOME PER COMMON SHARE:
Primary and fully diluted $ 0.29 $ 0.11
=========== ===========
</TABLE>
See notes to consolidated financial statements
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5
BENTON OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1996 1995
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<S> <C> <C>
REVENUES
Oil and gas sales $ 102,416,608 $41,816,499
Gain on sale of properties (Note 2) 7,153,253
Gain on exchange rates 2,026,815 773,028
Investment earnings and other 4,132,463 1,570,740
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115,729,139 44,160,267
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EXPENSES
Lease operating costs and production taxes 15,273,020 8,244,738
Depletion, depreciation and amortization 22,810,429 11,195,985
General and administrative 12,597,182 6,583,804
Interest 10,775,900 5,715,208
Partnership exchange expenses (Note 2) 2,139,655
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63,596,186 31,739,735
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INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST 52,132,953 12,420,532
INCOME TAXES (Note 6) 15,842,834 3,279,294
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INCOME BEFORE MINORITY INTEREST 36,290,119 9,141,238
MINORITY INTEREST (Note 8) 7,277,031 3,085,263
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INCOME BEFORE EXTRAORDINARY CHARGE 29,013,088 6,055,975
EXTRAORDINARY CHARGE FOR EARLY RETIREMENT OF
DEBT, NET OF TAX BENEFIT OF $879,000. (Note 2) 10,074,799
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NET INCOME $ 18,938,289 $ 6,055,975
============= ===========
INCOME (LOSS) PER COMMON SHARE:
Primary:
Income before extraordinary charge $ 1.00 $ 0.23
Extraordinary charge (0.35)
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Net Income $ 0.65 $ 0.23
============= ===========
Fully Diluted:
Income before extraordinary charge $ 0.96 $ 0.23
Extraordinary charge (0.33)
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Net Income $ 0.63 $ 0.23
============= ===========
</TABLE>
See notes to consolidated financial statements.
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6
BENTON OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1996 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 18,938,289 $ 6,055,975
Adjustments to reconcile net income to net cash
provided by operating activities:
Depletion, depreciation and amortization 22,810,429 11,195,985
Net earnings from limited partnerships (53,121)
Amortization of financing costs 397,277 137,553
(Gain) loss on disposition of assets (6,928,253) 12,482
Partnership exchange expenses 2,139,655
Minority interest in undistributed earnings of subsidiary 7,277,031 3,085,263
Extraordinary charge for early retirement of debt 10,074,799
Increase in accounts receivable (19,198,261) (11,599,117)
Increase in prepaid expense and other (120,841) (1,847,462)
Decrease in accounts payable 5,114,676 8,141,806
Increase in accrued interest and other liabilities 6,587,305 1,580,762
Increase in income taxes payable 12,765,341 2,556,634
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TOTAL ADJUSTMENTS 40,919,158 13,210,785
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NET CASH PROVIDED BY OPERATING ACTIVITIES 59,857,447 19,266,760
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 34,637,513 15,420,441
Additions of property and equipment (59,275,083) (47,934,120)
Increase in restricted cash (68,000,000)
Decrease in restricted cash 19,250,000
Purchases of marketable securities (132,421,754)
Maturities of marketable securities 58,292,067
Distributions from limited partnerships 277,469
------------- ------------
NET CASH USED IN INVESTING ACTIVITIES (147,239,788) (32,513,679)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants 13,440,014 686,615
Proceeds from issuance of notes payable 180,023,620 22,720,000
Payments on short term borrowings
and notes payable (73,991,720) (9,195,028)
Prepayment premiums on debt retirement (10,074,799)
Increase in other assets (5,548,118) (377,387)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 103,848,997 13,834,200
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NET INCREASE IN CASH 16,466,656 587,281
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,179,998 14,192,568
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 22,646,654 $ 14,779,849
============= ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest expense $ 4,340,484 $ 4,094,082
============= ============
Cash paid during the period for income taxes $ 2,201,424 $ 840,556
============= ============
</TABLE>
(continued)
See notes to consolidated financial statements.
<PAGE> 7
7
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the nine months ended September 30, 1996, $3,226,000 principal amount of
the Company's 8% convertible notes and $4,310,000 principal amount of the
Company's 8% convertible debentures were retired upon conversion into 275,081
and 435,872 shares of the Company's common stock, respectively. During the nine
months ended September 30, 1995, $127,000 of the Company's 8% convertible notes
and $768,000 of the Company's 8% convertible debentures were retired in exchange
for 10,827 and 77,679 shares of the Company's common stock, respectively.
During the nine months ended September 30, 1996 and 1995, the Company financed
the purchase of oil and gas equipment and services in the amount of $272,655 and
$9,896,729, respectively, and in 1995, leased office equipment in the amount of
$54,473. Also during the nine months ended September 30, 1996, the Company
acquired the partners' interests in each of the three limited partnerships
sponsored by the Company in exchange for an aggregate of 168,362 shares of the
Company's common stock and warrants to purchase 587,783 shares of common stock
at $11.00 per share, with a total value of $3,996,601.
See notes to consolidated financial statements.
<PAGE> 8
8
BENTON OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Benton Oil and Gas Company (the "Company") engages in the exploration,
development, production and management of oil and gas properties.
The Company and its former subsidiary, Benton Oil and Gas Company of Louisiana,
participated as the managing general partner of three oil and gas limited
partnerships formed during 1989 through 1991. Under the provisions of the
limited partnership agreements, the Company received compensation as stipulated
therein, and functioned as an agent for the partnerships to arrange for the
management, drilling, and operation of properties, and assumed customary
contingent liabilities for partnership obligations. In January 1996, the Company
issued an aggregate of 168,362 shares of common stock and warrants to purchase
587,783 shares of common stock at $11 per share in exchange for all outstanding
limited partnership interests and liquidated the partnerships.(See Note 2.)
The consolidated financial statements include the accounts of the Company and
its subsidiaries. The Company's investment in the Russia joint venture
("GEOILBENT") is proportionately consolidated based on the Company's 34%
ownership interest. Beginning in 1995, GEOILBENT has been included in the
consolidated financial statements based on a fiscal period ending September 30.
This change was made to provide adequate time for the accumulation and review of
financial information from the joint venture for both quarterly and annual
reporting purposes. This change did not have a material effect on the
consolidated financial statements. All material intercompany profits,
transactions and balances have been eliminated.
INTERIM REPORTING
In the opinion of the Company, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position as of September 30,
1996, and the results of operations for the three and nine month periods ended
September 30, 1996 and 1995. The unaudited financial statements are presented in
accordance with the requirements of Form 10-Q and do not include all disclosures
normally required by generally accepted accounting principles. Reference should
be made to the Company's consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1995 for additional disclosures, including a summary of the Company's
accounting policies.
The results of operations for the nine month period ended September 30, 1996 are
not necessarily indicative of the results to be expected for the full year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
<PAGE> 9
9
EARNINGS PER SHARE
Earnings per common share are computed by dividing net income by the weighted
average number of common and common equivalent shares outstanding. Common
equivalent shares are shares which may be issuable upon exercise of outstanding
stock options and warrants. Total weighted average common stock equivalent
shares used to calculate earnings per common share were:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
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<S> <C> <C> <C> <C>
Primary shares 30,324,562 26,706,084 29,126,486 26,541,919
Fully diluted shares 30,470,178 26,706,084 30,206,328 26,701,428
</TABLE>
PROPERTY AND EQUIPMENT
The Company follows the full cost method of accounting for oil and gas
properties. Accordingly, all costs associated with the acquisition, exploration,
and development of oil and gas reserves are capitalized as incurred, including
exploration overhead of $1,095,021 and $1,653,677 for the nine months ended
September 30, 1996 and 1995, respectively. Only overhead which is directly
identified with acquisition, exploration or development activities is
capitalized. All costs related to production, general corporate overhead and
similar activities are expensed as incurred. The costs of oil and gas properties
are accumulated in cost centers on a country by country basis, subject to a cost
center ceiling (as defined by the Securities and Exchange Commission).
All capitalized costs of oil and gas properties (excluding unevaluated property
acquisition and exploration costs) and the estimated future costs of developing
proved reserves, are depleted over the estimated useful lives of the properties
by application of the unit-of-production method using only proved oil and gas
reserves. Excluded costs attributable to the Venezuelan, Russian and other cost
centers at September 30, 1996 were $14,777,237, $2,611,204, and $1,102,140,
respectively. Excluded costs attributable to the Venezuelan, Russian and other
cost centers at December 31, 1995 were $14,001,386, $3,214,849 and $709,136,
respectively. Depletion expense attributable to the Venezuelan, Russian and
United States cost centers for the nine months ended September 30, 1996 was
$18,870,995, $1,915,984 and $1,659,859 ($2.09, $3.34 and $6.73 per equivalent
barrel), respectively. Depletion expense attributable to the Venezuelan, Russian
and United States cost centers for the nine months ended September 30, 1995 was
$7,055,634, $1,397,363 and $2,499,313 ($1.99, $2.85 and $6.12 per equivalent
barrel), respectively. Depreciation of furniture and fixtures is computed using
the straight-line method, with depreciation rates based upon the estimated
useful life applied to the cost of each class of property. Depreciation expense
was $362,209 and $243,675 for the nine months ended September 30, 1996 and 1995,
respectively.
MARKETABLE SECURITIES
Marketable securities are carried at amortized cost. They are comprised of
high-grade debt instruments, demand or time deposits, bankers' acceptances and
certificates of deposit or acceptances of large U.S. financial institutions and
commercial paper of highly rated U.S. corporations; all having maturities of no
more than 180 days.
RECLASSIFICATIONS
Certain items in 1995 have been reclassified to conform to the 1996 financial
statement presentation.
NOTE 2 - PROPERTY SALES AND PARTNERSHIP EXCHANGE OFFER
In March 1995, the Company sold its 32.5% working interest in certain depths
(above approximately 10,575 feet) in the West Cote Blanche Bay Field for
approximately $14.9 million. In April 1996, the Company sold its remaining
interests in the West Cote Blanche Bay, Rabbit Island and Belle Isle Fields
located in the Gulf Coast of Louisiana for approximately $35.4 million,
resulting in a gain of approximately $7.2 million after adjustments for revenues
and expenses subsequent to the effective date of December 31, 1995 and
satisfaction of a net profits interest associated with the properties. In
conjunction with this sale and to obtain the required consents for such sale,
the Company
<PAGE> 10
10
agreed to repay $35 million in senior unsecured notes and a $5 million revolving
credit facility which was secured in part by these properties. Debt prepayment
premiums and related costs totalling approximately $11.0 million ($10.1 million
net of tax benefits) were recognized as an extraordinary loss in the second
quarter of 1996. (See Note 3.)
In January 1996, the Company completed an exchange offer under which it issued
an aggregate of 168,362 shares of common stock and warrants to purchase 587,783
shares of common stock at $11 per share in exchange for all outstanding limited
partnership interests in the three remaining limited partnerships sponsored by
the Company. The shares of common stock were valued at $1.9 million (based upon
the current market price at the time of the offer), which was allocated to oil
and gas properties. Substantially all of the oil and gas properties were
immediately sold at their approximate book value. The warrants, issued as an
inducement to the participants to accept the exchange offer, were valued at
$3.64 per warrant (an aggregate of $2.1 million), which was charged to expense
in the first quarter of 1996.
NOTE 3 - LONG TERM DEBT
Long term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
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<S> <C> <C>
Senior unsecured notes with interest at 11.625%.
See description below. $125,000,000
Senior unsecured notes with interest at 13.0%.
See description below. $35,000,000
Revolving secured credit facility. Interest
payments due quarterly beginning
March 31, 1995. See description below. 5,000,000
Convertible subordinated debentures with
interest at 8.0%. See description below. 4,310,000
Convertible subordinated notes with interest
at 8.0%. See description below. 3,269,000
Benton-Vinccler credit facility with interest at
LIBOR plus 6%. Collateralized by a time deposit
of the Company earning
approximately LIBOR plus 5.75%.
See description below. 50,000,000
Promissory note due on July 1, 1996 with
interest at 13.0% from January 1, 1996.
Unsecured. 1,000,000
Vendor financing with interest ranging from 10.5 to 13.5%.
Principal and interest payments due in varying
installments through April 1997. Unsecured. 6,234,357
Bank financing with interest at LIBOR plus
7.5% to 8.0%. Secured by certain GEOILBENT
oil export proceeds. See description below. 1,411,000 850,000
Other--various equipment leases and bank financing with
interest and/or principal payments due monthly varying from
$180 to $3,381. Interest rates vary from 9.75% to 16.91%.
Notes and leases mature from March 1997 to March 2000.
Secured by equipment and, at December 31, 1995,
residential real estate. 74,173 1,256,288
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176,485,173 56,919,645
Less current portion 1,453,709 7,433,339
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$175,031,464 $49,486,306
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</TABLE>
In May 1996, the Company issued $125 million in 11.625% senior unsecured notes
due May 1, 2003. Interest on the notes is due May 1 and November 1 of each year,
beginning November 1, 1996. The indenture agreement provides for certain
limitations on liens, additional indebtedness, certain investment and capital
expenditures, dividends, mergers and sales of assets. A portion of the proceeds
from the notes was used to repay certain long term indebtedness and certain
short term obligations, and the remainder will be used for capital expenditure
and working capital purposes.
<PAGE> 11
11
In September 1994 and June 1995, the Company issued $15 million and $20 million
in 13% senior unsecured notes due 2002 and 2007, respectively. Additionally, in
connection with the two issuances of notes, the Company issued warrants
entitling the holder to purchase 250,000 shares of common stock at $9.00 per
share and 125,000 shares at $17.09 per share, subject to adjustment in certain
circumstances, that are exercisable on or before September 30, 2002 and June 30,
2007, respectively. In April and May 1996, in conjunction with the sale of the
Company's Gulf Coast properties and the issuance of $125 million of debt, the
Company repaid the outstanding 13% notes, accrued interest, and corresponding
prepayment premiums of $11.0 million. (See Note 2.)
In December 1994, the Company entered into a $10 million revolving credit
facility, secured in part by mortgages on the Company's U.S. properties and in
part by a guarantee provided by the financial institution which arranged the
credit facility. In exchange for the credit enhancement, the Company issued to
the arranging financial institution and lending commercial bank warrants
entitling the holders to purchase 50,000 shares of common stock at $12.00 per
share, subject to adjustment in certain circumstances, that are exercisable on
or before December 2004, and the Company granted to the arranging institution a
5% net profits interest in the Company's properties whose development was
financed by the facility. In conjunction with the sale of the Company's Gulf
Coast properties in April 1996, the Company repaid the outstanding balance of
$5.0 million to the lending institution. (See Note 2.)
In May 1992, the Company issued $6,428,000 aggregate principal amount of
publicly offered 8% convertible subordinated debentures due May 1, 2002,
convertible at the option of the note holders at 101.157 shares per $1,000
principal amount. In May 1996, the holders of the outstanding notes were
notified of the Company's intention to prepay the debentures on July 23, 1996 at
103% of the principal amount plus accrued interest. As a result, holders of the
remaining debentures elected to convert their notes for 430,007 shares of common
stock.
In October 1991, the Company issued $4,662,000 aggregate principal amount of
privately placed 8% convertible subordinated notes due October 1, 2001,
convertible at the option of the note holders at 85.259 shares per $1,000
principal amount. In December 1995, the holders of the outstanding notes were
notified of the Company's intention to prepay the notes on February 12, 1996 at
103% of the principal amount plus accrued interest. As a result, substantially
all of the holders elected to convert their notes for shares of common stock.
During the first quarter of 1996, the Company issued an aggregate of 275,081
shares of common stock upon the conversion of notes with a principal amount of
$3,226,000 and prepaid the remaining note principal of $43,000 plus premium and
accrued interest.
In August 1996, Benton-Vinccler entered into a $50 million, 2 year credit
facility with Morgan Guaranty Trust Company of New York ("Morgan Guaranty") to
repay the balance outstanding under a short term credit facility (See Note 4)
and to repay certain advances received from the Company. The credit facility is
collateralized in full by a time deposit of the Company and bears interest at
LIBOR plus 6%. The Company will receive interest on its time deposit and a
security fee on the outstanding principal of the loan, for a combined total of
approximately LIBOR plus 5.75%. The loan arrangement contains no restrictive
covenants and no financial ratio covenants.
Beginning in August 1994, GEOILBENT had entered into various agreements with
International Moscow Bank ("IMB") for credit facilities with the following
terms: amounts of $4-6 million, repayment over 14 to 17 months, and interest at
LIBOR plus 7.5 to 8.0%. In December 1995, GEOILBENT signed a new credit facility
with IMB for $5 million, payable over 17 months with interest at LIBOR plus
8.0%. At September 30, 1996 and December 31, 1995, the Company's proportionate
share of the outstanding balances was $1.4 million and $0.9 million,
respectively. While the repayment of loans under earlier agreements was
guaranteed by the Company, repayment under the current agreement is not.
NOTE 4 - SHORT TERM BORROWINGS
In 1994, Benton-Vinccler entered into a $25 million credit facility with Morgan
Guaranty to repay commercial paper and for working capital requirements. The
credit facility was collateralized in full by time deposits from the Company,
bore interest at LIBOR plus 3/4% and was renewed on a monthly basis. The loan
arrangement contained no restrictive covenants and no financial ratio covenants.
The outstanding balance under the credit facility at December 31, 1995 was
$19.25 million. In August 1996, the facility was replaced by a long term
agreement for $50 million. (See Note 3.)
<PAGE> 12
12
Beginning in the fourth quarter of 1994, Benton-Vinccler acquired approximately
$4.1 million of drilling and production equipment from trading companies and
suppliers under terms which included repayment within a 12-month period in
monthly and quarterly installments at interest rates from 6.7% to 10.75%. In
June 1996, the Company paid the balance remaining on these purchases with
proceeds from its debt issuance in May 1996. (See Note 3.) At December 31, 1995,
approximately $0.7 million related to these loans was outstanding.
In June 1994, GEOILBENT entered into a payment advance agreement with NAFTA
Moscow, the export agency which markets GEOILBENT's oil production to purchasers
in Europe. The payment advance of $2.5 million against future oil shipments,
which bore an effective discount rate of 12%, was repaid through withholdings
from oil sales on a monthly basis through December 1994. In March and August
1995, GEOILBENT received $3.0 million and $2.0 million, respectively, in
production payment advances pursuant to similar agreements with NAFTA Moscow
containing similar terms. During the period ended September 30, 1996, GEOILBENT
repaid the original NAFTA Moscow advances. Funding for the repayment was
provided largely by entering into other oil payment advance arrangements and
similar short term borrowings with other oil purchasers and with Russian
commercial banks. GEOILBENT also entered into an agreement with Morgan Guaranty
for a short term credit facility under which the Company provides cash
collateral for the loans to GEOILBENT. GEOILBENT's obligations under the new
agreements with the Russian commercial banks and oil purchaser are not
guaranteed by the Company. At September 30, 1996, the Company's proportionate
share of the outstanding liabilities of GEOILBENT was $1.1 million, all of which
was cash collateralized by the Company.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
In May 1996, the Company entered into an agreement with Morgan Guaranty which
provides for a $20 million revolving credit facility and an $18 million cash
collateralized 5-year letter of credit to secure the Company's performance of
the minimum exploration work program required in the Delta Centro Block in
Venezuela. The revolving credit facility can be drawn upon until December 1996,
and calls for interest at LIBOR plus 3% through June 1997 and LIBOR plus 3.75%
thereafter. Any amount outstanding at the end of the revolving period will
automatically convert into a term loan due 15 months thereafter. The credit
facility contains financial covenants requiring that the Company maintain a
current ratio of at least 1.1 to 1.0 and a minimum net worth of $100 million at
the end of each fiscal quarter.
In the normal course of its business, the Company may periodically become
subject to actions threatened or brought by its investors or partners in
connection with the operation or development of its properties or the sale of
securities. Prior to 1992, the Company was engaged in the formation and
operation of oil and gas limited partnership interests. In 1992, the Company
ceased raising funds through such sales. Certain limited partners in limited
partnerships sponsored by the Company have brought an action against the Company
in connection with the Company's operation of the limited partnerships as
managing general partner. The plaintiffs seek actual and punitive damages for
alleged actions and omissions by the Company in operating the partnerships and
alleged misrepresentations made by the Company in selling the limited
partnership interests. In May 1995, the Company agreed to a binding arbitration
proceeding with respect to such claims. As of September 30, 1996, the plaintiffs
had not commenced discovery. The Company intends to vigorously defend this
action and does not believe the claims raised are meritorious. However, new
developments could alter this conclusion at any time. The Company will be forced
to expend time and financial resources to defend or resolve any such matters.
The Company is also subject to ordinary litigation that is incidental to its
business. None of the above matters are expected to have a material adverse
effect on the Company's financial statements.
NOTE 6 - TAXES ON INCOME
As of December 31, 1995, for federal income tax purposes the Company had
operating loss carryforwards of approximately $41.0 million, expiring in the
years 2003 through 2010. If the carryforwards are ultimately realized,
approximately $3.0 million will be credited to additional paid-in capital for
tax benefits associated with deductions for income tax purposes related to stock
options. The provisions for income taxes for 1996 and 1995 consist primarily of
foreign taxes currently payable.
<PAGE> 13
13
NOTE 7 - RUSSIAN EXPORT TARIFF
GEOILBENT received a waiver from the Russian oil export tariff for 1995. In July
1996, the oil export tariff was terminated, replaced by new or increased excise
and transportation burdens levied on all oil producers. It is currently unclear
how such other tax rates and regimes will be set and administered. The Russian
regulatory environment continues to be volatile and the Company is unable to
predict the impact of such changes in tariffs, taxes and duties.
NOTE 8 - VENEZUELA OPERATIONS
On July 31, 1992, the Company and its partner, Venezolana de Inversiones y
Construcciones Clerico, C.A. ("Vinccler"), signed an operating service agreement
to reactivate and further develop three Venezuelan oil fields with Lagoven,
S.A., an affiliate of the national oil company, Petroleos de Venezuela, S.A.
("PDVSA"). The operating service agreement covers the Uracoa, Bombal and
Tucupita fields that comprise the South Monagas Unit. Under the terms of the
operating service agreement, Benton-Vinccler, a corporation owned 80% by the
Company and 20% by Vinccler, is a contractor for Lagoven and is responsible for
overall operations of the South Monagas unit, including all necessary
investments to reactivate and develop the fields comprising the unit.
Benton-Vinccler receives an operating fee in U.S. dollars deposited into a U.S.
commercial bank account for each barrel of crude oil produced (subject to
periodic adjustments to reflect changes in a special energy index of the U.S.
Consumer Price Index) and is reimbursed according to a prescribed formula in
U.S. dollars for its capital costs, provided that such operating fee and cost
recovery fee cannot exceed the maximum dollar amount per barrel set forth in the
agreement (which amount is periodically adjusted to reflect changes in the
average of certain world crude oil prices). The Venezuelan government maintains
full ownership of all hydrocarbons in the fields.
In January 1996, the Company and its bidding partners, Louisiana Land and
Exploration ("LL&E") and Norcen Energy Resources, LTD ("Norcen") were awarded
the right to explore and develop the Delta Centro Block in Venezuela. The
contract requires a minimum exploration work program consisting of completing a
1,300 kilometer seismic survey and drilling three wells to depths of 12,000 to
18,000 feet within five years. PDVSA estimates that this minimum exploration
work program will cost $60 million and requires that the Company, LL&E and
Norcen each post a performance surety bond or standby letter of credit for its
pro rata share of the estimated work commitment expenditures. The Company has a
30% interest in the exploration venture, with LL&E and Norcen each owning a 35%
interest. Under the proposed terms of the operating agreement, which establishes
the management company of the project, LL&E will be the operator of the field
and, therefore, the Company will not be able to exercise control of the
operations of the venture. It is currently anticipated that Corporation
Venezolana del Petroleo, S.A., an affiliate of PDVSA, will have up to a 35%
interest in the management company, which will dilute the voting power of the
partners on a pro rata basis. In July 1996, formal agreements were finalized and
executed and the Company posted an $18 million standby letter of credit, which
is collateralized in full by a time deposit of the Company, to secure its 30%
share of the minimum exploration work program.
NOTE 9 - SUBSEQUENT EVENTS
In September 1996, the Company signed an agreement with Crestone Energy
Corporation, a privately held corporation headquartered in Denver, Colorado,
which provides for the acquisition of Crestone by the Company in a stock
transaction valued at approximately $15 million. If the merger is approved by
the Crestone stockholders, the Company will issue one share of its common stock
for each seven outstanding shares of Crestone common stock which will result in
the issuance of approximately 628,100 shares of the Company's common stock and
options to purchase approximately 107,600 shares of the Company's common stock.
Crestone Energy Corporation's primary asset is a large undeveloped acreage
position in the South China Sea, under a Petroleum Contract with the China
National Offshore Oil Corporation (CNOOC) for an area known as Wan'An Bei,
WAB-21. The Company anticipates that the transaction will be completed during
the fourth quarter of 1996 and that Crestone will, as a wholly-owned subsidiary
of the Company, continue as the operator and contractor of WAB-21.
In October 1996, the Company announced that GEOILBENT had received a term sheet
from the European Bank for Reconstruction and Development ("EBRD") for a $55
million nonrecourse credit facility. The documentation for such facility is
expected to be completed and signed during the fourth quarter of 1996, with
initial disbursements occurring thereafter.
<PAGE> 14
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
PRINCIPLES OF CONSOLIDATION AND ACCOUNTING METHODS
The Company has included the results of operations of Benton-Vinccler in its
consolidated statement of operations and has reflected the 20% ownership
interest of Vinccler as a minority interest. Beginning in 1995, GEOILBENT has
been included in the consolidated financial statements based on a fiscal period
ending September 30. Results of operations reported for the period ended
September 30, 1996 for Russia reflect the nine months ended June 30, 1996. The
Company's investment in GEOILBENT is proportionately consolidated based on the
Company's ownership interest, and for oil and gas reserve information, the
Company reports its 34% share of the reserves attributable to GEOILBENT.
The Company follows the full-cost method of accounting for its investments in
oil and gas properties. The Company capitalizes all acquisition, exploration,
and development costs incurred. The Company accounts for its oil and gas
properties using cost centers on a country by country basis. Proceeds from sales
of oil and gas properties are credited to the full-cost pools. Capitalized costs
of oil and gas properties are amortized within the cost centers on an overall
unit-of-production method using proved oil and gas reserves as determined by
independent petroleum engineers. Costs amortized include all capitalized costs
(less accumulated amortization), the estimated future expenditures (based on
current costs) to be incurred in developing proved reserves, and estimated
dismantlement, restoration and abandonment costs. See Note 1 to Consolidated
Financial Statements.
The following discussion of the Company's results of operations for the periods
ended September 30, 1996 and 1995 and financial condition at September 30, 1996
and December 31, 1995 should be read in conjunction with the Company's
Consolidated Financial Statements and related notes thereto included in PART I,
Item 1, "Financial Statements."
RESULTS OF OPERATIONS
The Company's results of operations for the three and nine months ended
September 30, 1996 primarily reflect the substantial growth of Benton Vinccler,
C.A. in Venezuela and the sale of the Company's U.S. operations. Benton-
Vinccler accounted for more than 90% of the Company's production, oil and gas
sales and net income for the first nine months of 1996, and reported increases
of more than 130% in these areas over the corresponding period of 1995. Benton
Vinccler's significant growth has resulted in increases in both oil and gas
sales and expenses compared to the corresponding period in 1995, although
expenses have declined both on a per barrel basis and as a percent of oil and
gas sales as production volumes have increased. Other major influences on the
Company's results of operations during the nine months ended September 30, 1996
were the sale of its Gulf Coast operations, resulting in a gain of $7.2 million
and the restructuring of its long term debt, resulting in the issuance of $125
million of senior unsecured notes and an extraordinary charge of $11.0 million
($10.1 million net of tax benefits) related to the early retirement of certain
privately placed notes. In the first quarter of 1996, the Company completed a
partnership exchange offer, resulting in a noncash charge of $2.1 million
related to the issuance of certain warrants.
The following table presents selected expense items from the Company's
consolidated income statement as a percentage of oil and gas sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Lease Operating Costs and Production Taxes 15.8% 17.4% 14.9% 19.7%
Depletion, Depreciation and Amortization 21.1 27.8 22.3 26.8
General and Administrative 9.6 15.9 12.3 15.7
Interest 13.5 13.9 10.5 13.7
</TABLE>
<PAGE> 15
15
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
The Company had revenues of $40.9 million for the three months ended September
30, 1996. Expenses incurred during the period consisted of lease operating costs
and production taxes of $6.0 million, depletion, depreciation and amortization
expense of $8.0 million, general and administrative expense of $3.7 million,
interest expense of $5.1 million, income tax expense of $6.4 million and
minority interest of $2.9 million. Net income was $8.8 million or $0.29 per
share (fully diluted).
By comparison, the Company had revenues of $18.3 million for the three months
ended September 30, 1995. Expenses incurred during the period consisted of lease
operating costs and production taxes of $3.0 million, depletion, depreciation
and amortization expense of $4.7 million, general and administrative expense of
$2.7 million, interest expense of $2.4 million, income tax expense of $1.3
million and minority interest of $1.3 million. Net income for the period was
$2.9 million or $0.11 per share.
Revenues increased $22.6 million, or 123%, during the three months ended
September 30, 1996 compared to the corresponding period of 1995 primarily due to
increased oil sales in Venezuela. Sales quantities for the three months ended
September 30, 1996 from Venezuela and Russia were 3,375,384 Bbl and 176,089 Bbl,
respectively, compared to 1,453,717 Bbl and 217,056 Bbl, respectively, for the
three months ended September 30, 1995. Prices for crude oil averaged $10.84 per
Bbl (pursuant to terms of an operating service agreement) from Venezuela and
$12.65 per Bbl from Russia for the three months ended September 30, 1996
compared to $8.75 per Bbl from Venezuela and $11.06 per Bbl from Russia for the
corresponding period of 1995. The Company had no domestic sales for the three
months ended September 30, 1996 compared to 10,462 Bbl of crude oil and
condensate and 1,217,813 Mcf of natural gas for the three months ended September
30, 1995. Domestic prices for crude oil and natural gas averaged $13.61 per Bbl
and $1.50 per Mcf during the three months ended September 30, 1995. The decrease
in domestic production is due to the sale of substantially all of the Company's
remaining domestic properties in April 1996. (See Note 2.) Revenues for the
three months ended September 30, 1996 were reduced by a loss of $0.8 million
related to a commodity hedge agreement compared to a loss of $0.1 million during
the corresponding period of 1995. Investment earnings increased $1.9 million, or
317%, during the three months ended September 30, 1996 compared to the three
months ended September 30, 1995 due to increased cash and marketable securities
resulting primarily from the issuance of senior unsecured notes in May 1996 and
sale of property interests in Louisiana. Revenues for the three months ended
September 30, 1996 were increased by a foreign exchange gain of $0.4 million
compared to $0.7 million gain during the corresponding period of 1995.
Lease operating costs and production taxes increased $3.0 million, or 100%,
during the three months ended September 30, 1996 compared to the three months
ended September 30, 1995 primarily due to the growth of the Company's Venezuelan
operations and the payment of the export tariff in Russia, but decreased as a
percentage of oil and gas sales. Depletion, depreciation and amortization
increased $3.3 million, or 70%, during the three months ended September 30, 1996
compared to the corresponding period of 1995 primarily due to the increased oil
production in Venezuela, but decreased as a percentage of oil and gas sales.
Depletion expense per barrel of oil equivalent produced from Venezuela and
Russia during the three months ended September 30, 1996 was $2.14 and $3.22,
respectively, compared to $2.00 and $2.82, respectively, during the
corresponding period of the previous year. General and administrative expenses
increased $1.0 million, or 37%, during the three months ended September 30, 1996
compared to the corresponding period of 1995 primarily due to the implementation
of certain consulting and related arrangements among Benton-Vinccler, the
Company and Vinccler, Venezuelan municipal taxes (which are a function of
growing oil revenues) and the Company's increased corporate activity associated
with the growth of the Company's business, but decreased substantially as a
percentage of oil and gas sales. Interest expense increased $2.7 million, or
113%, during the three months ended September 30, 1996 compared to the three
months ended September 30, 1995 primarily due to increased borrowing to fund
operations in Venezuela and Russia. Income tax expense increased $5.1 million,
or 392%, during the three months ended September 30, 1996 compared to the
corresponding period of 1995 due primarily to increases in profitability in
Venezuela. Income attributable to minority interest increased $1.6 million, or
123%, for the three months ended September 30, 1996 compared to the three months
ended September 30, 1995 as a result of the increased profitability of Benton-
Vinccler's operations in Venezuela.
<PAGE> 16
16
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
The Company had revenues of $115.7 million for the nine months ended September
30, 1996. Expenses incurred during the period consisted of lease operating costs
and production taxes of $15.3 million, depletion, depreciation and amortization
expense of $22.8 million, general and administrative expense of $12.6 million,
interest expense of $10.8 million, partnership exchange expense of $2.1 million,
income tax expense of $15.8 million, minority interest of $7.3 million and an
extraordinary charge for early retirement of debt, net of tax benefit, of $10.1
million. Income before extraordinary charge for the period was $29.0 million or
$0.96 per share (fully diluted). Net income was $18.9 million or $0.63 per share
(fully diluted).
By comparison, the Company had revenues of $44.2 million for the nine months
ended September 30, 1995. Expenses incurred during the period consisted of lease
operating costs and production taxes of $8.2 million, depletion, depreciation
and amortization expense of $11.2 million, general and administrative expense of
$6.6 million, interest expense of $5.7 million, income tax expense of $3.3
million and minority interest of $3.1 million. Net income for the period was
$6.1 million or $0.23 per share.
Revenues increased $71.5 million, or 162%, during the nine months ended
September 30, 1996 compared to the corresponding period of 1995 primarily due to
increased oil sales in Venezuela and a $7.2 million gain on the sale of
properties. Sales quantities for the nine months ended September 30, 1996 from
Venezuela and Russia were 9,009,983 Bbl and 572,947 Bbl, respectively, compared
to 3,542,181 Bbl and 490,960 Bbl, respectively, for the nine months ended
September 30, 1995. Prices for crude oil averaged $10.31 per Bbl (pursuant to
terms of an operating service agreement) from Venezuela and $12.11 per Bbl from
Russia for the nine months ended September 30, 1996 compared to $9.09 per Bbl
from Venezuela and $12.25 per Bbl from Russia for the corresponding period of
1995. Domestic sales quantities for the nine months ended September 30, 1996
were 5,876 Bbl of crude oil and condensate and 1,443,834 Mcf of natural gas
compared to 55,422 Bbl of crude oil and condensate and 2,117,399 Mcf of natural
gas for the nine months ended September 30, 1995. The decrease in domestic
production is due to the sale of substantially all of the Company's remaining
domestic properties in April 1996. (See Note 2.) Domestic prices for crude oil
and natural gas averaged $20.18 per Bbl and $2.92 per Mcf during the nine months
ended September 30, 1996 compared to $15.76 per Bbl and $1.56 per Mcf during the
corresponding period of 1995. Revenues for the nine months ended September 30,
1996 were reduced by a loss of $1.8 million related to a commodity hedge
agreement compared to a loss of $0.6 million during the corresponding period of
1995. Investment earnings increased $2.5 million, or 156%, during the nine
months ended September 30, 1996 compared to the nine months ended September 30,
1995 due to increased cash and marketable securities resulting primarily from
the issuance of senior unsecured notes in May 1996 and sale of property
interests in Louisiana. Revenues for the nine months ended September 30, 1996
were increased by a foreign exchange gain of $2.0 million compared to a gain of
$0.8 million during the corresponding period of 1995.
Lease operating costs and production taxes increased $7.1 million, or 87%,
during the nine months ended September 30, 1996 compared to the nine months
ended September 30, 1995 primarily due to the growth of the Company's Venezuelan
operations, but decreased significantly as a percentage of oil and gas sales.
Depletion, depreciation and amortization increased $11.6 million, or 104%,
during the nine months ended September 30, 1996 compared to the corresponding
period of 1995 primarily due to the increased oil production in Venezuela, but
decreased as a percentage of oil and gas sales. Depletion expense per barrel of
oil equivalent produced from Venezuela, Russia and the United States during the
nine months ended September 30, 1996 was $2.09, $3.34 and $6.73, respectively,
compared to $1.99, $2.85 and $6.12, respectively, during the corresponding
period of the previous year. General and administrative expenses increased $6.0
million, or 91%, during the nine months ended September 30, 1996 compared to the
corresponding period of 1995 primarily due to the implementation of certain
consulting and related arrangements among Benton-Vinccler, the Company and
Vinccler, Venezuelan municipal taxes (which are a function of growing oil
revenues) and the Company's increased corporate activity associated with the
growth of the Company's business, but decreased as a percentage of oil and gas
sales. Interest expense increased $5.1 million, or 89%, during the nine months
ended September 30, 1996 compared to the nine months ended September 30, 1995
primarily due to increased borrowing to fund operations in Venezuela and Russia,
but decreased as a percentage of oil and gas sales. The Company incurred
partnership exchange expenses of $2.1 million during the nine months ended
September 30, 1996 as a result of the completion of an exchange offer resulting
in the liquidation of three limited partnerships. Income tax expense increased
$12.5 million, or 379%, during the nine months ended September 30, 1996 compared
to the corresponding period of 1995 due primarily to increases in profitability
in Venezuela. Income attributable to minority interest increased $4.2 million,
or 135%, for
<PAGE> 17
17
the nine months ended September 30, 1996 compared to the nine months ended
September 30, 1995 as a result of the increased profitability of
Benton-Vinccler's operations in Venezuela. The Company recorded an extraordinary
charge for early retirement of debt, net of tax benefit, of $10.1 million during
the nine months ended September 30, 1996 as a result of prepayment premiums due
upon the early repayment of senior unsecured notes.
INTERNATIONAL OPERATIONS
The Company's costs of operations in Venezuela and Russia beginning in 1993 have
included certain fixed or minimum office, administrative, legal and personnel
related costs and certain start up costs, including short term facilities
rentals, organizational costs, contract services and consultants. Such costs are
expected to grow over time as operations increase. In the last two years such
costs have become less significant on a unit of production basis, but such costs
can be expected to fluctuate in the future based upon a number of factors. For
the nine months ended September 30, 1996, the operating costs and general and
administrative expenses for Venezuela were $1.03 and $0.46 per Bbl,
respectively. For the nine months ended September 30, 1995, the operating costs
and general and administrative expenses for Venezuela were $1.33 and $0.59 per
Bbl, respectively. The Company's Venezuelan operations have grown considerably
since inception, and are expected to continue to grow, and its operating costs
and general and administrative expenses are expected to increase both in the
aggregate and on a per unit basis. In Russia, for the nine months ended
September 30, 1996, the operating costs and general and administrative expenses
were $9.71 and $1.74 per Bbl, respectively. For the nine months ended September
30, 1995, the operating costs and general and administrative expenses for Russia
were $5.04 and $1.16 per Bbl, respectively. The Company's Russian operations
have grown less significantly than the Venezuelan operations. Capital
expenditures through 1993 in both Venezuela and Russia focused on start-up
infrastructure items such as roads, pipelines, and facilities rather than
drilling. Beginning in 1994, a higher proportion of capital expenditures have
been and will continue to be spent on drilling and production activities.
As a private contractor, Benton-Vinccler is subject to a statutory income tax
rate of 34%. However, Benton-Vinccler reported lower effective tax rates due to
significant non-cash tax deductible expenses resulting from devaluations in
Venezuela when Benton-Vinccler had net monetary liabilities in U.S. dollars. The
Company cannot predict the timing or impact of future devaluations in Venezuela.
GEOILBENT is subject to a statutory income tax rate of 35%. GEOILBENT has also
been subject to various other tax burdens, including an oil export tariff. The
export tariff was 30 ECU's per ton through 1995, although GEOILBENT obtained an
exemption from such tariff for 1995. The tariff was reduced to 20 ECU's per ton
in January 1996 and terminated effective July 1996, replaced by new or increased
excise and transportation burdens levied on all oil producers. It is currently
unclear how such other tax rates and regimes will be set and administered.
In January 1996, the Company and its bidding partners, Louisiana Land and
Exploration ("LL&E") and Norcen Energy Resources, LTD ("Norcen") were awarded
the right to explore and develop the Delta Centro Block in Venezuela. The
contract requires a minimum exploration work program consisting of completing a
1,300 kilometer seismic survey and drilling three wells to depths of 12,000 to
18,000 feet within five years. PDVSA estimates that this minimum exploration
work program will cost $60 million and requires that the Company, LL&E and
Norcen each post a performance surety bond or standby letter of credit for its
pro rata share of the estimated work commitment expenditures. The Company has a
30% interest in the exploration venture, with LL&E and Norcen each owning a 35%
interest. Under the proposed terms of the operating agreement, which establishes
the management company of the project, LL&E will be the operator of the field
and, therefore, the Company will not be able to exercise control of the
operations of the venture. It is currently anticipated that Corporation
Venezolana del Petroleo, S.A., an affiliate of PDVSA, will have up to a 35%
interest in the management company, which will dilute the voting power of the
partners on a pro rata basis. In July 1996, formal agreements were finalized and
executed and the Company posted an $18 million standby letter of credit, which
is collateralized in full by a time deposit of the Company, to secure its 30%
share of the minimum exploration work program. The venture intends to conduct a
3-D seismic survey beginning in 1996 at a total cost to the Company of $4-6
million. The first well is tentatively scheduled for 1997 at a cost of $1.5-2.0
million to the Company. Future seismic and drilling programs will be based on
the results of 1996-97 activity.
<PAGE> 18
18
Any oil and gas produced at Delta Centro will be sold at market prices and will
be subject to the oil and gas taxation regime in Venezuela and to the terms of a
profit sharing agreement with PDVSA. Under current oil and gas tax law, a
royalty of up to 16.7% will be paid to the state, and an income tax rate of
66.7% will be applied to the venture's pre-tax profits. Under the terms of the
profit sharing agreement, the venture will share 41% of pre-tax income with
PDVSA for the period of time during which the first $1 billion of revenues is
produced; thereafter, the profit sharing may increase to up to 50% according to
a formula based on return on assets.
PROPOSED ACQUISITION
In September 1996, the Company signed an agreement with Crestone, a privately
held corporation headquartered in Denver, Colorado, which provides for the
acquisition of Crestone by the Company in a stock transaction valued at
approximately $15 million. If the merger is approved by the Crestone
stockholders, the Company will issue one share of its common stock for each
seven outstanding shares of Crestone common stock which will result in the
issuance of approximately 628,100 shares of the Company's common stock and
options to purchase approximately 107,600 shares of the Company's stock. The
Company anticipates that the transaction will be completed during the fourth
quarter of 1996 and that Crestone will, as a wholly-owned subsidiary of the
Company, continue as the operator and contractor of WAB-21.
The primary asset of Crestone is the WAB-21 Contract executed in 1992 between
Crestone and CNOOC to explore and develop certain offshore acreage in the South
China Sea. The WAB-21 Contract covers approximately six million acres, with an
option for another one million acres under certain circumstances, and lies
within an area which is the subject of a territorial dispute between The
People's Republic of China and Vietnam. Vietnam has also executed an agreement
on a portion of the same offshore acreage with Conoco, a unit of DuPont
Corporation. The territorial dispute has existed for many years, and there has
been limited exploration and no development activity in the area under dispute.
It is uncertain when or how this dispute will be resolved, and under what terms
the various countries and parties to the agreements may participate in the
resolution, although certain proposed economic solutions currently under
discussion would result in Crestone's interest being reduced.
Exploration and development of the area will require substantial capital
expenditures which the Company cannot provide from its cash flow from current
operations. The Company expects that it will be necessary to raise additional
funds from joint ventures or other arrangements which may reduce its interest in
the WAB-21 Contract or the sale of additional debt or equity. There can be no
assurance that such joint ventures can be formed or such funds can be raised or
such other arrangements made on terms acceptable to the Company.
EFFECTS OF CHANGING PRICES, FOREIGN EXCHANGE RATES AND INFLATION
The Company's results of operations and cash flow are affected by changing oil
and gas prices. However, the Company's Venezuelan revenues are based on a fee
adjusted quarterly by the percentage change of a basket of crude oil prices
instead of by absolute dollar changes, which lessens both any upward and
downward effects of changing prices on the Company's Venezuelan revenues and
cash flows. If the price of oil and gas increases, there could be an increase in
the cost to the Company for drilling and related services because of increased
demand, as well as an increase in revenues. Fluctuations in oil and gas prices
may affect the Company's total planned development activities and capital
expenditure program.
Effective May 1, 1994, the Company entered into a commodity hedge agreement with
Morgan Guaranty designed to reduce a portion of the Company's risk from oil
price movements. Pursuant to the hedge agreement, through the end of 1996 the
Company will receive from Morgan Guaranty $16.82 per Bbl and the Company will
pay to Morgan Guaranty the average price per Bbl of West Texas Intermediate
Light Sweet Crude Oil ("WTI") determined in the manner set forth in the hedge
agreement. Such payments will be made with respect to production of 1,500 Bbl of
<PAGE> 19
19
oil per day for 1996. During the nine months ended September 30, 1996, the
average price per Bbl of WTI was $21.18. The Company's net exposure for the nine
months was $1.8 million. The Company's oil production is not materially affected
by seasonality. The returns under the hedge agreement are affected by world-wide
crude oil prices, which are subject to wide fluctuation in response to a variety
of factors that are beyond the control of the Company.
There are presently no restrictions on conversion of currency in either
Venezuela or Russia. However, from June 1994 through April 1996, Venezuela
implemented exchange controls which significantly limited the ability to convert
local currency into U.S. dollars. Because payments made to Benton-Vinccler are
made in U.S. dollars into its United States bank account, and Benton-Vinccler is
not subject to regulations requiring the conversion or repatriation of those
dollars back into the country, the exchange controls did not have a material
adverse effect on Benton-Vinccler or the Company.
Within the United States, inflation has had a minimal effect on the Company, but
is potentially an important factor in results of operations in Venezuela and
Russia. With respect to Benton-Vinccler and GEOILBENT, substantially all of the
sources of funds, including the proceeds from oil sales, the Company's
contributions and credit financings, are denominated in U.S. dollars, while
certain local transactions in Russia and Venezuela are conducted in local
currency. Following the announcement of a Venezuelan preliminary loan accord
with the IMF and the lifting of certain exchange and price controls, inflation
could be expected to have an adverse effect on Benton-Vinccler if devaluation of
the local currency does not substantially offset the effects of inflation.
During the nine months ended September 30, 1996, the Company realized net
foreign exchange gains, primarily as a result of the decline in the value of the
Venezuelan bolivar during periods when Benton-Vinccler had substantial net
monetary liabilities denominated in bolivares. The Company has recognized
significant exchange gains and losses in the past, resulting from fluctuations
in the relationship of the Venezuelan and Russian currencies to the U.S. dollar.
However, there are many factors affecting foreign exchange rates and resulting
exchange gains and losses, many of which are beyond the influence of the
Company. It is not possible to predict the extent to which the Company may be
affected by future changes in exchange rates and exchange controls.
CAPITAL RESOURCES AND LIQUIDITY
The oil and gas industry is a highly capital intensive business. The Company
requires capital principally to fund the following costs: (i) drilling and
completion costs of wells and the cost of production and transportation
facilities; (ii) geological, geophysical and seismic costs; and (iii)
acquisition of interests in oil and gas properties. The amount of available
capital will affect the scope of the Company's operations and the rate of its
growth.
The net funds raised and/or used in each of the operating, investing and
financing activities for the nine months ended September 30, 1996 and 1995 are
summarized in the following table and discussed in further detail below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
Net cash provided by operating activities $ 59,857,447 $ 19,266,760
Net cash used in investing activities (147,239,788) (32,513,679)
Net cash provided by financing activities 103,848,997 13,834,200
------------ --------------
Net increase in cash $ 16,466,656 $ 587,281
============ ==============
</TABLE>
At September 30, 1996, the Company had current assets of $142.2 million
(including $1.1 million of cash restricted as collateral for a loan to
GEOILBENT) and current liabilities of $52.0 million (including a loan of $1.1
million collateralized by restricted cash), resulting in working capital of
$90.2 million and a current ratio of 2.7:1. This compares to the Company's
working capital deficit of $2.9 million at December 31, 1995. The increase of
$93.1 million was due primarily to increased cash as a result of the issuance of
$125 million in senior unsecured notes and the sale of property interests in the
Gulf Coast of Louisiana. (See Notes 2 and 3.)
CASH FLOW FROM OPERATING ACTIVITIES. During the nine months ended September 30,
1996 and 1995, respectively, net cash provided by operating activities was
approximately $59.9 million and $19.3 million, respectively. Cash flow from
operating activities increased by $40.6 million during the nine months ended
September 30, 1996 over the corresponding period of the prior year due primarily
to increased oil production in Venezuela.
<PAGE> 20
20
CASH FLOW FROM INVESTING ACTIVITIES. During the nine months ended September 30,
1996 and 1995, the Company had drilling and production related capital
expenditures of approximately $62.2 million and $57.9 million, respectively. Of
the 1996 expenditures, $52.6 million was attributable to the development of the
South Monagas Unit in Venezuela, $4.0 million related to the development of the
North Gubkinskoye Field in Russia, $2.0 million related to drilling activity in
the West Cote Blanche Bay, Rabbit Island and Belle Isle Fields in Louisiana, and
$3.6 million was attributable to other projects. The Company received proceeds
from the sale of property and equipment of $34.7 million during the nine months
ended September 30, 1996, primarily as a result of the sale of all of its
remaining interest in the West Cote Blanche Bay, Rabbit Island and Belle Isle
Fields; the Company received $14.7 million during the nine months ended
September 30, 1995, from the sale of its working interest in certain depths in
the West Cote Blanche Bay Field. (See Note 2.)
CASH FLOW FROM FINANCING ACTIVITIES. In May 1996, the Company issued $125
million in 11.625% senior unsecured notes due May 1, 2003. A portion of the
proceeds were used to repay certain long term indebtedness and certain short
term obligations. The remainder will be used for capital expenditure and working
capital purposes. (See Note 3.)
The Company expects capital expenditures of approximately $30 million and $115
million for the remainder of 1996 and for 1997, respectively. Funding for the
1996 and subsequent capital expenditure programs is expected to come from the
Company's recent issuance of senior unsecured notes and sale of property
interests, its cash flow from operations, future sales of property interests, or
issuance of debt or equity securities. Included in the 1997 budget is
approximately $24 million, in expenditures for Russia (net to the Company's
interest), which are dependent on proposed nonrecourse financing from the EBRD.
In October 1996, the Company announced that GEOILBENT had received a term sheet
from the EBRD for a $55 million nonrecourse credit facility. The documentation
for such facility is expected to be completed and signed during the fourth
quarter of 1996, with initial disbursements occurring thereafter. Negotiations
are currently underway with EBRD, but there can be no assurance that such
financing will ultimately become available under terms and conditions acceptable
to GEOILBENT or the Company.
FORWARD LOOKING STATEMENTS
This report includes historical information and forward-looking statements. When
used in this report, the words budget, budgeted, anticipate, expect, believes,
goals or projects and similar expressions are intended to identify
forward-looking statements. In accordance with the provisions of the Private
Securities Litigation Reform Act of 1995, the Company cautions that important
factors could cause actual results to differ materially from those in the
forward- looking statements. Such factors include the Company's substantial
concentration of operations in Venezuela, the political and economic risks
associated with international operations, the anticipated future development
costs for the Company's undeveloped proved reserves, the risk that actual
results may vary considerably from reserve estimates, the dependence upon the
abilities and continued participation of certain key employees of the Company,
the risks normally incident to the operation and development of oil and gas
properties and the drilling of oil and gas wells, and the price for oil and
natural gas, and other risks indicated in filings with the Securities and
Exchange Commission.
<PAGE> 21
21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of the Stockholders of the Company held on
July 10, 1996, the following items were voted upon by the
Stockholders:
1. Election of Directors
<TABLE>
<CAPTION>
VOTES AGAINST/ ABSTENTIONS/
VOTES IN FAVOR WITHHELD BROKER NON-VOTES
-------------- -------- ----------------
<S> <C> <C> <C>
Alex E. Benton 21,796,453 342,720 0
Bruce M. McIntrye 21,805,684 333,489 0
Michael B. Wray 21,491,070 648,103 0
Richard W. Fetzner 21,801,420 337,753 0
William H. Gumma 21,789,553 349,620 0
Garrett A. Garrettson 21,802,213 336,960 0
</TABLE>
2. To approve an amendment to the Company's 1991-1992 Stock
Option Plan to increase the number of shares issuable
pursuant to the plan from 2,500,000 shares to 3,400,000
shares.
<TABLE>
<CAPTION>
ABSTENTIONS/
VOTES IN FAVOR VOTES AGAINST BROKER NON-VOTES
-------------- ------------- ----------------
<S> <C> <C> <C>
15,047,048 6,923,134 168,991
</TABLE>
3. To approve and ratify the appointment of Deloitte &
Touche LLP as independent auditors for the fiscal year
ending December 31, 1996:
<TABLE>
<CAPTION>
ABSTENTIONS/
VOTES IN FAVOR VOTES AGAINST BROKER NON-VOTES
-------------- ------------- ----------------
<S> <C> <C> <C>
21,958,446 71,139 109,588
</TABLE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Computation of per share earnings.
(b) Reports on Form 8-K.
None.
<PAGE> 22
22
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.
BENTON OIL AND GAS COMPANY
Dated: November 13, 1996 By: /S/A. E. Benton
---------------
A. E. Benton,
Chairman and Chief Executive Officer
Dated: November 13, 1996 By: /S/Michael B. Wray
------------------
Michael B. Wray
President and Chief Financial Officer
<PAGE> 1
EXHIBIT 11.1
BENTON OIL AND GAS COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
------------ -----------
<S> <C> <C>
PRIMARY EARNINGS PER SHARE
Net income attributable to common stock $ 18,938,289 $ 6,055,975
============ ===========
Weighted average number of common shares outstanding 26,740,931 25,026,099
============ ===========
Primary earnings per share $ 0.71 $ 0.24
============ ===========
ADDITIONAL PRIMARY COMPUTATION
Net income attributable to common stock $ 18,938,289 $ 6,055,975
============ ===========
Shares:
Weighted average number of common shares outstanding 26,740,931 25,026,099
Add shares assuming exercise of options reduced by the number of shares which
could have been purchased with the
proceeds from exercise of such options 2,385,555 1,515,820
------------ -----------
Primary weighted average number of common shares outstanding
as adjusted 29,126,486 26,541,919
============ ===========
Primary earnings per share $ 0.65 $ 0.23
============ ===========
ASSUMING FULL DILUTION
Net income attributable to common stock $ 18,938,289 $ 6,055,975
============ ===========
Shares:
Weighted average number of common shares outstanding 26,740,931 25,026,099
Add shares assuming exercise of options reduced by the number of shares which
could have been purchased with the
proceeds from exercise of such options 3,172,444 1,675,329
------------ -----------
Weighted average number of common shares outstanding as
adjusted 29,913,375 26,701,428
============ ===========
Earnings per common share assuming full dilution $ 0.63 $ 0.23
============ ===========
ADDITIONAL FULLY DILUTED COMPUTATION
Additional adjustment to net income as adjusted per fully diluted computation
above:
Net income attributable to common stock $ 18,938,289 $ 6,055,975
Add after tax interest expense attributable to convertible notes (70,880) 272,100
Add after tax interest expense attributable to convertible
debentures 103,574 339,600
------------ -----------
Net income as adjusted $ 18,970,983 $ 6,667,675
============ ===========
Additional adjustment to weighted average number of shares outstanding:
Weighted average number of common shares outstanding 26,740,931 25,026,099
Add shares assuming conversion of convertible debentures 265,676 572,549
Add shares assuming conversion of convertible notes 27,277 386,650
Add shares assuming exercise of options reduced by the number of shares which
could have been purchased with the
proceeds from exercise of such options 3,172,444 1,675,329
------------ -----------
Weighted average number of common shares outstanding as
adjusted 30,206,328 27,660,627
============ ===========
Earnings per common share assuming full dilution (a) $ 0.63 $ 0.24
============ ===========
</TABLE>
(a) This calculation is submitted in accordance with Regulation S-K Item 601
(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15
because it produces an anti-dilutive result for the nine months ended
September 30, 1995.
<PAGE> 1
EXHIBIT 11.2
BENTON OIL AND GAS COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1996 1995
------------ -----------
<S> <C> <C>
PRIMARY EARNINGS PER SHARE
Net income attributable to common stock $ 8,813,291 $ 2,904,374
============ ===========
Weighted average number of common shares outstanding 27,559,340 25,112,294
============ ===========
Primary earnings per share $ 0.32 $ 0.12
============ ===========
ADDITIONAL PRIMARY COMPUTATION
Net income attributable to common stock $ 8,813,291 $ 2,904,374
============ ===========
Shares:
Weighted average number of common shares outstanding 27,559,340 25,112,294
Add shares assuming exercise of options reduced by the number of shares which
could have been purchased with the
proceeds from exercise of such options 2,765,222 1,593,790
------------ -----------
Primary weighted average number of common shares outstanding
as adjusted 30,324,562 26,706,084
============ ===========
Primary earnings per share $ 0.29 $ 0.11
============ ===========
ASSUMING FULL DILUTION
Net income attributable to common stock $ 8,813,291 $ 2,904,374
============ ===========
Shares:
Weighted average number of common shares outstanding 27,559,340 25,112,294
Add shares assuming exercise of options reduced by the number of shares which
could have been purchased with the
proceeds from exercise of such options 2,877,307 1,593,790
------------ -----------
Weighted average number of common shares outstanding as
adjusted 30,436,647 26,706,084
============ ===========
Earnings per common share assuming full dilution $ 0.29 $ 0.11
============ ===========
ADDITIONAL FULLY DILUTED COMPUTATION
Additional adjustment to net income as adjusted per fully diluted computation
above:
Net income attributable to common stock $ 8,813,291 $ 2,904,374
Add after tax interest expense attributable to convertible notes 0 90,700
Add after tax interest expense attributable to convertible
debentures (24,667) 113,200
------------ -----------
Net income as adjusted $ 8,788,624 $ 3,108,274
============ ===========
Additional adjustment to weighted average number of shares outstanding:
Weighted average number of common shares outstanding 27,559,340 25,112,294
Add shares assuming conversion of convertible debentures 33,531 572,529
Add shares assuming conversion of convertible notes -- 386,650
Add shares assuming exercise of options reduced by the number of shares which
could have been purchased with the
proceeds from exercise of such options 2,877,307 1,593,790
------------ -----------
Weighted average number of common shares outstanding as
adjusted 30,470,178 27,665,263
============ ===========
Earnings per common share assuming full dilution $ 0.29 $ 0.11
============ ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q FOR
THE PERIOD ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 22,646,654
<SECURITIES> 74,129,687
<RECEIVABLES> 44,015,885
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 142,191,689
<PP&E> 213,050,107
<DEPRECIATION> (41,130,610)
<TOTAL-ASSETS> 387,970,800
<CURRENT-LIABILITIES> 52,022,617
<BONDS> 175,031,464
0
0
<COMMON> 276,608
<OTHER-SE> 146,315,289
<TOTAL-LIABILITY-AND-EQUITY> 387,970,800
<SALES> 102,416,608
<TOTAL-REVENUES> 115,729,139
<CGS> 38,083,449
<TOTAL-COSTS> 38,083,449
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,775,900
<INCOME-PRETAX> 52,132,953
<INCOME-TAX> 15,842,834
<INCOME-CONTINUING> 29,013,088
<DISCONTINUED> 0
<EXTRAORDINARY> 10,074,799
<CHANGES> 0
<NET-INCOME> 18,938,289
<EPS-PRIMARY> .65
<EPS-DILUTED> .63
</TABLE>
