<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 June 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 (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 August 10, 1998, 29,576,896 shares of the Registrant's
Common Stock were outstanding.
<PAGE> 2
2
BENTON OIL AND GAS COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Page
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PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at June 30, 1998
and December 31, 1997 (Unaudited)........................................3
Consolidated Statements of Income for the Three
Months Ended June 30, 1998 and 1997 (Unaudited)..........................4
Consolidated Statements of Income for the Six
Months Ended June 30, 1998 and 1997 (Unaudited) .........................5
Consolidated Statements of Cash Flows for the Six
Months Ended June 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.................................................................23
Item 6. EXHIBITS AND REPORTS ON FORM 8-K..................................................23
Signatures..................................................................................................24
</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>
JUNE 30, DECEMBER 31,
1998 1997
---- ----
ASSETS
- ------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 22,650 $ 11,940
Restricted cash 48 48
Marketable securities 90,525 156,436
Accounts receivable:
Accrued oil and gas revenue 22,271 45,379
Joint interest and other 14,504 8,029
Prepaid expenses and other 6,931 2,463
--------- --------
TOTAL CURRENT ASSETS 156,929 224,295
RESTRICTED CASH 74,366 74,288
OTHER ASSETS 15,349 12,497
PROPERTY AND EQUIPMENT:
Oil and gas properties (full cost method - costs
of $26,922 and $31,588 excluded from amortization
in 1998 and 1997, respectively) 437,357 367,756
Furniture and fixtures 6,302 5,734
--------- --------
443,659 373,490
Accumulated depletion, impairment and depreciation (192,656) (100,293)
--------- --------
251,003 273,197
--------- --------
$ 497,647 $584,277
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable, trade and other $ 39,988 $ 43,490
Accrued interest payable 5,554 5,533
Payroll and related taxes 1,007 1,799
Income taxes payable 3,108 4,535
Short term borrowings 1,530
Current portion of long term debt 169 1,463
--------- --------
TOTAL CURRENT LIABILITIES 49,826 58,350
DEFERRED INCOME TAXES 13,635 24,811
LONG TERM DEBT 287,577 280,016
MINORITY INTEREST 19,111 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 June 30,
1998 and December 31, 1997, respectively 296 295
Additional paid-in capital 146,919 146,125
Retained earnings (deficit) (19,018) 52,011
Treasury stock, at cost, 50 shares in 1997 (699) (699)
--------- --------
TOTAL STOCKHOLDERS' EQUITY 127,498 197,732
--------- --------
$ 497,647 $584,277
========= ========
</TABLE>
See notes to consolidated financial statements.
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4
BENTON OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data, unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1998 1997
---- ----
<S> <C> <C>
REVENUES
Oil and gas sales $ 23,626 $37,000
Gain on exchange rates 886 967
Investment earnings and other 3,696 3,010
-------- -------
28,208 40,977
-------- -------
EXPENSES
Lease operating costs and production taxes 11,501 8,899
Depletion, depreciation and amortization 9,879 10,329
Write-down of oil and gas properties 53,967
General and administrative 6,046 5,404
Interest 8,030 5,786
-------- -------
89,423 30,418
-------- -------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST (61,215) 10,559
INCOME TAXES (7,294) 4,432
-------- -------
INCOME (LOSS) BEFORE MINORITY INTEREST (53,921) 6,127
MINORITY INTEREST (3,878) 1,639
-------- -------
NET INCOME (LOSS) $(50,043) $ 4,488
======== =======
NET INCOME (LOSS) PER COMMON SHARE:
Basic $ (1.69) $ 0.15
======== =======
Diluted $ (1.69) $ 0.15
======== =======
</TABLE>
See notes to consolidated financial statements.
<PAGE> 5
5
BENTON OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data, unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
---- ----
<S> <C> <C>
REVENUES
Oil and gas sales $ 52,127 $80,476
Gain on exchange rates 1,499 961
Investment earnings and other 7,840 5,839
--------- -------
61,466 87,276
--------- -------
EXPENSES
Lease operating costs and production taxes 24,742 17,180
Depletion, depreciation and amortization 20,945 20,040
Write-down of oil and gas properties 71,467
General and administrative 11,452 10,893
Interest 16,110 11,271
--------- -------
144,716 59,384
--------- -------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST (83,250) 27,892
INCOME TAXES (7,964) 10,416
--------- -------
INCOME (LOSS) BEFORE MINORITY INTEREST (75,286) 17,476
MINORITY INTEREST (4,257) 4,360
--------- -------
NET INCOME (LOSS) $ (71,029) $13,116
========= =======
INCOME (LOSS) PER COMMON SHARE:
Basic $ (2.41) $ 0.45
========= =======
Diluted $ (2.41) $ 0.43
========= =======
</TABLE>
See notes to consolidated financial statements.
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6
BENTON OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income (Loss) $ (71,029) $ 13,116
Adjustments to reconcile net income to net cash provided by operating
activities:
Depletion, depreciation and amortization 20,945 20,040
Write-down of oil and gas properties 71,467
Amortization of financing costs 612 796
(Gain) loss on disposition of assets 4
Minority interest in undistributed earnings of subsidiary (4,257) 4,360
Deferred income taxes (11,176) 4,342
Changes in operating assets and liabilities:
Accounts receivable 16,633 15,256
Prepaid expenses and other (4,468) (1,077)
Accounts payable (3,502) (2,318)
Accrued interest payable 21 19
Payroll and related taxes (792) (169)
Income taxes payable (1,427) 3,249
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 13,027 57,618
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment (70,211) (47,680)
Increase in other assets (2,376)
Increase in restricted cash (78) (5,100)
Decrease in restricted cash 3,000
Purchase of marketable securities (43,190) (31,297)
Maturities of marketable securities 109,101 27,874
--------- --------
NET CASH USED IN INVESTING ACTIVITIES (6,754) (53,203)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants 795 1,514
Proceeds from issuance of short term borrowings and notes payable 4,802 1,191
Payments on short term borrowings and notes payable (65) (1,159)
Increase in other assets (1,095) (1,146)
Treasury stock (699)
--------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 4,437 (299)
--------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 10,710 4,116
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,940 32,432
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 22,650 $ 36,548
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest expense $ 15,251 $ 10,716
========= ========
Cash paid during the period for income taxes $ 3,109 $ 2,207
========= ========
</TABLE>
(continued)
<PAGE> 7
7
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the six months ended June 30, 1998, the Company converted financing costs
in the amount of $2,598,000 to a long term account receivable from GEOILBENT.
During the six months ended June 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 six months ended June 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
SIX MONTHS ENDED JUNE 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 June 30,
1998, and the results of operations for the three and six month periods ended
June 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 six month periods ended June 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 June 30, 1998, consisted of $90.5 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
INCOME SHARES PER SHARE
------ ------ ---------
FOR THE THREE MONTHS ENDED JUNE 30, 1998
- -----------------------------------------
BASIC EPS
<S> <C> <C> <C>
Loss attributable to common stockholders $(50,043) 29,565 $ (1.69)
======== ====== =======
DILUTED EPS
Loss attributable to common stockholders $(50,043) 29,565 $ (1.69)
======== ====== =======
FOR THE THREE MONTHS ENDED JUNE 30, 1997
- ----------------------------------------
BASIC EPS
Income available to common stockholders $ 4,488 29,019 $ 0.15
======== ====== =======
Effect of Dilutive Securities:
Stock options and warrants - 1,582
-------- ------
DILUTED EPS
Income available to common stockholders
and assumed conversions $ 4,488 30,601 $ 0.15
======== ====== =======
FOR THE SIX MONTHS ENDED JUNE 30, 1998
- ---------------------------------------
BASIC EPS
Loss attributable to common stockholders $(71,029) 29,531 $ (2.41)
======== ====== =======
DILUTED EPS
Loss attributable to common stockholders $(71,029) 29,531 $ (2.41)
======== ====== =======
FOR THE SIX MONTHS ENDED JUNE 30, 1997
- --------------------------------------
BASIC EPS
Income available to common stockholders $ 13,116 28,990 $ 0.45
======== ====== =======
Effect of Dilutive Securities:
Stock options and warrants - 1,843
-------- ------
DILUTED EPS
Income available to common stockholders
and assumed conversions $ 13,116 30,833 $ 0.43
======== ====== =======
</TABLE>
For the three months ended June 30, 1998 and 1997, an aggregate 4,752,096 and
940,577 options and warrants, respectively, were excluded from the earnings per
share calculations because they were anti-dilutive. For the six months ended
June 30, 1998 and 1997, an aggregate 4,802,202 and 690,039 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 will 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 $1,246,000 and $869,000 for the six months ended June
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 June 30, 1998 were $2,128,000, $16,730,000 and $8,064,000,
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 six months ended
June 30, 1998, was $19,002,000 and $1,376,000 ($2.78 and $3.68 per equivalent
barrel), respectively. Depletion expense attributable to the Venezuela and
Russia cost centers for the six months ended June 30, 1997, was $17,973,000 and
$1,663,000 ($2.50 and $3.48 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 $560,000 and $393,000 for the
six months ended June 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>
JUNE 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 4,080 --
Other 3,666 1,479
-------- --------
287,746 281,479
Less current portion 169 1,463
-------- --------
$287,577 $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 June 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 1999. 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, January 1998 and May 1998, GEOILBENT (owned 34% by the Company)
borrowed $10.2 million, $1.8 million and $5.9 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 the West Cote Blanche Bay Properties 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
and in its management's opinion, while it is unlikely that the suit will result
in a material adverse effect on the Company's financial statements, 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
currently under construction in Carpinteria, California. The building will be
ready for occupancy in August 1998. The Company has leased the entire building
(50,000 square feet) for approximately $73,000 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 building which will not be immediately needed for
operations. The Company has also entered into a sublease agreement for the
office space that it will be vacating upon the completion of the new office
building. 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 and $1.8 million occurred in
October 1997 and January 1998, respectively, upon satisfaction of certain
conditions precedent. Another $5.9 million was subsequently drawn in May 1998.
Additional borrowings will be based on achieving certain reserve and production
milestones.
GEOILBENT is subject to excise, pipeline and other taxes. Although the Russian
regulatory environment has become less volatile, 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
early 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.
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 June 30, 1998, the Company's share of the
costs incurred to date were $7.8 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 will 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
("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 will be 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 June 30, 1998, the Company
had incurred $0.5 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 June 30, 1998, the Company had incurred $6.1
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 remainder
of 1998 will be devoted to reprocessing and remapping seismic data and
conducting geological studies on the remaining prospectivity of the block. At
June 30, 1998, the Company had incurred $3.4 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. In
addition, 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 June 30, 1998, the Company had incurred $1.3 million related to both the
onshore block and near-offshore acreage.
NOTE 11 - RELATED PARTY TRANSACTIONS
During 1996, 1997 and the first six 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 June 30, 1998, the balances owed to the Company by Mr. Benton,
Mr. Wray and Mr. Whipkey were $3.4 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, and 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 six months of 1997 and 1998 for
Russia reflect the six months ended March 31, 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 six
months ended June 30, 1998 and 1997 and financial condition at June 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 six months ended June 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 six months of 1998 compared
to 1997 with a 32% decrease in realized fees per barrel (from $10.40 in 1997 to
$7.04 in 1998) and a 5% decrease in oil sales quantities (from 7,196,323 Bbls of
oil in 1997 to 6,836,759 Bbls of oil in 1998) due to operational problems with
certain high volume wells. Production from the South Monagas Unit will continue
to be lower in the third quarter of 1998 while the operational problems are
being resolved. 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
<PAGE> 16
16
associated 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Lease Operating Costs and Production Taxes 48.7% 24.1% 47.5% 21.3%
Depletion, Depreciation and Amortization 41.8 27.9 40.2 24.9
General and Administrative 25.6 14.6 22.0 13.5
Interest 34.0 15.6 30.9 14.0
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
The Company had revenues of $28.2 million for the three months ended June 30,
1998. Expenses incurred during the period consisted of lease operating costs and
production taxes of $11.5 million, depletion, depreciation and amortization
expense of $9.9 million, write-down of oil and gas properties of $54.0 million,
general and administrative expense of $6.0 million, interest expense of $8.0
million, income tax benefit of $7.3 million and a minority interest reduction of
$3.9 million. Net loss was $50.0 million or $1.69 per share (diluted).
By comparison, the Company had revenues of $41.0 million for the three months
ended June 30, 1997. Expenses incurred during the period consisted of lease
operating costs and production taxes of $9.0 million, depletion, depreciation
and amortization expense of $10.3 million, general and administrative expense of
$5.4 million, interest expense of $5.8 million, income tax expense of $4.4
million and a minority interest of $1.6 million. Net income for the period was
$4.5 million or $0.15 per share (diluted).
Revenues decreased $12.8 million, or 31.2%, during the three months ended June
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 oil sales quantities. Sales quantities for the three months ended June 30,
1998 from Venezuela and Russia were 3,191,166 Bbls and 246,666 Bbls,
respectively, compared to 3,552,425 Bbls and 199,794 Bbls, respectively, for the
three months ended June 30, 1997. Prices for crude oil averaged $6.62 per Bbl
(pursuant to terms of an operating service agreement) from Venezuela and $10.10
per Bbl from Russia for the three months ended June 30, 1998 compared to $9.73
per Bbl from Venezuela and $12.14 per Bbl from Russia for the corresponding
period of 1997. Investment earnings increased $0.7 million, or 22.8%, during the
three months ended June 30, 1998 compared to the three months ended June 30,
1997 due to higher average cash and marketable securities balances. Revenues for
the three months ended June 30, 1998 were increased by a foreign exchange gain
of $0.9 million compared to a gain of $1.0 million during the corresponding
period of 1997.
Lease operating costs and production taxes increased $2.5 million, or 27.8%,
during the three months ended June 30, 1998 compared to the three months ended
June 30, 1997 primarily due to the continuing maturation of the Uracoa oil field
resulting in higher water handling, gas handling, transportation and chemical
costs in Venezuela. Depletion, depreciation and amortization decreased $0.4
million, or 3.9%, during the three months ended June 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 at March 31, 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 June
30, 1998 was $2.72 and $3.68, respectively, compared to $2.65 and $3.61,
respectively, during the corresponding period of the previous year.
Additionally, at June 30, 1998, the Company recognized a write-down of oil and
gas properties in the Venezuela and Russia cost centers of $38.4 million and
$10.1 million, respectively, pursuant to the ceiling limitation prescribed by
the full cost method of accounting. The write-down is 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 increased $0.6 million, or 11.1%, during the
three months ended June 30, 1998 compared to the corresponding period of
<PAGE> 17
17
1997 due to the Company's increased corporate activity associated with the
growth of its business. Interest expense increased $2.2 million, or 37.9%,
during the three months ended June 30, 1998 compared to the three months ended
June 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 $61.2 million during the three months ended June 30, 1998
as compared to income of $10.6 million in the corresponding period of 1997 which
resulted in decreased income tax expense of $11.7 million, or 265.9%. The net
income (loss) attributable to the minority interest decreased $5.5 million, or
343.8%, for the three months ended June 30, 1998 compared to the three months
ended June 30, 1997 as a result of decreased net income from Benton-Vinccler's
operations in Venezuela.
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
The Company had revenues of $61.5 million for the six months ended June 30,
1998. Expenses incurred during the period consisted of lease operating costs and
production taxes of $24.7 million, depletion, depreciation and amortization
expense of $20.9 million, write-down of oil and gas properties of $71.5 million,
general and administrative expense of $11.5 million, interest expense of $16.1
million, income tax benefit of $8.0 million and a minority interest reduction of
$4.3 million. Net loss for the period was $71.0 million or $2.41 per share
(diluted).
By comparison, the Company had revenues of $87.3 million for the six months
ended June 30, 1997. Expenses incurred during the period consisted of lease
operating costs and production taxes of $17.2 million, depletion, depreciation
and amortization expense of $20.0 million, general and administrative expense of
$10.9 million, interest expense of $11.3 million, income tax expense of $10.4
million, and minority interest of $4.4 million. Net income was $13.1 million or
$0.43 per share (diluted).
Revenues decreased $25.8 million, or 29.6%, during the six months ended June 30,
1998 compared to the corresponding period of 1997 primarily due to decreased oil
sales in Venezuela and Russia. Sales quantities for the six months ended June
30, 1998 from Venezuela and Russia were 6,836,759 and 374,068 Bbl, respectively,
compared to 7,196,323 and 478,349 Bbl, respectively, for the six months ended
June 30, 1997. Prices for crude oil averaged $7.04 per Bbl (pursuant to terms of
an operating service agreement) from Venezuela and $10.62 per Bbl from Russia
for the six months ended June 30, 1998 compared to $10.40 per Bbl from Venezuela
and $11.73 per Bbl from Russia for the corresponding period of 1997. Investment
earnings increased $2.0 million, or 34.3%, during the six months ended June 30,
1998 compared to the six months ended June 30, 1997 due to higher average cash
and marketable securities balances. Revenues for the six months ended June 30,
1998 were increased by a foreign exchange gain of $1.5 million compared to a
gain of $1.0 million during the corresponding period of 1997.
Lease operating costs and production taxes increased $7.5 million, or 43.6%,
during the six months ended June 30, 1998 compared to the six months ended June
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 increased
$0.9 million, or 4.5%, during the six months ended June 30, 1998 compared to the
corresponding period of 1997 primarily due to increased capital costs in
Venezuela. Depletion expense per barrel of oil equivalent produced from
Venezuela and Russia during the six months ended June 30, 1998 was $2.78 and
$3.68, respectively, compared to $2.50, and $3.48 from Venezuela, and Russia,
respectively, during the corresponding period of the previous year.
Additionally, during the six months ended June 30, 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 are
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 increased
$0.6 million, or 5.5%, during the six months ended June 30, 1998 compared to the
corresponding period of 1997 primarily due to the Company's increased corporate
activity associated with the growth of the Company's business. Interest expense
increased $4.8 million, or 42.5%, during the six months ended June 30, 1998
compared to the six months ended June 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 $83.3 million
during the six months ended June 30, 1998 as compared to income of $27.9 million
in the corresponding period of 1997 which resulted in decreased income tax
expense of $18.4 million, or 176.9%. The net income (loss) attributable to the
minority interest decreased $8.7 million, or 197.7%, for the six months ended
June 30, 1998 compared to the six months ended June 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 fourth quarter of 1998 at a cost to the Company of approximately $4.3
million. Subsequent seismic and drilling programs will be based on the results
of the 1997-1998 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 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 will 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
("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 will be 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 will be 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. In addition, 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 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
early 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. 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 six months ended June 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 rouble during periods when the Company's
Venezuela-related subsidiaries and GEOILBENT had substantial net monetary
liabilities denominated in bolivares and roubles. During the six months ended
June 30, 1998, the Company's net foreign exchange gains attributable to its
Venezuelan and Russian operations were $1.3 million and $0.2 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
20
The net funds raised and/or used in each of the operating, investing and
financing activities for the six months ended June 30, are summarized in the
following table and discussed in further detail below (in thousands):
1998 1997
---- ----
Net cash provided by operating activities $ 13,027 $ 57,618
Net cash used in investing activities (6,754) (53,203)
Net cash provided by financing) activities 4,437 (299)
-------- --------
Net increase in cash $ 10,710 $ 4,116
======== ========
At June 30, 1998, the Company had current assets of $156.9 million and current
liabilities of $49.8 million resulting in working capital of $107.1 million and
a current ratio of 3.2:1. This compares to the Company's working capital of
$165.9 million and a current ratio of 3.8:1 at December 31, 1997. The decrease
of $58.8 million was due primarily to (i) expenditures related to exploration
and development in Venezuela, Russia, Jordan and California and (ii) lower oil
sales as a result of declines in world crude oil prices.
CASH FLOW FROM OPERATING ACTIVITIES. During the six months ended June 30, 1998
and 1997, net cash provided by operating activities was approximately $13.0
million and $57.6 million, respectively. Cash flow from operating activities
decreased by $44.6 million during the six months ended June 30, 1998 compared to
the corresponding period of the prior year due primarily to decreased oil
revenues and increased lease operating costs and interest expense.
CASH FLOW FROM INVESTING ACTIVITIES. During the six months ended June 30, 1998
and 1997, the Company had drilling and production related capital expenditures
of approximately $70.2 million and $47.7 million, respectively. Of the 1998
expenditures, $50.2 million was attributable to the development of the South
Monagas Unit in Venezuela, $7.1 million related to the development of the North
Gubkinskoye Field in Russia, $3.8 million related to a 3-D seismic survey in the
Delta Centro Block in Venezuela, $3.4 million related to the development of the
Gaviota lease in Santa Barbara County, California, $2.1 million related to the
development of the Sirhan Block in Jordan, and $3.6 million was attributable to
other projects.
In April 1998, the Company reached an agreement to earn a 40% equity interest in
the Russian Open Joint Stock Company Severneftegaz. The Company will earn a 40%
equity interest in exchange for providing the initial capital needed to achieve
early 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.
The Company expects 1998 capital expenditures of approximately $149.0 million,
including $22.0 million in expenditures by GEOILBENT in Russia, net to the
Company's interest (which will be funded from borrowings under the GEOILBENT
Credit Facility, cash flow from operations or other financings). Additionally,
the Company anticipates loaning up to $100 million over the next two years to
Severneftegaz pursuant to an equity acquisition agreement signed in April 1998.
Funding for the currently anticipated 1998 capital expenditures and the 1998
loans to Severneftegaz is expected to come from working capital, cash flow from
operations, sales of property interests or the issuance of debt or equity
secruities. The Company's indentures contain provisions which restrict the
manner in which the Company can invest in certain of its current operations
including GEOILBENT. Although the Company believes it has sufficient funding for
its expected capital requirements from working capital and cash flow from
operations, sales of property interests or the issuance of debt or equity
securities, the Company may be limited in the manner of funding certain of such
capital requirements due to such restrictions in the indentures.
The Company continues to evaluate and pursue domestic and international
opportunities that fit within the Company's business strategy, including
exploration, development and acquisition opportunities. It is not presently
known whether, or on what terms, such evaluations will result in future
agreements or acquisitions.
CASH FLOW FROM FINANCING ACTIVITIES. In May 1996, the Company issued $125
million in 11.625% senior unsecured notes due May 1, 2003. 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. The indenture agreements provide for certain limitations on liens,
additional indebtedness, certain investment and capital expenditures, dividends,
mergers and sales of assets. At June 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 and $1.8 million occurred in October 1997 and
January 1998, and another $5.9 million was drawn in May 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.
<PAGE> 21
21
YEAR 2000 COMPLIANCE
The Company is in the process of assessing its information technology systems
and has, to date, not uncovered any serious year 2000 deficiencies. The Company
will, before the end of 1998, upgrade its current accounting software with a
year 2000 compliance modification provided by the software vendor at minimal
cost. The majority of the other software and hardware currently used by the
Company is year 2000 compliant and the cost of converting any non-compliant
systems is not expected to be material to the Company's financial condition. The
Company is also developing a plan to obtain year 2000 compliance information
from its material suppliers and customers and anticipates completing this
process by the end of 1998. The Company believes that it will be able to achieve
year 2000 compliance by the end of 1999, and does not currently anticipate any
disruption in its operations as a result of any failure by the Company to be in
compliance.
STOCK REPURCHASE PROGRAM
In June 1997, the Board of Directors instituted a treasury stock repurchase
program under which the Company is authorized to purchase up to 1.5 million
shares of its common stock. The shares will 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> 22
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
At the Annual Meeting of the Stockholders of the Company held on June
30, 1998, 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 26,650,660 234,174 0
Michael B. Wray 26,638,897 245,937 0
Bruce M. McIntyre 26,418,695 466,139 0
Richard W. Fetzner 26,653,065 231,769 0
Garrett A. Garrettson 26,649,927 234,907 0
</TABLE>
2. Amendment to the certificate of incorporation to increase the number
of authorized shares of the Company's common stock:
<TABLE>
<CAPTION>
VOTES AGAINST/ ABSTENTIONS/
VOTES IN FAVOR WITHHELD BROKER NON-VOTES
-------------- ------------ ----------------
<S> <C> <C> <C>
24,039,408 2,636,404 209,022
</TABLE>
3. Approval of 1998 stock-based incentive plan:
<TABLE>
<CAPTION>
VOTES AGAINST/ ABSTENTIONS/
VOTES IN FAVOR WITHHELD BROKER NON-VOTES
-------------- ------------ ----------------
<S> <C> <C> <C>
20,511,298 5,977,444 396,092
</TABLE>
4. To approve and ratify the appointment of Price Waterhouse LLP as
independent accountants for the fiscal year ending December 31, 1998:
<TABLE>
<CAPTION>
VOTES AGAINST/ ABSTENTIONS/
VOTES IN FAVOR WITHHELD BROKER NON-VOTES
--------------- ---------- ----------------
<S> <C> <C> <C>
26,716,413 81,185 87,236
</TABLE>
<PAGE> 23
23
ITEM 5. OTHER INFORMATION
The proxies for the 1999 annual meeting of stockholders intend to
use their discretion in voting on any and all matters brought
before the 1999 annual meeting of stockholders which were not
provided to the Company in advance notice on or prior to April 3,
1999.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
On April 21, 1998, the Company filed a report on Form 8-K, under
Item 4, "Changes in Registrant's Certifying Accountant" regarding
the dismissal of Deloitte & Touche LLP and the engagement of Price
Waterhouse LLP as independent accountants.
<PAGE> 24
24
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: August 10, 1998 By: /S/ A.E.BENTON
-----------------------------------
A.E. Benton
President and Chief Executive Officer
Dated: August 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 10-Q
FOR THE PERIOD ENDED JUNE 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 22,650
<SECURITIES> 90,525
<RECEIVABLES> 36,775
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 156,929
<PP&E> 443,659
<DEPRECIATION> 192,656
<TOTAL-ASSETS> 497,647
<CURRENT-LIABILITIES> 49,826
<BONDS> 287,577
0
0
<COMMON> 296
<OTHER-SE> 127,202
<TOTAL-LIABILITY-AND-EQUITY> 497,647
<SALES> 52,127
<TOTAL-REVENUES> 61,466
<CGS> 45,687
<TOTAL-COSTS> 45,687
<OTHER-EXPENSES> 71,467
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,110
<INCOME-PRETAX> (83,250)
<INCOME-TAX> (7,964)
<INCOME-CONTINUING> (71,029)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (71,029)
<EPS-PRIMARY> (2.41)
<EPS-DILUTED> (2.41)
</TABLE>
