<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission file number: 1-10671
THE MERIDIAN RESOURCE CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 76-0319553
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1401 ENCLAVE PARKWAY, SUITE 300, HOUSTON, TEXAS 77077
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 281-597-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 and 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 [ ]
Number of shares of common stock outstanding at November 13, 2000 53,739,730
Page 1 of 24
<PAGE>
THE MERIDIAN RESOURCE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations (unaudited) for the
Three Months and Nine Months Ended September 30, 2000
and 1999 3
Consolidated Balance Sheets as of September 30, 2000 (unaudited)
and December 31, 1999 4
Consolidated Statements of Cash Flows (unaudited) for the
Nine Months Ended September 30, 2000 and 1999 6
Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands of dollars, except per share information)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------
REVENUES: 2000 1999 2000 1999
-------- -------- --------- -------
<S> <C> <C> <C> <C>
Oil and natural gas $61,953 $38,678 $161,427 $92,587
Interest and other 828 269 1,305 635
------- ------- -------- -------
62,781 38,947 162,732 93,222
------- ------- -------- -------
OPERATING COSTS AND EXPENSES:
Oil and natural gas operating 4,355 3,880 13,069 12,096
Severance and ad valorem taxes 4,066 3,267 11,959 8,248
Depletion and depreciation 16,845 13,665 52,477 39,080
General and administrative 4,320 4,129 12,348 10,033
Litigation expenses and loss provision ----- (454) ----- (454)
------- ------- -------- -------
29,586 24,487 89,853 69,003
------- ------- -------- -------
EARNINGS BEFORE INTEREST
AND INCOME TAXES 33,195 14,460 72,879 24,219
OTHER EXPENSES:
Interest expense 6,472 6,121 19,256 16,729
Taxes on income ----- 600 ----- 600
------- ------- -------- -------
NET EARNINGS (LOSS) 26,723 7,739 53,623 6,890
DIVIDENDS ON PREFERRED STOCK 1,350 1,350 4,050 4,050
------- ------- -------- -------
NET EARNINGS (LOSS) APPLICABLE
TO COMMON STOCKHOLDERS $25,373 $ 6,389 $ 49,573 $ 2,840
======= ======= ======== =======
NET EARNINGS (LOSS) PER SHARE:
Basic $0.53 $0.14 $1.06 $0.06
======= ======= ======== =======
Diluted $0.41 $0.13 $0.83 $0.06
======= ======= ======== =======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
Basic 47,664 46,044 46,932 45,909
======= ======= ======== =======
Diluted 66,959 61,241 65,430 47,964
======= ======= ======== =======
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(thousands of dollars)
(unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 45,346 $ 6,617
Accounts receivable, less allowance for doubtful
accounts $891 [2000] and $1,003 [1999] 72,878 28,478
Due from affiliates 2,138 165
Prepaid expenses and other 811 1,234
-------- --------
Total current assets 121,173 36,494
-------- --------
PROPERTY AND EQUIPMENT:
Oil and natural gas properties, full cost method
(including $43,572 [2000] and
$62,686 [1999] not subject to depletion) 948,151 916,495
Land 478 478
Equipment 10,412 8,737
-------- --------
959,041 925,710
Accumulated depletion and depreciation 541,680 489,203
-------- --------
417,361 436,507
-------- --------
OTHER ASSETS 3,699 4,718
-------- --------
$542,233 $477,719
======== ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(thousands of dollars)
(unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 9,732 $ 21,359
Revenues and royalties payable 4,138 4,728
Accrued liabilities 23,647 17,772
--------- ---------
Total current liabilities 37,517 43,859
--------- ---------
LONG-TERM DEBT 230,500 250,000
--------- ---------
9 1/2% CONVERTIBLE SUBORDINATED NOTES 20,000 20,000
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value (25,000,000 shares
authorized, 3,982,906 [2000 and
1999] shares of Series A Cumulative
Convertible Preferred Stock issued at stated value) 135,000 135,000
Common stock, $0.01 par value (200,000,000 shares
authorized, 53,728,730 [2000] and
46,409,980 [1999] issued) 549 472
Additional paid-in capital 314,998 274,298
Accumulated deficit (195,774) (245,347)
Unrealized loss on securities held for resale (185) (185)
Unamortized deferred compensation (372) (378)
--------- ---------
Total stockholders' equity 254,216 163,860
--------- ---------
$ 542,233 $ 477,719
========= =========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands of dollars)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 53,623 $ 6,890
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depletion and depreciation 52,477 39,080
Amortization of other assets 961 816
Non-cash compensation 2,205 1,217
Changes in assets and liabilities:
Accounts receivable (44,400) (995)
Due from affiliates (1,973) 5,072
Prepaid expenses and other 423 (1,727)
Accounts payable (11,627) 5,516
Revenues and royalties payable (590) (3,088)
Accrued liabilities and other 4,525 (13,804)
-------- --------
Net cash provided by operating activities 55,624 38,977
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (70,670) (78,895)
Sale of property and equipment 37,339 9,747
-------- --------
Net cash used in investing activities (33,331) (69,148)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 2,000 40,000
Reductions in long-term debt (21,500) (10,084)
Preferred dividends (2,700) (4,050)
Issuance of stock/exercise of stock options 38,579 2,355
Additions to deferred loan costs 57 (600)
-------- --------
Net cash provided by (used in) financing activities 16,436 27,621
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 38,729 (2,550)
Cash and cash equivalents at beginning of period 6,617 9,478
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 45,346 $ 6,928
======== ========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
THE MERIDIAN RESOURCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements reflect the accounts of The Meridian
Resource Corporation and its subsidiaries (the "Company") after elimination of
all significant intercompany transactions and balances. The financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999, as filed with the Securities and Exchange Commission.
The financial statements included herein as of September 30, 2000, and for the
three and nine month periods ended September 30, 2000 and 1999, are unaudited,
and, in the opinion of management, the information furnished reflects all
material adjustments, including normal recurring adjustments, necessary for a
fair statement of the results for the interim periods presented. Certain minor
reclassifications of prior period statements have been made to conform to
current reporting practices.
2. DEBT
LONG-TERM DEBT
In May 1998, the Company amended and restated its credit facility with The Chase
Manhattan Bank as Administrative Agent (the "Credit Facility") to provide for
maximum borrowings, subject to borrowing base limitations, of up to $250
million. Due to the property sales of $10.6 million during the third quarter of
2000, $8.5 million was applied to the Company's Credit Facility;
correspondingly, the borrowing base was reduced to $230.5 million. The Company
is currently in the process of it's scheduled borrowing base redetermination.
3. COMMITMENTS AND CONTINGENCIES
LITIGATION
There are no material legal proceedings to which Meridian or any of its
subsidiaries or partnerships is a party or by which any of its property is
subject, other than ordinary and routine litigation incidental to the business
of producing and exploring for crude oil and natural gas.
4. SALE OF PROPERTIES
To reduce bank debt and increase liquidity, the Company announced on January 14,
2000, the initiation of a formal process to pursue the sale of certain non-
strategic oil and gas properties located in south Louisiana, the Texas Gulf
Coast and offshore in the Gulf of Mexico. The selected properties represented
about 88 Bcfe, or approximately 24% of the Company's 365 Bcfe in reserves. As of
September 30, 2000, seven transactions have been closed, covering a net total of
29.8 Bcfe for a total of $37 million, or an average price of $1.22 per Mcfe.
$19.5 million of the property sale proceeds were used to reduce bank debt. While
additional non-strategic properties may be sold, the Company may elect to retain
the properties if the expected revenue generated from continued operations
exceeds the value of the offer. There is no assurance that additional sales will
take place or that the prices realized on any such sales will be comparable to
previous property sales.
7
<PAGE>
5. EARNINGS PER SHARE
(in thousands, except per share)
The following tables set forth the computation of basic and diluted net earnings
per share:
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------
2000 1999
------- -------
Numerator:
Net earnings $26,723 $ 7,739
Less: Preferred dividend requirement 1,350 1,350
------- -------
Net earnings used in per share calculation $25,373 $ 6,389
Denominator:
Denominator for basic net earnings per
share - weighted-average shares outstanding 47,664 46,044
Effect of potentially dilutive common shares:
Convertible preferred stock 12,837 12,837
Convertible subordinated notes 2,857 -----
Employee and director stock options 1,424 830
Warrants 2,176 1,530
------- -------
Denominator for diluted net earnings per
share - weighted-average shares outstanding
and assumed conversions 66,959 61,241
======= =======
Basic net earnings per share $ 0.53 $ 0.14
======= =======
Diluted net earnings per share $ 0.41 $ 0.13
======= =======
8
<PAGE>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 1999
------- -------
Numerator:
Net earnings $53,623 $ 6,890
Less: Preferred dividend requirement 4,050 4,050
------- -------
Net earnings used in per share calculation $49,573 $ 2,840
Denominator:
Denominator for basic net earnings per
share - weighted-average shares outstanding 46,932 45,909
Effect of potentially dilutive common shares:
Convertible preferred stock 12,837 -----
Convertible subordinated notes 2,857 -----
Employee and director stock options 866 658
Warrants 1,938 1,397
------- -------
Denominator for diluted net earnings per
share - weighted-average shares outstanding
and assumed conversions 65,430 47,964
======= =======
Basic net earnings per share $ 1.06 $ 0.06
======= =======
Diluted net earnings per share $ 0.83 $ 0.06
======= =======
6. SHELL TRANSACTIONS
Meridian and Shell Louisiana Onshore Properties, Inc. ("Shell"), an affiliate of
Shell Exploration and Production Company, on July 18, 2000, announced a
definitive agreement granting Meridian an option to repurchase all of the
outstanding shares of Meridian Preferred Stock (convertible into 12.8 million
shares of Common Stock), plus six million shares of Meridian Common Stock now
held by Shell, for an aggregate cash price of $114 million. The "Option and
Standstill Agreement" is exercisable in a single transaction through January 31,
2001. As consideration for the option, Meridian issued Shell one million shares
of Meridian Common Stock in July 2000. If Meridian exercises the option, Shell
will remain Meridian's largest shareholder, with approximately 7.1 million
shares of Common Stock.
7. STOCKHOLDERS' EQUITY
On September 29, 2000, the Company announced that it sold to certain investors
an aggregate of 6,021,500 shares of Common Stock at a price of $6 5/8 per share
under the terms of the prospectus supplement dated September 28, 2000. The
shares were placed with certain investors on a best-efforts basis. In
connection with the placement of the shares, the Company paid the placement
agents a total fee of approximately $1.2 million, resulting in proceeds of
approximately $38.7 million to the Company. The Company plans to use the
proceeds from this sale to fund in part the exercise of the option to repurchase
Preferred and Common Stock from Shell for $114 million prior to the expiration
of this option on January 31, 2001.
9
<PAGE>
8. NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is required
to be adopted in years beginning after June 15, 2000. Due to the Company's
minimal use of derivatives, management does not anticipate the adoption of the
new Statement will have a significant effect on earnings or the financial
position of the Company.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of Meridian's financial operations for the three
and nine months ended September 30, 2000 and 1999. The notes to the Company's
consolidated financial statements included in this report, as well as our Annual
Report on Form 10-K for the year ended December 31, 1999 (and the notes attached
thereto), should be read in conjunction with this discussion.
GENERAL
BUSINESS ACTIVITIES. During the nine months ended September 30, 2000,
Meridian's drilling activities were primarily focused on exploration and
development at the Company's North Turtle Bayou/Ramos Field, Weeks Island Field,
Thornwell Field and West Lake Verret Field. The additional production from new
discoveries and workovers enabled Meridian to benefit from current high
commodity prices, partially offset by natural production declines and the
production sold in conjunction with the property sales. Development activities
at each of these fields has contributed to the 9% increase in our net average
daily production rates of 148.2 MMcfe per day for the first nine months of 2000
as compared to 136.3 MMcfe per day for the first nine months of 1999.
For the first nine months of 2000, we completed and placed on production sixteen
of twenty wells drilled in a variety of fields, including North Turtle
Bayou/Ramos, Weeks Island, Thornwell, and West Lake Verret, all of which
contributed to the increase in daily average production rates for the first nine
months of this year versus the first nine months of 1999.
During the third quarter of 2000, Meridian announced successful drilling results
on the Avoca 47-1 well in North Turtle Bayou/South Ramos field. We expect to
bring this well on production by the end of the fourth quarter. The North
Turtle Bayou/South Ramos field was first discovered with the C.M. Thibodaux No.
1 well completed in April of 1999. Since that time, three additional producing
wells have been drilled and successfully completed: the Thibodaux No. 3, the
Breaux No. 1, and now the Avoca 47-1. All of these wells are producing from
closures on the downthrown side of a regional Operc. growth fault. The most
westerly offset closure was the Avoca 5-1 prospect, located approximately 3.5
miles southwest of the Avoca 47-1. The Avoca 5-1 well was drilled to a total
depth of approximately 19,000 feet with the expected structural closures and
sands confirmed by the drilling. However, commercial hydrocarbons were not
found and the Company elected to plug and abandon the well as non-commercial
during the beginning of the fourth quarter. This area remains one of our most
promising plays and we anticipate drilling additional wells in the near future.
During the first nine months of 2000, we drilled four wells in the Weeks Island
project, three of which have been successful. The Weeks Island Field consists
of Pliocene and Miocene sediments trapped against a shallow piercement salt
dome, the associated radial faulting, and salt overhangs. At least 50 sands
have been proven productive from depths of 2,000 to 16,500 feet.
In the Thornwell Field, we have drilled six wells in the past nine months, all
of which have been successful. The Marg. Idio sands in the Thornwell Field are
a series of northwest-southeast trending sand-filled filuvial channels.
Production is from stratigraphically controlled sand lenses that can have a
thickness of over 100 feet, and initial production rates have ranged from 10 to
12 Mmcfe/d.
We have drilled three wells in the West Lake Verret Field during the first nine
months of this year, all of which have been successful. This field is a large
faulted anticline with east-west elongation. The producing section is mainly in
the Miocene sands with producing traps either structural closures in a large
central grabin or fault closures in adjacent blocks. Approximately 58 producing
horizons from approximately than 1,000 feet to 16,000 feet have been identified
to date.
Several other wells were drilled during the third quarter of 2000, including the
Tex-Emma No.1 well in the Oakley field. The Tex-Emma No. 1 well tested an
easterly offset from the main Oakley field accumulation. This prospect was
syncline separated and the well we drilled confirmed our 3-D structure as
mapped. However, commercial hydrocarbons were not found and the Company elected
to plug and abandon the well as non-commercial during the beginning of the
fourth quarter.
11
<PAGE>
The three key elements in exploring for oil and gas are structure, reservoir,
and hydrocarbon charge (charge determines whether hydrocarbons have migrated
into the structure). We believe that the structure accounts for the great
majority of the risk encountered in drilling, and that the proper interpretation
of 3-D seismic data may reduce the majority of the structural risk. Many of
Meridian's best discoveries have been in deeper, high-pressure wells in very
complex geological areas where reservoir and charge risks cannot be easily
evaluated. In these cases, Meridian's geologists and geophysicists have
mitigated as much of the risk as possible by accurately defining and mapping the
structures in these deep prospects. Meridian has been highly successful in its
application of geology and geophysics to developing prospects. While our
interpretations of the structures in the Avoca 5-1 and the Tex-Emma No. 1 wells
were accurate, the wells were not deemed to be commercial.
As previously discussed, the drilling and workover activities for the first nine
months of 2000 substantially replaced the reserves produced during the period.
Approximately $47.9 million of the 2000 capital budget was spent on these
drilling and workover activities. Of the capital expenditures made during the
first nine months, approximately $10.9 million was for land, seismic, geological
and geophysical development of future projects to support the Company's growth.
The Company expanded well workover activities beyond the reserve report
operations (as reported on 12/31/99) to take advantage of high commodity prices.
Our strategy to blend exploration drilling activities with high-confidence
workover and development projects selected from our broad asset inventory added
to our daily production during a period of high commodity prices. This strategy
brought on production sooner than the drilling of deep, higher risk exploration
wells. The workover additions came from our key producing fields, primarily
West Lake Verret, Weeks Island, and Good Hope.
The balance of the capital expenditure budget will be spent primarily on three
prospects, including both exploration and development wells with an emphasis on
low risk exploration in the Company's North Turtle Bayou/Ramos Field and Weeks
Island Field. Development wells in both North Turtle Bayou and Weeks Island are
expected to be drilled during the fourth quarter of 2000.
Meridian's drilling activities, combined with strong commodity prices, have
resulted in increased profitability. Earnings increased from $6.4 million
during the third quarter of 1999 to $25.4 million in the third quarter of 2000.
We believe we have a competitive advantage created by our dominant acreage and
seismic positions in our niche region of south Louisiana. In addition, our
technical team is focused and disciplined in screening drilling prospects,
(which results in fewer, but larger-potential), that form the basis of our
future growth. We have developed a strong asset base, generally covered by 3-D
seismic, that enables us to utilize internal funding for exploration and
development activities. This asset base gives Meridian financial flexibility
and reduces our dependence on external funding to finance future high-potential,
low-risk drilling projects.
Meridian completed the sale of certain non-strategic properties resulting in
debt reduction of $8.5 million in the third quarter of 2000 and $19.5 over the
first nine months of 2000. The property sales that have closed since January
2000 included a total of approximately 16 MMcfe in daily production; however,
since the transactions were closed at various times during the second and third
quarters, the net impact on the quarterly production rates from the second
quarter 2000 to the third quarter was 12.2 MMcfe per day, with a change in
production rates from 150 MMcfe per day in the second quarter of 2000 to 138
MMcfe per day in the third quarter. Year over year production rates for the
third quarter of 2000 are up 2% from the third quarter of 1999.
INDUSTRY CONDITIONS. Revenues, profitability and future growth rates of
Meridian are substantially dependent upon prevailing prices for oil and natural
gas. Oil and natural gas prices have been extremely volatile in recent years
and are affected by many factors outside of our control. In this regard,
average worldwide oil and natural gas prices have increased substantially from
levels in early 1999. Meridian's unhedged position allowed the Company to take
full advantage of strong commodity prices during the third quarter of 2000. Our
average oil price for the three months ended September 30, 2000, was $29.92 per
barrel compared to $24.24 per barrel for the three months ended June 30, 2000,
and $20.21 per barrel for the three months ended September 30, 1999. Our
average oil price for the nine months ended September 30, 2000, was $26.01 per
barrel compared to $16.00 per barrel for the nine months ended September 30,
1999. Our average natural
12
<PAGE>
gas price for the three months ended September 30, 2000, was $4.83 per Mcf
compared to $3.57 per Mcf for the three months ended June 30, 2000, and $2.80
per Mcf for the three months ended September 30, 1999. Our average natural gas
price for the nine months ended September 30, 2000, was $3.67 per Mcf compared
to $2.28 per Mcf for the nine months ended September 30, 1999.
Meridian has no oil collar agreements in place and has not entered into any
agreements that fix the price of natural gas, therefore the Company is poised to
take advantage of any continuing strength in commodity prices. Fluctuations in
prevailing prices for oil and natural gas have several important consequences to
us which could impact our revenues, profitability and ability to maintain or
increase our exploration and development program.
13
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000, COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
OPERATING REVENUES. Third quarter 2000 oil and natural gas revenues increased
$23.3 million as compared to third quarter 1999 revenues, primarily due to the
2% increase in production volumes and the 57% increase in average commodity
prices, both on a natural gas equivalent basis. The production increase, net of
reductions from property sales and natural declines, was a direct result of new
wells being placed on production and an aggressive workover program during the
last twelve months.
The following table summarizes the Company's operating revenues, production
volumes and average sales prices for the three months ended September 30, 2000
and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, 2000 PERCENTAGE
------------------- INCREASE INCREASE
2000 1999 (DECREASE) (DECREASE)
------- ------- --------- ---------
<S> <C> <C> <C> <C>
Production Volumes:
Oil (Mbbl) 958 1,165 (207) (18%)
Natural gas (MMcf) 6,899 5,412 1,487 27%
MMcfe 12,647 12,402 245 2%
Average Sales Prices:
Oil (per Bbl) $ 29.92 $ 20.21 $ 9.71 48%
Natural gas (per Mcf) $ 4.83 $ 2.80 $ 2.03 73%
MMcfe $ 4.90 $ 3.12 $ 1.78 57%
Operating Revenues (000's):
Oil $28,662 $23,542 $ 5,120 22%
Natural gas 33,291 15,136 18,155 120%
------- ------- -------
Total Operating Revenues $61,953 $38,678 $23,275 60%
======= ======= =======
</TABLE>
OPERATING EXPENSES. Oil and natural gas operating expenses increased $0.5
million, to $4.4 million for the third quarter of 2000, compared to $3.9 million
for the same period in 1999. This net increase was the result of several
factors. To take advantage of higher commodity prices, the Company pursued an
expanded well workover program to increase production during the third quarter
of 2000, however these marginal wells incur higher lifting costs. The Company
has implemented a cost reduction program to reduce the operating costs on
properties, and this partially offset the increase in costs from the expanded
workover expenses on marginal wells. Additional factors included the expense
incurred in bringing new reserves on production, which was partially offset by
the disposition of wells in the property sales, several of which had high
operating costs. On an Mcfe basis, operating expenses were $0.34 per Mcfe for
the third quarter of 2000, compared to $0.31 for the three months ended
September 30, 1999.
SEVERANCE AND AD VALOREM TAXES. Severance and ad valorem taxes increased $0.8
million to $4.1 million for the third quarter of 2000, compared to $3.3 million
during the same period in 1999. Meridian's oil and natural gas production is
primarily from southern Louisiana, and is therefore subject to Louisiana
severance
14
<PAGE>
tax. The severance tax rates for Louisiana are 12.5% of gross oil revenues and
$0.097 per Mcf for natural gas. The tax rate for natural gas increased in July
2000 from $0.078 per Mcf. Our third quarter 2000 increase was primarily due to
the 27% increase in natural gas production compared to the same period in 1999,
the tax rate increase in the current quarter and the 48% increase in the average
sales price of oil over 1999.
DEPLETION AND DEPRECIATION. Depletion and depreciation expense increased $3.2
million during the third quarter of 2000 to $16.8 million from $13.7 million for
the same period of 1999. This was primarily a result of the increase in
production volumes in 2000 over 1999 levels and an increase in the depletion
rate reflecting the movement of $19 million from the unevaluated costs to the
full cost pool subject to depletion.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased by $0.2 million to $4.3 million for three months ended September 30,
2000, compared to $4.1 million during the comparable period last year. This
increase was primarily a result of employee benefit plans sharing in profit
growth and to an increase in rental expense, partially offset by a decrease in
legal expenses and other related administrative costs.
INTEREST EXPENSE. Interest expense increased $0.4 million to $6.5 million
during the third quarter of 2000 compared to $6.1 million in the comparable
period in 1999. The increase is primarily due to the Federal Reserve Bank's
increase in overall interest rates over the last twelve months, leading to an
increase in the average interest rates on the credit facility, partially offset
by a decrease of $19.5 million in the amount borrowed under our credit facility.
15
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 2000, COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1999
OPERATING REVENUES. Oil and natural gas revenues during the nine months ended
September 30, 2000, increased $68.8 million as compared to revenues during the
nine months ended September 30, 1999, as production volumes increased by 9% and
average sales prices increased 59%, both on a natural gas equivalent basis. The
production increase, net of reductions from property sales and natural declines,
was a direct result of the inclusion of new wells being placed on production and
an aggressive workover program during the previous twelve months.
The following table summarizes production volumes, average sales prices and
gross revenues for the nine months ended September 30, 2000 and 1999.
NINE MONTHS ENDED 2000
SEPTEMBER 30, 2000 PERCENTAGE
----------------- INCREASE INCREASE
2000 1999 (DECREASE) (DECREASE)
------ ------ ---------- ----------
Production Volumes:
Oil (Mbbl) 3,116 3,329 (213) (6%)
Natural gas (MMcf) 21,923 17,249 4,674 27%
MMcfe 40,618 37,223 3,396 9%
Average Sales Prices:
Oil (Bbl) $ 26.01 $ 16.00 $ 10.01 63%
Natural gas (Mcf) $ 3.67 $ 2.28 $ 1.39 61%
MMcfe $ 3.97 $ 2.49 $ 1.48 59%
Gross Revenues (000's):
Oil $ 81,046 $53,256 $27,790 52%
Natural gas 80,381 39,331 41,050 104%
-------- ------- -------
Total $161,427 $92,587 $68,840 74%
======== ======== =======
OPERATING EXPENSES. Oil and natural gas operating expenses increased $1.0
million, to $13.1 million for the nine months ended September 30, 2000, compared
to $12.1 million for the nine months ended September 30, 1999. This net
increase was the result of several factors. To take advantage of higher
commodity prices, the Company pursued an expanded well workover program to
increase production during the nine-month period of 2000, however these marginal
wells incur higher lifting costs. The Company did implement a cost reduction
program to reduce the operating costs on several properties, and this partially
offset the increase in costs from the expanded workovers on marginal wells.
Additional factors included the expense incurred in bringing new reserves on
production, which was partially offset by the property sales which included
several wells with high operating costs. The net impact of these various
factors was a slight increase in operating expenses when viewed year over year;
however, on an Mcfe basis, operating expenses were $0.32 per Mcfe for the first
three quarters of 2000, which is equal to the comparable period in the prior
year.
SEVERANCE AND AD VALOREM TAXES. Severance and ad valorem taxes increased $3.7
million to $12.0 million for the nine months ended September 30, 2000, compared
to $8.2 million for the nine months ended September 30, 1999. This increase is
largely attributable to the 27% increase in natural gas production over
16
<PAGE>
the same period in 1999 and the 63% increase in the average sales price of oil
over 1999. Meridian's production is primarily from southern Louisiana, and is
therefore, subject to a tax rate of 12.5% of gross oil revenues and $0.097 per
Mcf for natural gas, an increase from $0.078 per Mcf effective in July 2000.
DEPLETION AND DEPRECIATION. Depletion and depreciation expense increased $13.4
million to $52.5 million during the first nine months of 2000 from $39.1 million
for the same period last year. This increase was primarily a result of the 9%
increase in production on an Mcfe basis over the comparable period in 1999 and
an increase in the depletion rate, reflecting the movement of $19 million for
the first nine months of 2000 from the unevaluated to the full cost pool subject
to depletion.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased $2.3 million to $12.3 million for the first nine months of 2000
compared to $10.0 million during the first nine months of 1999. This increase
was primarily a result of our expanded exploration and production activities;
costs included additional salaries, wages and other compensation and related
employee expenses and increased rent related expenses, partially offset by a
decrease in legal expenses and other related administrative expenses.
INTEREST EXPENSE. Interest expense increased $2.5 million to $19.3 million
during the first nine months of 2000 compared to $16.7 million during the
comparable period of 1999. The increase is primarily a result of the issuance
of the Subordinated Notes in June 1999, and due to the Federal Reserve Bank's
increase in overall interest rates, leading to an increase in the average
interest rate on the credit facility, partially offset by a decrease in the
balance outstanding on the credit facility to $230.5 million.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL. During the third quarter of 2000, Meridian's liquidity
improved significantly. Capital expenditures were internally financed from the
Company's cash flow generated from operations. Meridian's unhedged position
allowed us to take full advantage of strong commodity prices during the third
quarter, contributing to high levels of cash flow. In addition, Meridian
continued initiatives designed to increase liquidity and provide flexibility in
our corporate financial structure. We completed the sale of certain non-
strategic assets resulting in cash proceeds of approximately $37 million of
which only $8.5 million in the third quarter of 2000 and $19.5 over the nine
month period were applied to debt reduction. The Company also sold 6,021,500
shares of Common Stock during the third quarter of 2000, for proceeds of
approximately $38.7 million to the Company. As of September 30, 2000, we had a
cash balance of $45.3 million and working capital of $83.7 million, reflecting
the equity proceeds which were received on October 5, 2000.
This improvement in working capital demonstrates our commitment to de-levering
the balance sheet by using available cash flow to reduce payables and other
debt. Our strategy is to grow the Company prudently, taking advantage of the
strong asset base built over the years (including seismic, acreage and the
acquisitions of the Shell and Cairn properties) to add reserves through the
drill bit while maintaining a disciplined approach to costs. We plan to
allocate excess cash above budgeted capital expenditure levels to two key areas,
debt reduction and repurchasing the Preferred and Common Stock now held by Shell
(see "Stock Rights and Restrictions Agreement").
CREDIT FACILITY. We entered into an amended and restated credit facility with
The Chase Manhattan Bank as Administrative Agent (the "Credit Facility") to
provide for maximum borrowings, subject to borrowing base limitations, of up to
$250 million. Due to the property sales during the first nine months of 2000,
the borrowing base was reduced to $230.5 million. The Company is currently
negotiating its scheduled borrowing base redetermination with its banks.
Borrowings under the Credit Facility are secured by pledges of the outstanding
capital stock of our subsidiaries and a mortgage of the offshore oil and natural
gas
17
<PAGE>
properties and several onshore oil and natural gas properties. As a condition to
maintaining the $230 borrowing base and making payments to Shell, Meridian will
grant mortgages to lenders on selected oil and gas properties. The Credit
Facility contains various restrictive covenants, including certain minimum
financial ratios and restrictions on cash dividends. Borrowings under the Credit
Facility mature on May 22, 2003.
Under the Credit Facility, as amended, the Company may secure either (i) an
alternative base rate loan that bears interest at a rate per annum equal to the
greater of the administrative agent's prime rate, a certificate of deposit based
rate or a federal funds based rate plus 0.25% to 1.0% or (ii) a Eurodollar base
rate loan that bears interest, generally, at a rate per annum equal to the
London interbank offered rate plus 1.25% to 2.5%, depending on the ratio of the
aggregate outstanding loans and letters of credit to the borrowing base. The
Credit Facility also provides for commitment fees ranging from 0.3% to 0.5% per
annum.
SHORT-TERM CREDIT FACILITY. The Company entered into a short-term committed
line of credit with a commercial bank for $5 million which will expire on
January 1, 2001. The interest rate is the prime rate plus 1%, and interest
payments are due on the last day of March, June, September and December. It is
renewable by mutual agreement of the parties. The line of credit also provides
for commitment fees of 0.5% per annum. As of September 30, 2000, the full
amount was available to be drawn.
9 1/2% CONVERTIBLE SUBORDINATED NOTES. During June 1999, the Company completed
private placements of an aggregate of $20 million of its 9 1/2% Convertible
Subordinated Notes due June 18, 2005 (the "Notes"). The Notes are unsecured and
contain customary events of default, but do not contain any maintenance or other
restrictive covenants. Interest is payable on a quarterly basis.
The Notes are convertible at any time by the holders of the Notes into shares of
our Common Stock utilizing a conversion price of $7.00 per share (the
"Conversion Price"). The Conversion Price is subject to customary anti-dilution
provisions. The holders of the Notes have been granted registration rights with
respect to the shares of Common Stock that are issued upon conversion of the
Notes or issuance of the warrants discussed below.
The Company may prepay the Notes at any time without penalty or premium;
however, in the event we redeem or prepay the Notes on or before June 21, 2001,
we will issue to the holders of the Notes warrants to purchase that number of
shares of Common Stock into which such Notes would have been convertible on the
date of prepayment. Such warrants will have exercise prices equal to the
Conversion Price in effect on the date of issuance and will expire on June 21,
2001, regardless of the date such warrants are issued.
CAPITAL EXPENDITURES. During the first nine months of 2000, capital
expenditures totaled $70.7 million. Approximately $47.9 million of the 2000
capital budget was spent on drilling and workover activities during the first
nine months, which substantially replaced the reserves produced during the
period. During the first nine months of 2000, approximately $10.9 million of
the capital expenditures were for land, seismic, geological and geophysical
development of future projects to support the Company's growth.
The Company expanded workover activities beyond the reserve report operations
(as reported on 12/31/99) to take advantage of high commodity prices. Our
strategy to blend exploration drilling activities with high-confidence workover
and development projects selected from our broad asset inventory added to our
daily production during a high commodity price environment. This strategy
brought on production sooner than the drilling of deep, higher risk exploration
wells. The workover additions came from our key producing fields, primarily
West Lake Verret, Weeks Island, and Good Hope.
18
<PAGE>
To capture the benefits of favorable commodity pricing we have accelerated our
drilling program which will result in an increase in our 2000 capital
expenditure budget. Capital expenditures will be spent primarily on three
prospects, including both exploration and development wells with an emphasis on
low risk exploration in the Company's North Turtle Bayou/Ramos Field and Weeks
Island Field.
SALE OF PROPERTIES. To reduce bank debt and increase liquidity, the Company
announced on January 14, 2000, the initiation of a formal process to pursue the
sale of certain non-strategic oil and gas properties located in south Louisiana,
the Texas Gulf Coast and offshore in the Gulf of Mexico. The selected
properties represented about 88 Bcfe, or approximately 24% of the Company's 365
Bcfe in reserves. As of September 30, 2000, seven transactions have been
closed, covering a net total of 29.8 Bcfe for a total of $37 million, or an
average price of $1.22 Mcfe. $19.5 million of the property sale proceeds were
used to reduce bank debt. While additional non-strategic properties may be
sold, the Company may elect to retain the properties if the expected revenue
generated from continued operations exceeds the value of the offer. There is no
assurance that additional sales will take place or that the prices realized on
any such sales will be comparable to previous property sales.
STOCK RIGHTS AND RESTRICTIONS AGREEMENT. In June of 1998, Meridian acquired
substantially all of Shell's onshore south Louisiana oil and gas properties. In
consideration of the purchase, Meridian issued to Shell Louisiana Onshore
Properties, Inc. ("SLOPI"), 12.1 million shares of Common Stock plus Preferred
Stock with a stated value of $135 million. The terms of the original Stock
Rights and Restrictions Agreement allowed for the conversion of the Preferred
Stock into Common Stock at any time and beginning July 1, 2000, and the
potential for 25% of Shell's Common Stock holdings to be sold per year, each
subsequent year.
Meridian and SLOPI, on July 18, 2000, announced a definitive agreement granting
Meridian an option to repurchase all of the outstanding shares of Meridian
Preferred Stock (convertible into 12.8 million shares of Common Stock), plus six
million shares of Meridian Common Stock held by Shell, for an aggregate cash
price of $114 million. The "Option and Standstill Agreement" is exercisable in
a single transaction through January 31, 2001. As consideration for the option,
Meridian issued Shell one million shares of Meridian Common Stock. If Meridian
exercises the option, Shell will remain Meridian's largest shareholder, with
approximately 7.1 million shares of Common Stock. The agreement is intended to
benefit all shareholders, both by potentially reducing the number of outstanding
shares and by eliminating the uncertainty resulting from the unknown amount of
dilution related to the "make whole" provision of the Preferred Stock. We
believe that exercise of the option will simplify our capital structure.
If the option is exercised, we would expect to finance the transaction using
cash on hand, internal cash flow, proceeds from the sale of Common Stock and the
property sales discussed above, subordinated note proceeds and, if necessary,
other capital market transactions.
DIVIDENDS. It is Meridian's policy to retain its existing cash for reinvestment
in its business, and therefore, we do not anticipate paying dividends with
respect to the Common Stock in the foreseeable future. The Preferred Stock
accrues an annual cash dividend of 4% of its stated value with the dividend
ceasing to accrue incrementally on one-third of the shares of Preferred Stock on
June 30, 2001, 2002 and 2003, so that no dividends will accrue on any shares of
Preferred Stock after June 30, 2003. Dividends on the Preferred Stock
aggregating $4.05 million were accrued for the first nine months of 2000, of
which none had been paid as of September 30, 2000. If the option to purchase
the Preferred Stock held by Shell is exercised, dividends will be paid on a pro-
rata basis up until the exercise date.
19
<PAGE>
FORWARD-LOOKING INFORMATION
From time to time, we may make certain statements that contain "forward-looking"
information as defined in the Private Securities Litigation Reform Act of 1995
and that involve risk and uncertainty. These forward-looking statements may
include, but are not limited to exploration and seismic acquisition plans;
anticipated results from current and future exploration prospects; future
capital expenditure plans; anticipated results from third party disputes and
litigation; expectations regarding compliance with our credit facility; the
ability to raise sufficient public and/or private capital and terms thereof; the
anticipated results of wells based on logging data and production tests; future
sales of production; earnings, margins, production levels and costs; market
trends in the oil and natural gas industry and the exploration and development
sector thereof; environmental and other expenditures; and various business
trends. Forward-looking statements may be made by management orally or in
writing including, but not limited to, the Management's Discussion and Analysis
of Financial Condition and Results of Operations section and other sections of
our filings with the Securities and Exchange Commission under the Securities Act
of 1933, as amended, and the Securities Exchange Act of 1934, as amended.
Actual results and trends in the future may differ materially depending on a
variety of factors including, but not limited to the following:
Changes in the price of oil and natural gas. The prices we receive for our oil
and natural gas production and the level of such production are subject to wide
fluctuations and depend on numerous factors that we do not control, including
seasonality, worldwide economic conditions, the condition of the United States
economy (particularly the manufacturing sector), foreign imports, political
conditions in other oil-producing and natural-gas-producing countries, the
actions of the Organization of Petroleum Exporting Countries and domestic
government regulation, legislation and policies. Material declines in the
prices received for oil and natural gas could make the actual results differ
from those reflected in our forward-looking statements.
Operating Risks. The occurrence of a significant event against which we are not
fully insured could have a material adverse effect on our financial position and
results of operations. Our operations are subject to all of the risks normally
incident to the exploration for and the production of oil and natural gas,
including uncontrollable flows of oil, natural gas, brine or well fluids into
the environment (including groundwater and shoreline contamination), blowouts,
cratering, mechanical difficulties, fires, explosions, unusual or unexpected
formation pressures, pollution and environmental hazards, each of which could
result in damage to or destruction of oil and natural gas wells, production
facilities or other property, or injury to persons. In addition, we are subject
to other operating and production risks such as title problems, weather
conditions, compliance with government permitting requirements, shortages of or
delays in obtaining equipment, reductions in product prices, limitations in the
market for products, litigation and disputes in the ordinary course of business.
Although we maintain insurance coverage considered to be customary in the
industry, we are self insured against risks for which either insurance is not
available or not cost effective. We cannot predict if or when any such risks
could affect our operations. The occurrence of a significant event for which we
are not adequately insured could cause our actual results to differ from those
reflected in our forward-looking statements.
20
<PAGE>
Drilling Risks. Our decision to purchase, explore, develop or otherwise exploit
a prospect or property will depend in part on the evaluation of data obtained
through geophysical and geological analysis, production data and engineering
studies, which are inherently imprecise. Therefore, we cannot assure you that
all of our drilling activities will be successful or that we will not drill
uneconomical wells. The occurrence of unexpected drilling results could cause
the actual results to differ from those reflected in our forward-looking
statements.
Uncertainties in Estimating Reserves and Future Net Cash Flows. Reserve
engineering is a subjective process of estimating the recovery from underground
accumulations of oil and natural gas that cannot be measured in an exact manner,
and the accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and judgement.
Reserve estimates are inherently imprecise and may be expected to change as
additional information becomes available. There are numerous uncertainties
inherent in estimating quantities and values of proved reserves and in
projecting future rates of production and timing of development expenditures,
including many factors beyond our control. Because all reserve estimates are to
some degree speculative, the quantities of oil and natural gas that we
ultimately recover, production and operating costs, the amount and timing of
future development expenditures and future oil and natural gas sales prices may
differ from those assumed in these estimates. Significant downward revisions to
our existing reserve estimates could cause the actual results to differ from
those reflected in our forward-looking statements.
21
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is from time to time exposed to market risk from changes in interest
rates and hedging contracts. A discussion of the market risk exposure in
financial instruments follows.
INTEREST RATES
We are subject to interest rate risk on our long-term fixed interest rate debt
and variable interest rate borrowings. Our long-term borrowings primarily
consist of borrowings under the Credit Facility and the $20 million principal of
9 1/2% Convertible Subordinated Notes due June 18, 2005. Since borrowings under
the Credit Facility float with prevailing interest rates (except for the
applicable interest period for Eurodollar loans), the carrying value of
borrowings under the Credit Facility should approximate the fair market value of
such debt. Changes in interest rates, however, will change the cost of
borrowing. Assuming $230.5 million remains borrowed under the Credit Facility,
we estimate our annual interest expense will change by $2.4 million for each 100
basis point change in the applicable interest rates utilized under the Credit
Facility. Changes in interest rates would, assuming all other things being
equal, cause the fair market value of debt with a fixed interest rate, such as
the Notes, to increase or decrease, and thus increase or decrease the amount
required to refinance the debt. The fair value of the Notes is dependent on
prevailing interest rates and our current stock price as it relates to the
conversion price of $7.00 per share of our Common Stock.
HEDGING CONTRACTS
Meridian addresses market risk by selecting instruments whose value fluctuations
correlate strongly with the underlying commodity being hedged. From time to
time, we may enter into swaps and other derivative contracts to hedge the price
risks associated with a portion of anticipated future oil and gas production.
While the use of hedging arrangements limits the downside risk of adverse price
movements, it may also limit future gains from favorable movements. Under these
agreements, payments are received or made based on the differential between a
fixed and a variable product price. These agreements are settled in cash at or
prior to expiration or exchanged for physical delivery contracts. Meridian does
not obtain collateral to support the agreements, but monitors the financial
viability of counter-parties and believes its credit risk is minimal on these
transactions. In the event of nonperformance, we would be exposed to price
risk. Meridian has some risk of accounting loss since the price received for
the product at the actual physical delivery point may differ from the prevailing
price at the delivery point required for settlement of the hedging transaction.
22
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material legal proceedings to which Meridian or any of its
subsidiaries or partnerships is a party or by which any of its property is
subject, other than ordinary and routine litigation incidental to the business
of producing and exploring for crude oil and natural gas.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.1 Financial Data Schedule.
(b) On July 20, 2000, the Company filed with the Securities and Exchange
Commission a Current Report on Form 8-K, dated July 17, 2000, regarding the
agreement entered into by the Company and Shell granting the Company an
option to repurchase all of the outstanding shares of the Company's
Preferred Stock and six million shares of the Company's Common Stock held
by Shell.
23
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE MERIDIAN RESOURCE CORPORATION
(Registrant)
Date: November 14, 2000 By: P. RICHARD GESSINGER
-------------------------------
P. Richard Gessinger
Executive Vice President and
Chief Financial Officer
By: LLOYD V. DELANO
-------------------------------
Lloyd V. DeLano
Vice President
Chief Accounting Officer
24
