<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, 1998 or
Transition Report Pursuant to Section 13 or 15(d)
[ ] of the Securities 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 incorporation (I.R.S. Employer Identification
or organization) Number)
6267 CARPINTERIA AVE., 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 10, 1998, 26,576,896 shares of the
Registrant's Common Stock were outstanding.
<PAGE> 2
2
BENTON OIL AND GAS COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at September 30, 1998
and December 31, 1997 (Unaudited).....................................................3
Consolidated Statements of Operations for the Three
Months Ended September 30, 1998 and 1997 (Unaudited)..................................4
Consolidated Statements of Operations for the Nine
Months Ended September 30, 1998 and 1997 (Unaudited) .................................5
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and 1997 (Unaudited)..................................6
Notes to Consolidated Financial Statements.................................................8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..............................................................15
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS................................................................................22
Item 2. CHANGES IN SECURITIES............................................................................22
Item 3. DEFAULTS UPON SENIOR SECURITIES..................................................................22
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............................................22
Item 5. OTHER INFORMATION................................................................................22
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................................22
Signatures...............................................................................................................23
</TABLE>
<PAGE> 3
3
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BENTON OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 17,238 $ 11,940
Restricted cash 12 48
Marketable securities 71,163 156,436
Accounts receivable:
Accrued oil and gas revenue 19,708 45,379
Joint interest and other 14,105 8,029
Affiliated company 4,993
Prepaid expenses and other 1,841 2,463
--------- ---------
TOTAL CURRENT ASSETS 129,060 224,295
RESTRICTED CASH 74,518 74,288
OTHER ASSETS 14,106 12,497
INVESTMENT IN AND ADVANCES TO AFFILIATED COMPANY, at cost 5,156
PROPERTY AND EQUIPMENT:
Oil and gas properties (full cost method - costs of
$32,972 and $31,588 excluded from amortization in
1998 and 1997, respectively) 461,568 367,756
Furniture and fixtures 9,067 5,734
--------- ---------
470,635 373,490
Accumulated depletion, impairment and depreciation (200,220) (100,293)
--------- ---------
270,415 273,197
--------- ---------
$ 493,255 $ 584,277
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable, trade and other $ 34,230 $ 43,490
Accrued interest payable 11,762 5,533
Payroll and related taxes 1,468 1,799
Income taxes payable 5,120 4,535
Short term borrowings 1,530
Current portion of long term debt 167 1,463
--------- ---------
TOTAL CURRENT LIABILITIES 52,747 58,350
DEFERRED INCOME TAXES 12,469 24,811
LONG TERM DEBT 289,563 280,016
MINORITY INTEREST 18,817 23,368
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01 a share; authorized 5,000 shares;
outstanding, none
Common stock, par value $0.01 a share; authorized 80,000 shares;
issued 29,627 and 29,522 shares at September 30, 1998
and December 31, 1997, respectively 296 295
Additional paid-in capital 146,919 146,125
Retained earnings (deficit) (26,857) 52,011
Treasury stock, at cost, 50 shares in 1997 (699) (699)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 119,659 197,732
--------- ---------
$ 493,255 $ 584,277
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 4
4
BENTON OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data, unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1998 1997
-------- --------
REVENUES
<S> <C> <C>
Oil sales $ 20,030 $ 41,393
Gain on exchange rates 526 751
Investment earnings and other 3,323 3,044
-------- --------
23,879 45,188
-------- --------
EXPENSES
Lease operating costs and production taxes 10,610 12,698
Depletion, depreciation and amortization 7,719 12,622
General and administrative 5,244 5,833
Interest 8,244 5,450
-------- --------
31,817 36,603
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST (7,938) 8,585
INCOME TAXES 197 4,492
-------- --------
INCOME (LOSS) BEFORE MINORITY INTEREST (8,135) 4,093
MINORITY INTEREST (296) 1,224
-------- --------
NET INCOME (LOSS) $ (7,839) $ 2,869
======== ========
NET INCOME (LOSS) PER COMMON SHARE:
Basic $ (0.27) $ 0.10
======== ========
Diluted $ (0.27) $ 0.09
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 5
5
BENTON OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data, unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
--------- ---------
<S> <C> <C>
REVENUES
Oil sales $ 72,157 $ 121,869
Gain on exchange rates 2,025 1,712
Investment earnings and other 11,163 8,883
--------- ---------
85,345 132,464
--------- ---------
EXPENSES
Lease operating costs and production taxes 35,352 29,878
Depletion, depreciation and amortization 28,664 32,662
Write-down of oil and gas properties 71,467
General and administrative 16,696 16,726
Interest 24,354 16,721
--------- ---------
176,533 95,987
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST (91,188) 36,477
INCOME TAXES (7,767) 14,908
--------- ---------
INCOME (LOSS) BEFORE MINORITY INTEREST (83,421) 21,569
MINORITY INTEREST (4,553) 5,584
--------- ---------
NET INCOME (LOSS) $ (78,868) $ 15,985
========= =========
INCOME (LOSS) PER COMMON SHARE:
Basic $ (2.67) $ 0.55
========= =========
Diluted $ (2.67) $ 0.52
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 6
6
BENTON OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands, unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (78,868) $ 15,985
Adjustments to reconcile net income to net cash provided by operating
activities:
Depletion, depreciation and amortization 28,664 32,662
Write-down of oil and gas properties 71,467
Amortization of financing costs 964 990
Loss on disposition of assets 72 4
Minority interest in undistributed earnings of subsidiary (4,551) 5,585
Deferred income taxes (12,342) 4,624
Changes in operating assets and liabilities:
Accounts receivable 14,602 7,591
Prepaid expenses and other 622 (216)
Accounts payable (9,260) 4,928
Accrued interest payable 6,229 3,664
Payroll and related taxes (331) 99
Income taxes payable 585 6,007
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 17,853 81,923
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment (97,410) (80,205)
Increase in investment in and advances to affiliated company (5,156)
Increase in restricted cash (230) (3,664)
Decrease in restricted cash 36 2,100
Purchase of marketable securities (49,389) (48,147)
Maturities of marketable securities 134,662 48,992
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (17,487) (80,924)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants 795 2,611
Proceeds from issuance of short term borrowings and notes payable 6,810 1,190
Payments on short term borrowings and notes payable (89) (1,643)
Increase in other assets (2,584) (1,935)
Treasury stock (699)
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 4,932 (476)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,298 523
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,940 32,432
========= =========
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,238 $ 32,955
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
$ 16,858 $ 11,818
Cash paid during the period for interest expense
========= =========
Cash paid during the period for income taxes $ 3,634 $ 3,397
========= =========
</TABLE>
(continued)
<PAGE> 7
7
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the nine months ended September 30, 1998, the Company converted financing
costs in the amount of $2,598,000 to a long term account receivable from
GEOILBENT.
During the nine months ended September 30, 1998, GEOILBENT converted its short
term borrowing to long term debt. The Company's proportionate share of the
converted debt is $1,573,000.
During the nine months ended September 30, 1997, certain trade payables of
GEOILBENT were converted to long term debt. The Company's proportionate share of
the converted payables is $1,484,000.
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, 1998 (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
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 ownership interest.
GEOILBENT (owned 34% by the Company) has been included in the consolidated
financial statements based on a fiscal period ending September 30. 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,
1998, and the results of operations for the three and nine month periods ended
September 30, 1998 and 1997. 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, 1997 for additional disclosures, including a summary of the Company's
accounting policies.
The results of operations for the three and nine month periods ended September
30, 1998 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.
MARKETABLE SECURITIES
Marketable securities are carried at amortized cost. The marketable securities
the Company may purchase are limited to those defined as Cash Equivalents in the
indentures for its senior unsecured notes. Cash Equivalents may be 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. The Company's marketable securities at cost, which
approximates fair value, at September 30, 1998, consisted of $71.2 million in
commercial paper and at December 31, 1997, consisted of $12.6 million in
government backed notes, $139.4 million in commercial paper, $2.4 million in
agreements to repurchase treasury securities and $2.0 million in bankers'
acceptances.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128") "Earnings per Share." SFAS
128 replaces the presentation of primary earnings per share with a presentation
of basic earnings per share based upon the weighted average number of common
shares for the period. It also requires dual presentation of basic and diluted
earnings per share for companies with complex capital structures. SFAS 128 was
adopted by the Company in December 1997 and earnings per share for all prior
periods have been restated. The numerator (income) and denominator (shares) of
the basic and diluted earnings per share computations for income were (in
thousands, except per share amounts):
<PAGE> 9
9
<TABLE>
<CAPTION>
AMOUNT PER
INCOME SHARES SHARE
------------- ------------ ------------
<S> <C> <C> <C>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
---------------------------------------------
BASIC EPS
Loss attributable to common stockholders $ (7,839) 29,577 $ (0.27)
======== ======== ========
DILUTED EPS
Loss attributable to common stockholders $ (7,839) 29,577 $ (0.27)
======== ======== ========
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
---------------------------------------------
BASIC EPS
Income available to common stockholders $ 2,869 29,094 $ 0.10
======== ======== ========
Effect of Dilutive Securities:
Stock options and warrants 1,552
-------- --------
DILUTED EPS
Income available to common stockholders
and assumed conversions $ 2,869 30,646 $ 0.09
======== ======== ========
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
---------------------------------------------
BASIC EPS
Loss attributable to common stockholders $(78,868) 29,546 $ (2.67)
======== ======== ========
DILUTED EPS
Loss attributable to common stockholders $(78,868) 29,546 $ (2.67)
======== ======== ========
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
---------------------------------------------
BASIC EPS
Income available to common stockholders $15,985 29,025 $ 0.55
======== ======== ========
Effect of Dilutive Securities:
Stock options and warrants 1,746
-------- --------
DILUTED EPS
Income available to common stockholders
and assumed conversions $15,985 30,771 $ 0.52
======== ======== ========
</TABLE>
For the three months ended September 30, 1998 and 1997, an aggregate 5,013,453
and 624,239 options and warrants, respectively, were excluded from the earnings
per share calculations because they were anti-dilutive. For the nine months
ended September 30, 1998 and 1997, an aggregate 4,873,209 and 668,105 options
and warrants, respectively, were excluded from the earnings per share
calculations because they were anti-dilutive.
TREASURY STOCK
In June 1997, the Board of Directors instituted a treasury stock repurchase
program under which the Company is authorized to purchase up to 1,500,000 shares
of its common stock. The shares may be used for re-issuance in connection with
the Company's employee stock option plan, treasury stock or for other corporate
purposes to be determined in the future. During 1997, the Company repurchased
50,000 shares at an average price of $13.99 per share.
<PAGE> 10
10
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 $1,822,000 and $1,323,000 for the nine months ended
September 30, 1998 and 1997, 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). Pursuant
to the ceiling limitation as a result of declines in world crude oil prices, the
Company recognized a write-down of oil and gas properties in the Venezuela cost
center of $17.5 million at March 31, 1998, and recognized write-downs of oil and
gas properties in the Venezuela and Russia cost centers of $38.4 million and
$10.1 million, respectively, at June 30, 1998. Additionally, the Company
recognized a $5.5 million write-down at June 30, 1998 of capitalized costs
associated with certain exploration activities.
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 Russia, China and other cost
centers at September 30, 1998 were $3,695,000, $19,313,000 and $9,964,000,
respectively. Excluded costs attributable to the Venezuela, Russia, China,
Jordan and other cost centers at December 31, 1997 were $7,742,000, $842,000,
$16,473,000, $1,694,000 and $4,837,000, respectively. Depletion expense
attributable to the Venezuela and Russia cost centers for the nine months ended
September 30, 1998, was $25,539,000 and $2,214,000 ($2.69 and $3.51 per
equivalent barrel), respectively. Depletion expense attributable to the
Venezuela and Russia cost centers for the nine months ended September 30, 1997,
was $29,674,000 and $2,355,000 ($2.63 and $3.53 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
$901,000 and $622,000 for the nine months ended September 30, 1998 and 1997,
respectively.
RECLASSIFICATIONS
Certain items in 1997 have been reclassified to conform to the 1998 financial
statement presentation.
NOTE 2 - LONG TERM DEBT
Long term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------- --------
<S> <C> <C>
Senior unsecured notes with interest at 9.375%
See description below $105,000 $105,000
Senior unsecured notes with interest at 11.625%
See description below 125,000 125,000
Benton-Vinccler credit facility with interest at
LIBOR plus 6.125%. Collateralized by a time deposit of the Company earning
approximately LIBOR plus 5.75%
See description below 50,000 50,000
Non-recourse, reserve-based loans with average interest rate of
LIBOR plus 5.25%. See description below 6,088 --
Other 3,642 1,479
-------- --------
289,730 281,479
Less current portion 167 1,463
-------- --------
$289,563 $280,016
======== ========
</TABLE>
<PAGE> 11
11
In November 1997, the Company issued $115 million in 9.375% senior unsecured
notes due November 1, 2007, of which the Company subsequently repurchased $10
million at their par value. 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. The indenture agreements provide for certain
limitations on liens, additional indebtedness, certain investment and capital
expenditures, dividends, mergers and sales of assets. At September 30, 1998, the
Company was in compliance with all covenants of the indentures.
In August 1996, Benton-Vinccler entered into a $50 million, long term credit
facility with Morgan Guaranty Trust Company of New York ("Morgan Guaranty") to
repay the balance outstanding under a short term credit facility and to repay
certain advances received from the Company. The credit facility is
collateralized in full by a time deposit of the Company, bears interest at LIBOR
plus 6.125% and matures in August 2001. The Company receives 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.
In October 1997 and during 1998, GEOILBENT (owned 34% by the Company) borrowed
$10.2 million and $8.8 million respectively, under parallel reserve-based,
non-recourse loan agreements with the European Bank for Reconstruction and
Development ("EBRD") and International Moscow Bank ("IMB"). EBRD and IMB have
agreed to lend up to a total of $65 million to GEOILBENT based on achieving
certain reserve and production milestones. The loans bear an average interest
rate of LIBOR plus 5.25% payable on January 27 and July 27 each year. Principal
payments will be due in varying installments every six months beginning January
27, 2000 until July 27, 2004. The loan agreements require that GEOILBENT meet
certain financial ratios and covenants, including a minimum current ratio, and
provides for certain limitations on liens, additional indebtedness, certain
investment and capital expenditures, dividends, mergers and sales of assets.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
On February 17, 1998, the WRT Creditors Liquidation Trust filed suit in the
United States Bankruptcy Court, Western District of Louisiana, against the
Company and Benton Oil and Gas Company of Louisiana, a.k.a. Ventures Oil & Gas
of Louisiana ("BOGLA"), seeking a determination that the sale by BOGLA to Tesla
Resources Corporation ("Tesla"), a wholly owned subsidiary of WRT Energy
Corporation, of certain West Cote Blanche Bay interests for $15.1 million,
constituted a fraudulent conveyance under 11 U.S.C. Sections 544, 548 and 550
(the "Bankruptcy Code"). The alleged basis of the claim is that at the time of
Tesla's acquisition, it was insolvent and that it paid a price in excess of the
fair value of the property. The Company intends to vigorously contest the suit.
In management's opinion, it is unlikely that the suit will result in a material
adverse effect on the Company's financial statements, but it is too early to
assess the probability of such an outcome.
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. In June 1994, certain limited partners
in limited partnerships sponsored by the Company brought an action against the
Company in connection with the Company's operation of the limited partnerships
as managing general partner. The claimants 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 in return for the limited partners'
agreement to dismiss the state court action. The arbitration has not proceeded
to a hearing, and the Company maintains that the claimants have waived their
right to arbitrate because of their unreasonable delay. If the arbitration does
ever go forward, and if any liability is found to exist, the arbitrator will
determine the amount of any damages and may consider all distributions made to
the partners, including the consideration received in the exchange offer, in
determining the extent of damages, if any. However, there can be no assurance
that an arbitrator will consider such factors in his or her determination of
damages if the allegations are found to be true and damages are awarded. 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.
In May 1996, the Company entered into an agreement with Morgan Guaranty which
provides for 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.
<PAGE> 12
12
The Company has entered into a 15 year lease agreement for office space in
Carpinteria, California. The Company has leased 50,000 square feet for
approximately $74,000 per month, subject to adjustments for tenant improvements,
with annual rent adjustments based on certain changes in the Consumer Price
Index. The Company has entered into a sublease agreement for a portion of the
office space which will not be immediately needed for operations. The Company
has also entered into a sublease agreement for the office space that it
previously occupied. Rents for the sublease of the old office space and the
portion of the new building that will not be immediately needed for operations
approximate the Company's lease costs per square foot of these facilities.
NOTE 4 - TAXES ON INCOME
At December 31, 1997, the Company had, for federal income tax purposes,
operating loss carryforwards of approximately $63 million, expiring in the years
2003 through 2012. If the carryforwards are ultimately realized, approximately
$13 million will be credited to additional paid-in capital for tax benefits
associated with deductions for income tax purposes related to stock options.
The Company has not provided for United States income taxes on $93 million of
foreign subsidiaries' unremitted earnings at December 31, 1997 which are
expected to be reinvested indefinitely. It is not practicable to determine the
amount of income taxes that might be payable if such earnings are ultimately
repatriated.
NOTE 5 - RUSSIA OPERATIONS
The EBRD and IMB have agreed to lend a total of $65 million to GEOILBENT (owned
34% by the Company) under parallel reserve-based, non-recourse loan agreements
("GEOILBENT Credit Facility"). The proceeds from the loans are to be used by
GEOILBENT to develop the North Gubkinskoye and Prisklonovoye fields in West
Siberia, Russia. Initial funding of $10.2 million occurred in October 1997 upon
satisfaction of certain conditions precedent. Another $8.8 million was
subsequently drawn during 1998. Additional borrowings will be based on achieving
certain reserve and production milestones.
GEOILBENT is subject to excise, pipeline and other taxes. The Russian economic,
political and regulatory environment continues to be volatile, and the Company
is unable to predict the impact of taxes, duties and other burdens for the
future.
In April 1998, the Company signed an agreement to earn a 40% equity interest in
the Russian Open Joint Stock Company Severneftegaz. Severneftegaz owns the
exclusive rights to evaluate, develop and produce the natural gas, condensate,
and oil reserves in the Samburg and Evo-Yakha license blocks in West Siberia,
Russia. The two blocks comprise 837,000 acres within and adjacent to the Urengoy
field, Russia's largest producing natural gas field. The Company will earn a 40%
equity interest in exchange for providing the initial capital needed to achieve
natural gas production. The Company's capital commitment will be in the form of
a $100 million loan to the project, the terms of which have yet to be finalized,
which is expected to be disbursed over the initial two-year development phase.
As of September 30, 1998, the Company had loaned $4.9 million to Severneftegaz
pursuant to an interim loan agreement, with interest at LIBOR plus 3%.
NOTE 6 - 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., then one of three exploration and production affiliates of the national
oil company, Petroleos de Venezuela, S.A ("PDVSA"), which have subsequently all
been combined into PDVSA Petroleo Y Gas, S.A. ("P&G"). The operating service
agreement covers the Uracoa, Bombal and Tucupita fields that comprise the South
Monagas Unit ("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 P&G and is responsible for overall operations of the 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. (See Note 1.)
<PAGE> 13
13
In January 1996, the Company and its bidding partners, Louisiana Land &
Exploration ("LL&E"), which has been subsequently acquired by Burlington
Resources Inc., and Norcen Energy Resources, LTD ("Norcen"), which has been
subsequently acquired by Union Pacific Resources Group Inc., 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 an 839
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 and its partners
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 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. Corporacion Venezolana del Petroleo, S.A., an affiliate of PDVSA,
has the right to obtain a 35% interest in the management company, which dilutes
the voting power and equity ownership 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 (See Note 3.). As of September 30, 1998, the Company's share of the
costs incurred to date were $8.0 million. (See Note 1.)
NOTE 7 - CHINA OPERATIONS
In December 1996, the Company acquired Crestone Energy Corporation ("Crestone"),
a privately held corporation headquartered in Denver, Colorado, for 628,142
shares of common stock and options to purchase 107,571 shares of the Company's
common stock at $7.00 per share, valued at $14.6 million. Crestone's primary
asset is a large undeveloped acreage position in the South China Sea, under a
petroleum contract with China National Offshore Oil Corporation ("CNOOC") of the
People's Republic of China for an area known as Wan'An Bei, WAB-21. Crestone
will, as a wholly owned subsidiary of the Company, continue as the operator and
contractor of WAB-21. Crestone has submitted an exploration program and budget
to CNOOC. However, due to certain territorial disputes over the sovereignty of
the contract area, it is unclear when such program will commence.
In October 1997, the Company signed a farmout agreement with Shell Exploration
(China) Limited ("Shell") whereby the Company would acquire a 50% participation
interest in Shell's Liaohe area onshore exploration project in northeast China.
Shell holds a petroleum contract with China National Petroleum Corporation to
explore and develop the deep rights in the Qingshui Block, 563 square kilometers
(approximately 140,000 acres) in the delta of the Liaohe River. Shell is the
operator of the project. In July 1998, the Company paid to Shell 50% of Shell's
prior investment in the Block, which was approximately $4.0 million ($2.0
million to the Company). The Company is required to pay 100% of the first $8.0
million of the costs for the phase one exploration period, after which any
resulting development costs will be shared equally. If the first phase of the
exploration period results in a commercial discovery and if the Company elects
to continue to phase two, then the Company will pay 100% of the first $8.0
million of the costs of the second phase of the exploration period, after which
any resulting development costs will be shared equally. The Company and Shell
will share costs equally for the third exploration phase if the Company elects
to continue to this phase. As of September 30, 1998, the Company had incurred
$3.0 million related to the farmout agreement.
NOTE 8 - SANTA BARBARA OPERATIONS
In March 1997, the Company acquired a 40% participation interest in three
California State offshore oil and gas leases from Molino Energy. The project
area covers the Molino, the Gaviota and the Caliente fields, located
approximately 35 miles west of Santa Barbara, California. Molino Energy holds a
100% working interest in each of the leases. The Company serves as operator of
the project. In consideration of the 40% participation interest, the Company
will initially pay 100% of the costs of the first well to be drilled on the
block, which began in March 1998. The Company's cost participation in the first
well will be reduced to 53% when an amount equal to 70% of costs of $2.5 million
incurred by Molino Energy prior to the agreement with the Company is paid from
47% of the Company's initial cost participation. The Company will then pay 40%
of all subsequent costs. As of September 30, 1998, the Company had incurred $7.5
million related to the project.
<PAGE> 14
14
NOTE 9 - JORDAN OPERATIONS
In August 1997, the Company acquired the rights to an Exploration and Production
Sharing Agreement ("PSA") with Jordan's Natural Resources Authority ("NRA") to
explore, develop and produce the Sirhan block in southeastern Jordan. The Sirhan
block consists of approximately 1.2 million acres (4,827 square kilometers) and
is located in the Sirhan basin adjacent to the Saudi Arabia border. Under the
terms of the PSA, the Company is obligated to make certain capital and operating
expenditures in up to three phases over eight years. The Company is obligated to
spend $5.1 million in the first exploration phase, which is expected to last
approximately two years. If the Company ultimately elects to continue through
phases two and three, it would be obligated to spend an additional $18 million
over the succeeding six years. During the first quarter of 1998, the Company
reentered two wells and tested two different reservoirs. The WS-10 well was
tested in the Umm Sahm formation and did not result in the production of
commercial amounts of hydrocarbons. The WS-9 well was tested in the Dubaydib
formation and yielded good shows of gas with traces of light oil. The well was
temporarily abandoned pending the evaluation of additional data. The Company
will continue to reprocess and remap seismic data and conduct geological studies
on the remaining prospectivity of the block. At September 30, 1998, the Company
had incurred $3.6 million related to the PSA.
NOTE 10 - SENEGAL OPERATIONS
In December 1997, the Company signed a memorandum of understanding with Societe
des Petroles du Senegal ("Petrosen"), the state oil company of the Republic of
Senegal, to receive a minimum 45% working interest in and to operate the
approximately one million acre onshore Thies Block in western Senegal. The
arrangement was formalized with the signing of a joint operating agreement in
January 1998. In addition, in April 1998, the Company obtained rights from
Petrosen to evaluate and reprocess geophysical data for Senegal's shallow
near-offshore acreage, an area encompassing approximately 7.5 million acres
extending from the Mauritania border in the north to the Guinea Bissau border in
the south, and to choose certain blocks for further data acquisition and
exploration drilling. The Company's working interest in any offshore discovery
will be 85% with the remainder held by Petrosen. The Company's $5.4 million work
commitment on the Thies Block, where Petrosen has recently drilled and completed
the Gadiaga #2 discovery well, consists of hooking up the existing well,
drilling two additional wells and constructing a 41 kilometer (approximately 25
mile) gas pipeline en route to Senegal's main electric generating facility near
Dakar. As of September 30, 1998, the Company had incurred $1.5 million related
to both the onshore block and near-offshore acreage.
NOTE 11 - RELATED PARTY TRANSACTIONS
During 1996, 1997 and the first nine months of 1998, the Company made loans to
Mr. A.E. Benton, its Chief Executive Officer, Mr. M.B. Wray, its Vice Chairman,
and Mr. J.M. Whipkey, its Chief Financial Officer, each loan bearing interest at
6%. At December 31, 1997, the balances owed to the Company by Mr. Benton, Mr.
Wray and Mr. Whipkey were $2.0 million, $0.7 million and $0.5 million,
respectively. At September 30, 1998, the balances owed to the Company by Mr.
Benton, Mr. Wray and Mr. Whipkey were $4.4 million, $0.7 million and $0.5
million, respectively.
<PAGE> 15
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company cautions that any forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) contained in
this report or made by management of the Company involve risks and uncertainties
and are subject to change based on various important factors. 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, the price for oil and natural gas, and other
risks indicated in filings with the Securities and Exchange Commission. The
following factors, among others, in some cases have affected and could cause
actual results and plans for future periods to differ materially from those
expressed or implied in any such forward-looking statements: fluctuations in oil
and gas prices, changes in operating costs, overall economic conditions,
political stability, acts of terrorism, currency and exchange risks, changes in
existing or potential tariffs, duties or quotas, availability of additional
exploration and development opportunities, availability of sufficient financing,
changes in weather conditions, and ability to hire, retain and train management
and personnel.
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. GEOILBENT has been included in the
consolidated financial statements based on a fiscal period ending September 30.
Results of operations reported in the first nine months of 1997 and 1998 for
GEOILBENT reflect the nine months ended June 30, 1997 and 1998, respectively.
The Company's investment in GEOILBENT is proportionately consolidated based on
the Company's ownership interest.
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 of Notes to
Consolidated Financial Statements.)
The following discussion of the Company's results of operations for the nine
months ended September 30, 1998 and 1997 and financial condition at September
30, 1998 and December 31, 1997 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 nine months ended September 30,
1998, reflected the results for Benton Vinccler, C.A. in Venezuela. As a result
of declines in world crude oil prices and lower production from the South
Monagas Unit, oil sales in Venezuela were lower in the first nine months of 1998
compared to 1997 with a 31% decrease in realized fees per barrel (from $10.11 in
1997 to $6.95 in 1998) and a 16% decrease in oil sales quantities (from
11,302,893 Bbls of oil in 1997 to 9,496,143 Bbls of oil in 1998) due to
operational problems with certain high volume wells. Additionally, the Company
recognized full cost ceiling limitation write-downs of its oil and gas
properties in Venezuela and Russia of $55.9 million and $10.1 million,
respectively, and a $5.5 million write-down of capitalized costs associated
<PAGE> 16
16
with certain exploration activities. Benton-Vinccler also experienced increased
operating expenses primarily in the areas of workovers, transportation and
chemical costs, and increased capital requirements for production facilities.
The increased costs resulted in increased per barrel lease operating and
depletion expenses and, especially when combined with the decreased fee
realizations, represented a significantly higher percentage of oil sales
revenues during the period than in the prior period.
The following table presents selected expense items from the Company's
consolidated income statement items as a percentage of oil and gas sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Lease Operating Costs and Production Taxes 53.0% 30.7% 49.0% 24.5%
Depletion, Depreciation and Amortization 38.5 30.5 39.7 26.8
General and Administrative 26.2 14.1 23.1 13.7
Interest 41.2 13.2 33.8 13.7
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
The Company had revenues of $23.9 million for the three months ended September
30, 1998. Expenses incurred during the period consisted of lease operating costs
and production taxes of $10.6 million, depletion, depreciation and amortization
expense of $7.7 million, general and administrative expense of $5.2 million,
interest expense of $8.2 million, income tax expense of $0.2 million and a
minority interest reduction of $0.3 million. Net loss was $7.8 million or $0.27
per share (diluted).
By comparison, the Company had revenues of $45.2 million for the three months
ended September 30, 1997. Expenses incurred during the period consisted of lease
operating costs and production taxes of $12.7 million, depletion, depreciation
and amortization expense of $12.6 million, general and administrative expense of
$5.8 million, interest expense of $5.5 million, income tax expense of $4.5
million and a minority interest of $1.2 million. Net income for the period was
$2.9 million or $.09 per share (diluted).
Revenues decreased $21.3 million, or 47%, during the three months ended
September 30, 1998 compared to the corresponding period of 1997 primarily due to
decreased oil sales revenue in Venezuela as a result of declines in world crude
oil prices and a 35% decrease in oil sales quantities due largely to operational
problems with certain high volume wells. Sales quantities for the three months
ended September 30, 1998 from Venezuela and Russia were 2,659,384 Bbls and
256,168 Bbls, respectively, compared to 4,106,570 Bbls and 188,965 Bbls,
respectively, for the three months ended September 30, 1997. Prices for crude
oil averaged $6.73 per Bbl (pursuant to terms of an operating service agreement)
from Venezuela and $8.35 per Bbl from Russia for the three months ended
September 30, 1998 compared to $9.59 per Bbl from Venezuela and $10.71 per Bbl
from Russia for the corresponding period of 1997. Investment earnings increased
$0.3 million, or 9%, during the three months ended September 30, 1998 compared
to the three months ended September 30, 1997 due to higher average cash and
marketable securities balances. Revenues for the three months ended September
30, 1998 were increased by a foreign exchange gain of $0.5 million compared to a
gain of $0.8 million during the corresponding period of 1997.
Lease operating costs and production taxes decreased $2.1 million, or 17%,
during the three months ended September 30, 1998 compared to the three months
ended September 30, 1997 primarily due to reduced oil production in Venezuela.
Depletion, depreciation and amortization decreased $4.9 million, or 39%, during
the three months ended September 30, 1998 compared to the corresponding period
of 1997 primarily due to reduced oil sales and a write-down of oil and gas
properties in Venezuela and Russia during the six months ended June 30, 1998,
partially offset by increased capital requirements in Venezuela. Depletion
expense per barrel of oil equivalent produced from Venezuela and Russia during
the three months ended September 30, 1998 was $2.46 and $3.27, respectively,
compared to $2.85 and $3.66, respectively, during the corresponding period of
the previous year. General and administrative expenses decreased $0.6 million,
or 10%, during three months ended September 30, 1998 compared to the
corresponding period of 1997 primarily due to decreased Venezuelan municipal
taxes (which are a function of oil revenues) partially offset by costs incurred
in the Company's China operations. Interest expense increased $2.7 million, or
49%, during the three months ended September 30, 1998 compared to the three
months ended September 30, 1997 primarily due to the issuance of $115 million in
senior unsecured notes in November 1997. The Company recognized a loss before
income taxes and minority interest of $7.9 million during the three months ended
September 30, 1998 as compared to income of $8.6 million in the corresponding
period of 1997 which resulted in decreased income tax expense of $4.3 million,
or 96%. The net income (loss) attributable to the minority interest decreased
$1.5 million, or 125%, for the three months ended September 30, 1998 compared to
the three months ended September 30, 1997 as a result of decreased net income
from Benton-Vinccler's operations in Venezuela.
<PAGE> 17
17
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
The Company had revenues of $85.3 million for the nine months ended September
30, 1998. Expenses incurred during the period consisted of lease operating costs
and production taxes of $35.4 million, depletion, depreciation and amortization
expense of $28.7 million, write-down of oil and gas properties of $71.5 million,
general and administrative expense of $16.7 million, interest expense of $24.4
million, income tax benefit of $7.8 million and a minority interest reduction of
$4.6 million. Net loss for the period was $78.9 million or $2.67 per share
(diluted).
By comparison, the Company had revenues of $132.5 million for the nine months
ended September 30, 1997. Expenses incurred during the period consisted of lease
operating costs and production taxes of $29.9 million, depletion, depreciation
and amortization expense of $32.7 million, general and administrative expense of
$16.7 million, interest expense of $16.7 million, income tax expense of $14.9
million, and minority interest of $5.6 million. Net income was $16.0 million or
$0.52 per share (diluted).
Revenues decreased $47.2 million, or 36%, during the nine months ended September
30, 1998 compared to the corresponding period of 1997 primarily due to decreased
oil sales in Venezuela and Russia as a result of declines in world crude oil
prices and reduced oil sales quantities in Venezuela. Sales quantities for the
nine months ended September 30, 1998 from Venezuela and Russia were 9,496,143
and 630,236 Bbl, respectively, compared to 11,302,893 and 667,312 Bbl,
respectively, for the nine months ended September 30, 1997. Prices for crude oil
averaged $6.95 per Bbl (pursuant to terms of an operating service agreement)
from Venezuela and $9.70 per Bbl from Russia for the nine months ended September
30, 1998 compared to $10.11 per Bbl from Venezuela and $11.44 per Bbl from
Russia for the corresponding period of 1997. Investment earnings increased $2.3
million, or 26%, during the nine months ended September 30, 1998 compared to the
nine months ended September 30, 1997 due to higher average cash and marketable
securities balances. Revenues for the nine months ended September 30, 1998 were
increased by a foreign exchange gain of $2.0 million compared to a gain of $1.7
million during the corresponding period of 1997.
Lease operating costs and production taxes increased $5.5 million, or 18%,
during the nine months ended September 30, 1998 compared to the nine months
ended September 30, 1997 primarily due to the continuing maturation of the
Uracoa oil field resulting in higher water handling, gas handling, workover,
transportation and chemical costs in Venezuela. Depletion, depreciation and
amortization decreased $4.0 million, or 12%, during the nine months ended
September 30, 1998 compared to the corresponding period of 1997 primarily due to
reduced oil sales and a write-down of oil and gas properties in Venezuela and
Russia during the six months ended June 30, 1998, partially offset by increased
capital requirements in Venezuela. Depletion expense per barrel of oil
equivalent produced from Venezuela and Russia during the nine months ended
September 30, 1998 was $2.69 and $3.51, respectively, compared to $2.63, and
$3.53 from Venezuela, and Russia, respectively, during the corresponding period
of the previous year. Additionally, during the first half of 1998, the Company
recognized write-downs of oil and gas properties in the Venezuela and Russia
cost centers of $55.9 million and $10.1 million, respectively, pursuant to the
ceiling limitation prescribed by the full cost method of accounting. The
write-downs were a result of the effect of declines in world crude oil prices on
the prices realized by the Company for its Venezuelan and Russian oil sales. The
Company also recognized a $5.5 million write-down of capitalized costs
associated with certain exploration activities. General and administrative
expenses were substantially unchanged during the nine months ended September 30,
1998 compared to the corresponding period of 1997 as decreases in Venezuelan
municipal taxes (which are a function of oil revenues) were offset by costs
incurred in the Company's China and Jordan operations. Interest expense
increased $7.7 million, or 46%, during the nine months ended September 30, 1998
compared to the nine months ended September 30, 1997 primarily due to the
issuance of $115 million in 9.375% senior unsecured notes in November 1997. The
Company recognized a loss before income taxes and minority interest of $91.2
million during the nine months ended September 30, 1998 as compared to income of
$36.5 million in the corresponding period of 1997 which resulted in decreased
income tax expense of $22.7 million, or 152%. The net income (loss) attributable
to the minority interest decreased $10.2 million, or 182%, for the nine months
ended September 30, 1998 compared to the nine months ended September 30, 1997 as
a result of decreased net income from Benton-Vinccler's operations in Venezuela.
<PAGE> 18
18
INTERNATIONAL OPERATIONS
As a private contractor, Benton-Vinccler is subject to a statutory income tax
rate of 34%. However, Benton-Vinccler reported a significantly lower effective
tax rate for 1996 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.
A 3-D seismic survey is being conducted over the southwestern portion of the
Delta Centro Block in Venezuela with an expected total cost to the Company
during 1998 of approximately $4.0 million. Following the initial interpretation
of the seismic data, an initial exploration well is expected to be drilled
during the first quarter of 1999 at a cost to the Company of approximately $4.3
million. Subsequent seismic and drilling programs will be based on the results
of the 1997-1999 activity. The Company's operations related to Delta Centro will
be subject to Venezuelan oil and gas industry taxation, which currently provides
for royalties of 16.66% and income taxes of 67.7%.
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 which
was terminated effective July 1, 1996. Excise, pipeline and other taxes continue
to be levied on all oil producers and certain exporters. The Russian economic,
political and regulatory environment continues to be volatile, and the Company
is unable to predict the impact of taxes, duties and other burdens for the
future.
In December 1996, the Company acquired Crestone Energy Corporation ("Crestone"),
a privately held company headquartered in Denver, Colorado. Crestone's principal
asset is a petroleum contract with China National Offshore Oil Corporation
("CNOOC") for an area known as Wan'An Bei, WAB-21. The WAB-21 petroleum contract
covers 6.2 million acres in the South China Sea, 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 the
Company's interest being reduced. The Company, through Crestone, has submitted
plans and budgets to CNOOC for an initial seismic program to survey the area.
However, exploration activities will be subject to resolution of such
territorial dispute. The Company has recorded no reserves attributable to this
petroleum contract.
In August 1997, the Company acquired the rights to an Exploration and Production
Sharing Agreement ("PSA") with Jordan's Natural Resources Authority ("NRA") to
explore, develop and produce the Sirhan block in southeastern Jordan. The Sirhan
block consists of approximately 1.2 million acres (4,827 square kilometers) and
is located in the Sirhan basin adjacent to the Saudi Arabia border. Under the
terms of the PSA, the Company is obligated to make certain capital and operating
expenditures in up to three phases over eight years. The Company is obligated to
spend $5.1 million in the first exploration phase, which is expected to last
approximately two years. If the Company ultimately elects to continue through
phases two and three, it would be obligated to spend an additional $18.0 million
over the succeeding six years.
In October 1997, the Company signed a farmout agreement with Shell Exploration
(China) Limited ("Shell") whereby the Company would acquire a 50% participation
interest in Shell's Liaohe area onshore exploration project in northeast China.
Shell holds a petroleum contract with CNPC to explore and develop the deep
rights in the Qingshui Block, 563 square kilometers (approximately 140,000
acres) in the delta of the Liaohe River. Shell is the operator of the project.
In July 1998, the Company paid to Shell 50% of Shell's costs to date, which was
approximately $4.0 million ($2.0 million to the Company). The Company is
required to pay 100% of the costs for the phase one exploration period, with a
maximum required expenditure of $8.0 million. If the first phase of the
exploration period results in a commercial discovery and if the Company elects
to continue to phase two, then the Company will pay 100% of the costs of the
second phase of the exploration period, with a maximum required expenditure of
$8.0 million. The Company and Shell is responsible for the costs of the third
exploration phase and the costs of development activities associated with any of
the three phases in proportion to their interests.
In December 1997, the Company signed a memorandum of understanding with Societe
des Petroles du Senegal ("Petrosen") to receive a minimum 45% working interest
in and to operate the approximately one million acre onshore Thies Block in
western Senegal. The arrangement was formalized with the signing of a joint
operating agreement in January 1998. In addition, in April 1998, the Company
obtained rights from Petrosen to evaluate and reprocess geophysical data for
Senegal's shallow near-offshore acreage, an area encompassing approximately 7.5
million acres extending from the Mauritania border in the north to the Guinea
Bissau border in the south, and to choose certain blocks for further data
acquisition and exploration drilling. The Company's working interest in any
offshore discovery will be 85% with the remainder held by Petrosen.
<PAGE> 19
19
The Company's $5.4 million work commitment on the Thies Block, where Petrosen
has recently drilled and completed the Gadiaga #2 discovery well, consists of
hooking up the existing well, drilling two additional wells and constructing a
41 kilometer (approximately 25 mile) gas pipeline en route to Senegal's main
electric generating facility near Dakar. The Company's minimum commitment
related to the offshore blocks involves $1 million of seismic reprocessing to be
followed by additional data acquisition and drilling at the Company's
discretion.
In April 1998, the Company reached an agreement to earn a 40% equity interest in
the Russian Open Joint Stock Company Severneftegaz. Severneftegaz owns the
exclusive rights to evaluate, develop and produce the natural gas, condensate,
and oil reserves in the Samburg and Evo-Yakha license blocks in West Siberia,
Russia. The two blocks comprise 837,000 acres within and adjacent to the Urengoy
field, Russia's largest producing natural gas field. The Company will earn a 40%
equity interest in exchange for providing the initial capital needed to achieve
natural gas production. The Company's capital commitment will be in the form of
a $100 million loan to the project, the terms of which have yet to be finalized,
which is expected to be disbursed over the initial two-year development phase.
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 dampens both any upward and
downward effects of changing prices on the Company's Venezuelan revenues and
cash flows. As a result of declines in world crude oil prices during the first
six months of 1998, the Company recognized full cost ceiling test write-downs of
oil and gas properties in the Venezuela and Russia cost centers of $55.9 million
and $10.1 million, respectively, through June 30, 1998. No further write-downs
were recognized during the quarter ended September 30, 1998. However, continued
declines in world crude oil prices could result in further full cost ceiling
test write-downs. 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.
There are presently no restrictions in either Venezuela or Russia that restrict
converting U.S. dollars into local currency. Currently, there are no exchange
controls in Venezuela or Russia that restrict conversion of local currency into
U.S. dollars. 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 Venezuela, 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
it 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
local transactions in Russia and Venezuela are conducted in local currency. If
the rate of increase in the value of the dollar compared to the bolivar
continues to be less than the rate of inflation in Venezuela, then inflation
could be expected to have an adverse effect on Benton-Vinccler.
During the nine months ended September 30, 1998, the Company realized net
foreign exchange gains, primarily as a result of the decline in the value of the
Venezuelan bolivar and the Russian ruble during periods when the Company's
Venezuela-related subsidiaries and GEOILBENT had substantial net monetary
liabilities denominated in bolivares and roubles. During the nine months ended
September 30, 1998, the Company's net foreign exchange gains attributable to its
Venezuelan and Russian operations were $1.6 million and $0.3 million,
respectively. However, there are many factors affecting foreign exchange rates
and resulting exchange gains and losses, many of which are beyond the control of
the Company. 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. 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.
<PAGE> 20
21
for certain limitations on liens, additional indebtedness, certain investment
and capital expenditures, dividends, mergers and sales of assets. At September
30, 1998, the Company was in compliance with all covenants of the indentures.
The EBRD and IMB have agreed to lend a total of $65 million to GEOILBENT (owned
34% by the Company) under parallel reserve-based, non-recourse loan agreements.
Initial funding of $10.2 million occurred in October 1997 and another $8.8
million was drawn during 1998. The proceeds from the loans will be used by
GEOILBENT to develop the North Gubkinskoye and Prisklonovoye fields in West
Siberia, Russia. Additional borrowings will be based on achieving certain
reserve and production milestones.
YEAR 2000 COMPLIANCE
The Year 2000 problem concerns the inability of information systems to properly
recognize and process date-sensitive information beyond January 1, 2000. The
Company began a process of assessing its information technology systems in
November 1997 and has, to date, not uncovered any significant Year 2000
deficiencies. Substantially all of the software utilized by the Company is
purchased or licensed from external providers. The Company's home office
business systems are Year 2000 compliant, and its subsidiaries are currently in
the process of upgrading their business systems with completion anticipated
during the first quarter of 1999. A review of the Company's non-financial
software and imbedded chip technology is currently underway to assess the impact
of the Year 2000 on systems such as plant flow control devices, product
measurement and delivery devices and fire or other disaster-related safety
systems. To date, the costs associated with required modifications to become
Year 2000 compliant have not exceeded $50,000, and the Company does not
anticipate that the cost of converting any non-compliant systems will be
material to its financial condition.
The Company is also developing a plan to obtain Year 2000 compliance information
from its material suppliers and customers prior to March 31, 1999. To the extent
that the Company does not receive adequate responses from its material
third-party suppliers and customers prior to March 31, 1999, it is prepared to
develop contingency plans that would include changing suppliers to those who
have demonstrated Year 2000 readiness. However, there can be no assurance that
the Company will be successful in finding such alternative suppliers. The oil
produced in Venezuela by the Company, which is delivered to P&G under the terms
of an operating service agreement, represented approximately 92% of the
Company's oil sales during the nine months ended September 30, 1998. In the
event that P&G is unable to accept deliveries of, or make payment for, the oil
produced by the Company due to a Year 2000 failure, the Company's operations and
financial position could be materially and adversely affected.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition.
<PAGE> 21
22
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
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
<PAGE> 22
23
SIGNATURES
Pursuant to the requirements of 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 10, 1998 By:
/s/ A.E. Benton
----------------------------------
A.E. Benton
President and Chief Executive Officer
Dated: November 10, 1998 By: /s/ James M. Whipkey
---------------------------------
James M. Whipkey
Senior Vice President and Chief
Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q FOR
THE PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 17,238
<SECURITIES> 71,163
<RECEIVABLES> 33,813
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 129,060
<PP&E> 470,635
<DEPRECIATION> (200,220)
<TOTAL-ASSETS> 493,255
<CURRENT-LIABILITIES> 52,747
<BONDS> 289,563
0
0
<COMMON> 296
<OTHER-SE> 119,363
<TOTAL-LIABILITY-AND-EQUITY> 493,255
<SALES> 72,157
<TOTAL-REVENUES> 85,345
<CGS> 64,016
<TOTAL-COSTS> 64,016
<OTHER-EXPENSES> 71,467
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,354
<INCOME-PRETAX> (91,188)
<INCOME-TAX> (7,767)
<INCOME-CONTINUING> (78,868)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (78,868)
<EPS-PRIMARY> (2.67)
<EPS-DILUTED> (2.67)
</TABLE>
