UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
--------------
Commission file number 1-12634
______________
BELCO OIL & GAS CORP.
(Exact name of registrant as specified in its charter)
Nevada 13-3869719
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
767 Fifth Avenue 10153
New York, New York (Zip code)
(Address of principal executive
offices)
(212) 644-2200
(Registrant's telephone number, including area code)
______________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
-- --
As of September 30, 1996, there were 31,575,300 shares of the Registrant's
Common Stock, par value $.01 per share, outstanding.
==============================================================================
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<C>
PART I
FINANCIAL INFORMATION
<S>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at September 30, 1996
and December 31, 1995 . . . . . . . . . . . . . . . . . . 1
Condensed Consolidated Statements of Operations for the three
months and nine months ended September 30, 1996 and 1995..2
Condensed Consolidated Changes in Stockholders' Equity for
the nine months ended September 30, 1996 . . . . . . . . 3
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1996 and 1995. . . . . . . . . 4
Notes to Condensed Consolidated Financial Statements . . . . . 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . 9
PART II
OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 18
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . 18
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . 18
Item 4. Submission of Matters to a Vote of Security-Holders. . . . . 18
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . 18
Item 6. Exhibits and Reports on 8-K. . . . . . . . . . . . . . . . . 19
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BELCO OIL & GAS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------- -----------------
<C> <C>
ASSETS
-----
<S>
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . $ 57,851 $ 1,556
Accounts receivable, oil and gas . . . . 22,700 16,979
Advances to oil and gas operators . . . . -- 45
Other current assets . . . . . . . . . . 218 401
---------- --------
Total current assets . . . . . . . . . 80,769 18,981
---------- --------
PROPERTY AND EQUIPMENT:
Oil and gas properties at cost
based on full cost accounting
Proved oil and gas properties . . . . . 200,930 152,081
Unproved oil and gas properties . . . . 74,829 19,927
Less--Accumulated depreciation,
depletion and amortization . . . . . (75,662) (45,771)
---------- --------
Net property and equipment . . . . . . 200,097 126,237
---------- --------
OTHER ASSETS . . . . . . . . . . . . . . . 232 332
---------- --------
Total assets . . . . . . . . . . . . . $ 281,098 $145,550
========== ========
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities . . . . . . . . . . . . . . $ 14,213 $ 8,440
Revenues and royalties payable. . . . . . 3,437 --
Income taxes payable. . . . . . . . . . . 340 --
Distribution payable . . . . . . . . . . -- 10,095
---------- ----------
Total current liabilities . . . . . . . . . 17,990 18,535
---------- ----------
LONG-TERM DEBT . . . . . . . . . . . . . . -- 22,000
DEFERRED INCOME TAXES . . . . . . . . . . . 39,625 --
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value;
10,000,000 shares authorized;
none issued or outstanding . . . . . . -- --
Common stock ($.01 par value,
120,000,000 shares authorized;
31,571,300 shares issued and
outstanding at June 30, 1996) . . . . . 315 --
Additional paid-in capital . . . . . . . . 186,441 --
Retained earnings . . . . . . . . . . . . . 38,788
Combined equity of predecessor entities . . -- 105,849
Unearned compensation . . . . . . . . . . . (1,316) --
Less: Notes receivable for equity
interest . . . . . . . . . . . . . . . . (745) (834)
--------- ---------
Total stockholders' equity . . . . . . . . 213,483 105,015
--------- ---------
Total liabilities and stockholders' equity $ 281,098 $ 145,550
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
- 1 -
<PAGE>
BELCO OIL & GAS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ----------------
<C> <C> <C> <C>
1996 1995 1996 1995
---- ---- ---- ----
<S>
REVENUES:
Oil and gas sales . . . . . . $27,284 $16,275 $83,930 $47,349
Commodity Price Risk
Management. . . . . . . . . (220) 4,445 2,413 8,507
Interest and other. . . . . . 963 8 1,849 29
------- ------- ------- -------
Total revenues 28,027 20,728 88,192 55,885
------- ------- ------- -------
COSTS AND EXPENSES:
Oil and gas operating
expenses . . . . . . . . . . 1,947 1,513 5,826 4,424
Depreciation, depletion and
amortization . . . . . . . . 10,571 6,815 29,891 19,800
General and administrative. . 688 687 2,444 1,838
------- ------- ------- -------
Total costs and expenses. . . . 13,206 9,015 38,161 26,062
------- ------- ------- -------
INCOME BEFORE INCOME TAXES. . . 14,821 11,713 50,031 29,823
PROVISION FOR INCOME TAXES. . . 5,039 0 (a) 41,143 0
------- ------- ------- -------
NET INCOME (LOSS) . . . . . . . $9,782 $ 11,713 (a) $ 8,888 $ 29,823
======= ======= ======= =======
PRO FORMA NET INCOME
Income before income taxes. . $14,821 $ 11,713 $50,031 $ 29,823
Pro forma provision for
income taxes. . . . . . . . 5,039 3,865 17,011 9,842
------- -------- ------- --------
Pro forma net income . . . . . $9,782 $ 7,848 $33,020 $ 19,981
======= ========= ======= ========
PRO FORMA NET INCOME PER
COMMON SHARE . . . . . . . . $ 0.31 $ 0.31 $ 1.12 $ 0.80
======= ========= ======= ========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING . . . . . 31,500 25,000 29,476 25,000
======= ========= ======= ========
</TABLE>
(a) Includes a one-time non-cash deferred tax charge of $29.9 million
recognized as a result of the Combination consummated on March 29, 1996
in connection with the Company's Initial Public Offering and discussed
in the Belco Oil & Gas Corp. Prospectus dated March 25, 1996.
Historical loss per share, including the deferred tax charge, was $0.30
for the nine months ended September 30, 1996. The pro forma amounts
present the Company as if a taxable corporation for all periods and is
based on the average number of shares outstanding during the period
assuming the Combination.
The accompanying notes are an integral part of these condensed financial
statements.
- 2 -
<PAGE>
BELCO OIL & GAS CORP.
CONDENSED CONSOLIDATED CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
<C> <C> <C> <C> <C> <C> <C> <C>
Notes
Common Stock Additional Combined Receivable
---------------- Paid-in Unearned Retained Predecessor for Equity
Shares Amount Capital Compensation Earnings Equity Interest
Total
-------------------------------------------------------------------------------------------
<S>
BALANCE, December 31, 1995 . -- $ -- $ -- $ -- $ -- $ 105,849 $ (834) $105,015
-------------------------------------------------------------------------------------------
Exchange combination . . . . 25,000 250 71,929 -- -- (72,179) -- --
Public stock offering, net
of costs of $10.4 million. 6,500 65 113,050 -- -- -- -- 113,115
Restricted stock issued. . . 75 -- 1,462 (1,316) -- -- -- 146
Repayment of employee notes
receivable . . . . . . . . -- -- -- -- -- -- 89 89
Distributions to predecessor
owners . . . . . . . . . . -- -- -- -- -- (3,770) -- (3,770)
Net Income (loss) (a). . . . -- -- -- -- 38,788 (29,900) -- 8,888
------------------------------------------------------------------------------------------
BALANCE, September 30, 1996 31,575 $ 315 $186,441 $(1,316) $38,788 $ -- $ (745) $223,483
------------------------------------------------------------------------------------------
</TABLE>
(a) Including one-time deferred tax charge of $29.9 million upon becoming a
taxable corporation on March 29, 1996.
The accompanying notes are an integral part of these condensed financial
statements.
- 3 -
<PAGE>
BELCO OIL & GAS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
<C> <C>
Nine Months Ended
September 30,
1996 1995
----------------
<S>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . .$ 8,888 $ 29,823
Adjustments to reconcile net income
(loss) to net operating cash inflows--
Depreciation, depletion and amortization. . . . 29,891 19,800
Deferred income taxes . . . . . . . . . . . . . 39,625 --
Amortization of deferred compensation . . . . . 70 --
Changes in operating assets and liabilities--
Accounts receivable . . . . . . . . . . . . . (5,721) (3,210)
Revenues and royalties payable. . . . . . . . 3,437 --
Income taxes payable. . . . . . . . . . . . . 340 --
Accounts payable and accrued liabilities. . . -- 307
Other current assets . . . . . . . . . . . . . 183 17
------- --------
Net operating cash inflows . . . . . . . . . . 76,713 46,517
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration and development expenditures. . . . . (103,751) (48,260)
Changes in accounts payable and accrued
liabilities for oil and gas expenditures. . . . 5,773 6,237
Change in advances to oil and gas operators . . . 45 1,611
Changes in other assets . . . . . . . . . . . . . 100 (110)
Other . . . . . . . . . . . . . . . . . . . . . . 76 --
------- --------
Net investing cash outflows . . . . . . . . . . . . (97,757) (40,522)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings. . . . . . . . . . . . . . . 13,300 7,700
Long-term debt repayments . . . . . . . . . . . . (35,300) (2,100)
Net proceeds from public offering . . . . . . . . 113,115 --
Equity contributions. . . . . . . . . . . . . . . -- 4,512
Equity distributions. . . . . . . . . . . . . . . (13,865) (18,841)
Employee loans, net . . . . . . . . . . . . . . . 89 (622)
-------- -------
Net financing cash inflows (outflows) . . . . . 77,339 (9,351)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . 56,295 (3,356)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD. . 1,556 6,951
CASH AND CASH EQUIVALENTS AT END OF PERIOD. . . . . 57,851 3,595
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
- 4 -
<PAGE>
BELCO OIL & GAS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Accounting Policies:
The financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission and reflect all adjustments which
are, in the opinion of management, necessary to present a fair statement
of the results for the interim periods, on a basis consistent with the
annual audited financial statements. All such adjustments are of a
normal recurring nature. The results of operations for the interim
period are not necessarily indicative of the results to be expected for
an entire year. Certain information, accounting policies, and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations, although the Company
believes that the disclosures are adequate to make the information
presented not misleading. These financial statements should be read in
conjunction with the Company's Form S-1 Registration Statement dated
March 25, 1996 which includes financial statements and notes thereto.
Note 2 - Organization and Principles of Combination:
The Company was organized as a Nevada corporation in January of 1996 in
connection with the combination of assets (the "Combination") consisting
of ownership interests (the "Combined Assets") in certain entities and
direct interests in oil and gas properties and certain hedge
transactions owned by members of the Robert A. Belfer family and by
employees of the predecessors and entities related thereto.
The Company and the owners of the Combined Assets
entered into an Exchange and Subscription Agreement and Plan of
Reorganization dated as of January 1, 1996 (the "Exchange Agreement")
that provided for the issuance by the Company of an aggregate of
25,000,000 shares of common stock to such owners in exchange for the
Combined Assets on March 29, 1996, the date the Offering closed. The
owners of the Combined Assets received shares of common stock
proportionate to the value of the Combined Assets underlying their
ownership interests in the predecessors and the direct interests. The
Combination was accounted for as a reorganization of entities under
common control because of the common control of the stockholders of the
Nevada corporation and by virtue of their direct ownership of the
entities and interests exchanged.
Accordingly, the net assets acquired in the Combination have been
recorded at the historical cost basis of the affiliated predecessor
owners.
On March 29, 1996, the Company completed its initial public offering
(the "Offering") issuing 6.5 million shares at $19 per share. Net
proceeds totaled $113.1 million after Offering costs of $10.4 million.
- 5 -
<PAGE>
Note 3 - Pro Forma Net Income Per Share:
Pro forma net income per share is based on the weighted average number
of shares of common stock outstanding. The computation assumes that the
Company was incorporated during the periods presented and presents the
shares issued in connection with the Combination as outstanding for all
periods. The effects of common stock equivalent shares (stock options)
and restricted stock were not material and not dilutive for the three
and nine month periods ended on September 30, 1996.
Note 4 - Income Taxes:
Prior to March 29, 1996, the earnings of the Company were not subject to
corporate income taxes as the Company, prior to the Combination, was a
combination of non-taxpaying entities, including Subchapter S, limited
liability corporations, partnership and joint venture entities and
individual interests. Accordingly, taxable earnings were directly
taxable to the individual owners through the date of the Combination.
As a result of the Combination consummated on March 29, 1996, the
Company became a taxpaying entity and recorded, in the first quarter of
1996, a $29.9 million one-time, non-cash charge to earnings to establish
a deferred tax liability (discussed further below). The historical
provision for income taxes for the nine months ended September 30, 1996
includes the one-time charge. The pro forma provision for income taxes
reflected in the Condensed Consolidated Statements of Operations for the
three and nine month periods ended September 30, 1996 and 1995 have been
presented to reflect the Company's income taxes under the assumption
that the Company was a taxpaying entity since its inception.
Under the liability method specified by Statement of Financial
Accounting Standards No. 109, deferred taxes are determined based on the
estimated future tax effect of differences between the financial
statement and tax basis of assets and liabilities given the provisions
of enacted tax laws. At March 31, 1996, the estimated tax basis of the
Company's net assets is approximately $85 million below the recorded
financial statement amounts. The difference relates primarily to
deductions of oil and gas property costs for tax purposes in excess of
the deductions for financial reporting purposes. The related tax basis
amounts at March 31, 1996, have been estimated. Such amounts will be
adjusted once the respective March 29, 1996 income tax returns are
finalized.
Although the effective date of the Exchange Agreement is January 1,
1996, each owner of the Combined Assets will be required under existing
federal income tax rules and regulations to include in its taxable
income, for all periods ending on the date of or prior to the completion
of the Combination (March 29, 1996), its allocable portion of the
taxable income attributable to the Combined Assets and will be entitled
to all tax benefits related to the Combined Assets through the
completion of the Combination on March 29, 1996.
- 6 -
<PAGE>
The differences between the statutory federal income taxes and the
Company's pro forma effective taxes is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
<C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S>
Statutory federal income taxes . .$ 5,187 $ 4,108 $17,511 $ 10,469
State income tax, net of federal
benefit. . . . . . . . . . . . . 20 28 60 78
Section 29 tax credits . . . . . . (175) (225) (575) (603)
Other. . . . . . . . . . . . . . . (7) (46) 15 (102)
-------- -------- -------- ---------
Pro forma provision for income
taxes. . . . . . . . . . . . . .$ 5,039 $ 3,865 $ 17,011 $ 9,842
</TABLE>
Note 5 -Commodity Price Risk Management Activities:
The Company periodically enters into commodity hedging transactions such as
swaps and options in order to manage its exposure to oil and gas price
volatility. Gains and losses related to qualifying hedges of the Company's
oil and gas production are deferred and recognized as a component of revenues
as the associated production occurs. Reference is made to the December 31,
1995 financial statements of Belco Oil & Gas Corp. and affiliated entities
included in the Form S-1 effective March 25, 1996 for a more thorough discussion
of the Company's commodity hedging activities.
The Company uses the mark-to-market method of accounting for instruments that do
not qualify for hedge accounting. Under mark-to-market accounting, those
contracts which do not qualify for hedge accounting are reflected at market
value at the end of the period with resulting unrealized gains and losses
recorded as assets and liabilities in the consolidated balance sheet. Under
such method, changes in the market value of outstanding financial instruments
are recognized as gain or loss in the period of change. As of the end of the
third quarter of 1996, the results of marking these positions to market would
approximate break even.
For the nine months ended September 30, 1996 and 1995, the Company had net gains
of $2.4 and $8.5 million, respectively, related to its price risk management
activities.
- 7 -
<PAGE>
Note 6 - Stock Incentive Plan:
On March 25, 1996, the Company adopted its planned Stock Incentive Plan for
which 2,250,000 shares of common stock have been reserved for issuance pursuant
to such plan. During 1996, 374,500 stock options were granted to employees with
an exercise price equal to the fair market value on the date of grant. The
Company accounts for employee stock-based compensation using the intrinsic
value method prescribed by Accounting Principles Board (APB) Opinion No.25,
"Accounting for Stock Issued to Employees". Accordingly, stock options granted
at fair market value on the date of grant will have no effect on the Company's
results of operations. In addition, during the second quarter of 1996, 12,000
Stock Options were granted, subject to stockholder approval, to non-employee
directors with an exercise price equal to the fair market value on the date of
grant.
On March 25, 1996, the Company also issued 72,300 shares of restricted stock to
employees, without payment to the Company, under the Stock Incentive Plan. The
restrictions on disposition lapse 20% each year and non-vested shares must be
forfeited in the event employment ceases. The value of the restricted stock on
the date of grant, totaling $1.4 million based upon the offering price, has been
recorded as an equity issuance and deferred compensation (presented as a
reduction of equity). The deferred compensation will be charged to earnings
over the vesting period. During the quarter ended September 30, 1996, 3,000
net additional shares of restricted stock were issued to employees.
Note 7 - Supplemental Cash Flow Information:
Cash paid for income taxes and interest expense is as follows:
1996 1995
($'s in thousands)
Income taxes $1,178 $ --
Interest 563 765
Note 8 - Subsequent Event:
On October 31, 1996 the Company purchased from third-party investors interests
(the "Acquired Interests") in the Belco Oil & Gas Corp. 1992, 1993 and 1992
Offset Moxa Arch Drilling Programs. The effective date of the purchase was
August 1, 1996. However, for financial reporting purposes, the effective date is
October 31, 1996. The Acquired Interests represent incremental working
interests in the Company's natural gas wells in the Moxa Arch trend located
in Lincoln, Sweetwater and Uinta Counties, Wyoming. The Company will pay
aggregate cash consideration of $7.9 million plus an 80% participation in
potential natural gas price increases associated with production from the
wells through July 31, 1999 (the "Price Participation Right"). The cash
purchase price, which differs from the contractual "put" price the Company
would be required to pay under the original terms of the Moxa Programs, was
based on estimated future net revenues of Proven Reserves attributable to the
Acquired Interests as of July 31, 1996 discounted to present value at 10%
per annum ("PV10 Value") plus (a) in the case of the 1992 Program, the net
revenues attributable to Section 29 Tight Sand Gas Credits associated with the
Acquired Interests as of July 31, 1996 discounted to present value at 10% per
annum, and (b) in the case of the 1993 Program and 1992 Offset Program, 10%
of the PV10 value. The acquisition will be funded out of the Company's
existing working capital.
- 8 -
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since its inception in April 1992, the Company has grown rapidly through
farm-ins, acreage acquisitions and participation agreements.
The Company's participation in exploration and development activities in the
Moxa Arch Trend of Wyoming and in the Austin Chalk Trend in the Giddings
Field of Texas are principally responsible for the substantial expansion of
production, revenues and reserves since the Company's inception.
The Company was organized as a Nevada corporation in January 1996 in
connection with the combination (the "Combination") of ownership interests
(the "Combined Assets") in certain entities (the "Predecessors") and direct
interests in oil and gas properties and certain hedge transactions (the
"Direct Interests") owned by members of the Robert A. Belfer family and by
employees of the Predecessors and entities related thereto. The Company and
the owners of the Combined Assets entered into an Exchange and Subscription
Agreement and Plan of Reorganization, dated as of January 1, 1996 (the
"Exchange Agreement"), that provided for the issuance by the Company of an
aggregate of 25 million shares of Common Stock to such owners in exchange for
the Combined Assets on March 29, 1996, the date the Offering closed. The
owners of the Combined Assets received shares of Common Stock proportionate
to the value of the Combined Assets underlying their ownership interests in
the Predecessors and the Direct Interests.
Pursuant to the Exchange Agreement, the owners of the Combined Assets
received all revenues attributable to production and are responsible for all
incurred expenses related to the Combined Assets for all periods prior to
January 1, 1996. Effective with the Combination (which was
contemporaneous with the closing of the Offering), the Company is entitled to
receive all revenues and is responsible for all expenses related to the
Combined Assets on and after January 1, 1996.
- 9 -
<PAGE>
From inception through 1995, the Predecessors were not required to pay
federal income taxes due to their status as either a partnership,
individual owner, Subchapter S corporation, limited liability corporation
or joint venture, which are "pass-through" entities that are not subject
to federal income taxation; instead, taxes relating to the Combined Assets
for such periods were required to be paid by the owners of the
Predecessors and the Direct Interests.
Although the effective date of the Exchange Agreement is January 1, 1996,
each owner of the Combined Assets will be required to include in its
taxable income, for all periods ending on the date of or prior to the
completion of the Combination, its allocable portion of the taxable
income attributable to the Combined Assets and will be entitled to all
tax benefits attributable to the Combined Assets through completion of the
Combination.
The Company's revenue, profitability and future rate of growth are
substantially dependent upon prevailing prices for natural gas, oil
and condensate. These prices are dependent upon numerous factors beyond
the Company's control, such as economic, political and regulatory
developments and competition from other sources of energy. The energy
markets have historically been very volatile, and there can be no
assurance that oil and gas prices will not be subject to wide fluctuations in
the future. A substantial or extended decline in oil and gas prices
could have a material adverse effect on the Company's financial position,
results of operations and access to capital, as well as the quantities of
oil and gas reserves that the Company may economically produce. The Company
markets its oil with other working interest owners on spot price contracts
and typically receives a premium compared to the price posted for such crude
oil. Natural gas produced is sold under contracts that primarily reflect
spot market conditions for their particular area. Approximately 92% of the
Company's production volumes relate to the sale of natural gas.
From time to time, the Company has utilized commodity swaps and options and
other commodity price risk management transactions for a portion of its oil
and gas production to achieve a more predictable cash flow and to reduce
its exposure to price fluctuations. The Company accounts for these
transactions as hedging activities or using mark-to-market accounting for
those contracts which do not qualify for hedge accounting. The Company has
various gas and oil price risk management contracts in place with respect
to a substantial portion of its estimated production for 1996 and with
respect to lesser portions of its estimated production for 1997 and 1998.
The Company expects from time to time to either add or reduce the amount
of price risk management contracts that it has in place.
- 10 -
<PAGE>
The following table sets forth certain operations data of the Company for
the periods presented:
<TABLE>
<CAPTION>
<C> <C> <C> <C> <C> <C> <C> <C>
Three Months Ended Variances Nine Months Ended Variances
September 30, September 30,
1996 1995 AMOUNT % 1996 1995 AMOUNT %
---------------------------------------------------------------------
<S>
Oil and Gas Sales (Unhedged) (in thousands). . . $27,284 $16,275 $11,009 68% $83,930 $47,349 $36,581 77%
Commodity Price Hedging. . . . . . . . . . . . . (220) 4,445 (4,665) -105% 2,413 8,507 (6,094) -72%
Weighted Average Sales Prices (Unhedged):
Oil (per Bbl) . . . . . . . . . . . . . . . . $22.17 $17.86 $4.31 24% $20.36 $17.86 $2.22 12%
Gas (per Mcf) . . . . . . . . . . . . . . . . 1.90 1.39 0.51 37% 1.84 1.39 0.43 31%
Net Production Data:
Oil (Mbbl). . . . . . . . . . . . . . . . . . 161 253 (92) -36% 575 734 (159) -22%
Gas (Mmcf). . . . . . . . . . . . . . . . . . 12,465 9,065 3,400 38% 39,252 26,533 12,719 48%
Gas equivalent (Mmcfe). . . . . . . . . . . . 13,430 10,583 2,847 27% 42,701 30,937 11,764 38%
Data per Mcfe:
Oil and gas sales revenues (Unhedged) . . . . $2.03 1.54 $0.49 32% $1.97 $1.53 $0.44 28%
Commodity Price Hedging . . . . . . . . . . . (0.02) 0.42 (0.44) -104% 0.06 0.27 (0.21) -78%
Oil and gas operating expenses. . . . . . . . (0.14) (0.14) -- -- (0.14) (0.14) -- --
General and administrative. . . . . . . . . . (0.05) (0.06) .01 16% (0.06) (0.06) -- --
Depreciation, depletion and amortization. . . (0.79) (0.64) (0.15) 22% (0.70) (0.64) (0.06) 9%
Interest income (Net) . . . . . . . . . . . . 0.07 -- 0.07 -- 0.04 -- 0.04 --
--------- ------- ------- ----- ------ -------- ------- ----
Pre-tax operating profit. . . . . . . . . . . $1.10 $1.11 $(0.01) -1% $1.17 $0.96 $0.21 22%
========= ======= ======= ===== ====== ======== ======= ====
</TABLE>
- 11 -
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended September 30, 1996 Compared to September 30, 1995
Revenues:
During the third quarter of 1996, oil and gas sales revenues (unhedged)
increased $11.0 million, or 68%, to $27.3 million over the prior year
comparable period. The revenue increase is the result of newly drilled
Giddings Field well additions in the Navasota River and Independence areas of
the Company's Texas operations and continued higher average prices realized
for both oil and natural gas. Production volume during the third quarter
of 1996 on a Mcfe basis increased to 13,430 MMcfe from 10,583 Mcfe over
the prior year comparable period, representing an increase of 27%. Natural
gas production represented approximately 93% of total Company production on a
Mcfe basis. Daily production for the quarter also increased 27% to 146,000
Mcfe compared to 115,000 Mcfe in the third quarter of 1995.
Marketing activities associated with sales of natural gas and crude oil also
include natural gas and crude oil price swap, option and other commodity
price risk management transactions of natural gas and crude oil and
condensate prices. These transactions resulted in a modest loss of $0.2
million during the third quarter of 1996. During the prior year
comparable quarter a $4.4 million net gain was realized. The average Mcfe
price impact realized for these transactions amounted to a loss and gain of
$0.02 and $0.42 per Mcfe for 1996 and 1995, respectively.
Costs and Expenses:
Production and Operating Expenses. Production and operating expenses
increased 29% from $1.51 million for the third quarter of 1995 to $1.95
million for the comparable period in 1996 due mainly to increased
production from new well additions. On a Mcfe basis, operating costs were
flat at $0.14 for the third quarter of 1996 when compared to the third
quarter of 1995.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization ("DD&A"), for the quarter ended September 30, 1996 increased 55%
over the prior year comparable period, from $6.8 million to $10.6 million,
due primarily to increased production and additional expenses related to the
previously announced unsuccessful initial well drilled in the Cotton Valley
Reef Trend area of East Texas. The DD&A rate for the third quarter of 1996
was $0.79 compared to $0.64 per Mcfe in the third quarter of 1995.
General and Administrative Expenses. General and administrative expenses
("G&A") were virtually unchanged in the third quarter of 1996 at $688,000
when compared to the $687,000 incurred in the third quarter of 1995.
Income Before Income Taxes
The Company's income before income taxes for the third quarter of 1996
increased by approximately $3.1 million, or 27% to $14.8 million from $11.7
million in the prior year period. Increases in income continue to be
generated primarily by increases in production from new well additions in
the Giddings Field and higher prices.
- 12 -
<PAGE>
Income Taxes
Income tax expense for the third quarter of 1996 was $5.0 million utilizing
an estimated effective income tax rate of 34.0%. In connection with the
Combination and Exchange Agreement, the Company became a taxable
corporation and, as a result, was required to record a one-time, non-cash
charge in the amount of $29.9 million during the first quarter of 1996 to
establish a deferred tax liability related to prior years on its balance
sheet due to the change in the tax status of the Company.
Nine Months Ended September 30, 1996 Compared to September 30, 1995:
Revenues
For the first nine months of 1996, oil and gas sales revenues (unhedged)
increased 77% to $83.9 million when compared to the $47.3 million realized in
the first nine months of 1995. The substantial increase is principally
identified with the addition of new Giddings Field wells in both the
Navasota and Independence areas of the Company's operations and higher
average prices realized for both oil and natural gas. Production volume
in the first nine months of 1996 on an Mcfe basis increased to 42,701
MMcfe, an increase of 38% over the prior year first nine months. Daily
production improved to 156,000 Mcfe for the first nine months of 1996
compared to 113,000 Mcfe for the comparable period in 1995.
Commodity Price Hedging activities associated with sales of crude oil and
natural gas added $2.4 and $8.5 million to net operating revenues for the
first nine months of 1996 and 1995, respectively. The average Mcfe price
realized from such activities amounted to $0.06 and $0.27 per Mcfe for 1996
and 1995, respectively.
- 13 -
<PAGE>
Costs and Expenses:
Production and Operating Expenses. Production and operating expenses
including associated taxes incurred in the first nine months of 1996 amounted
to $5.8 million, an increase of 32% over the $4.4 million incurred in the
prior year nine month period. Operating costs on a Mcfe basis were flat at
$0.14 per Mcfe for both 1996 and 1995. A substantial portion of the
Company's gas production from wells drilled prior to September 1996 in the
downdip Giddings Field qualifies for exemption from Texas state production
taxes. This exemption will continue for production through August 31, 2001.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization ("DD&A") costs related to oil and gas properties totaled $29.9
million for the first nine months of 1996, a 51% increase over the $19.8
million incurred in the 1995 comparable period. The Company average DD&A
rate per Mcfe for the first nine months of 1996 was $0.70 compared to a rate
of $0.64 per Mcfe in the first nine months of 1995. The increased rate
reflects the higher average cost of drilling deeper wells and costs
associated with the unsuccessful East Texas Cotton Valley Reef Trend
exploration activities.
General and Administrative Expenses. General and administrative expense
("G&A") was $2.44 million for the first nine months of 1996, a 33% increase
over the prior year first nine months primarily reflecting the addition of
new employees hired to assist with the Company's expanding activities and
additional costs incurred in connection with becoming a publicly traded
entity. On a Mcfe basis, G&A costs were flat at $0.06 for the first nine
months of 1996 and 1995.
Income Before Income Taxes
The Company's income before income taxes for the first nine months of 1996
was $50.0 million, an 68% increase over the $29.8 realized in the prior year
comparable period. The increase is directly related to increased
production from new well additions in the Giddings Field and higher prices
realized for both crude oil and natural gas.
Income Taxes
Income tax expense for the first nine months of 1996 amounted to $41.1
million. The provision for taxes includes a one-time, non-cash charge in the
amount of $29.9 million that was required as a result of the Combination
and the Exchange Agreement which changed the tax status of the Company.
- 14 -
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
On March 29, 1996, the Company successfully completed an initial public
offering of 6.5 million shares of common stock. The Offering provided the
Company with approximately $113 million net of Offering expenses.
Revolving credit agreement indebtedness in the amount of $35.3 million was
repaid with proceeds from the Offering. The remaining proceeds from the
Offering, together with cash flows from operations, will be used to fund
planned capital expenditures, commitments, other working capital
requirements and for general corporate purposes.
Net operating cash flow (pre-tax), a measure of performance for exploration
and production companies, is generally derived by adjusting net income to
eliminate the effects of the non-cash depreciation, depletion and
amortization expense and the provision for deferred income taxes. Net
operating cash flow (pre-tax) before changes in working capital was
approximately $78.4 million for the first nine months of 1996 and $49.6
million for the prior year comparable period, an increase of 58%. The
year to date cash flow increase is the result of higher prices realized
for production and increases in production from new well additions,
reflecting expanding operations. The Company had working capital
amounting to $62.8 million as of September 30, 1996, a substantial increase
over the $0.4 million in working capital available as of December 31, 1995.
For 1996, the Company has budgeted approximately $130 million for capital
expenditures which amount may be increased or decreased depending on oil
and gas prices, drilling results and other investment opportunities. The
Company is allocating approximately 70% of its budget to development
and exploration projects and approximately 30% to leasehold and seismic
acquisition activities.
In December of 1994, the Company entered into a three-year $25 million Credit
Agreement with The Chase Manhattan Bank, N.A. (the "Credit Facility").
Principal outstanding is due and payable upon maturity in December 1997
with interest due quarterly. In order to finance future capital requirements
during the first quarter of 1996, the Company increased the Credit Facility
and the Borrowing Base thereunder to $ 40 million. The Borrowing Base
represents the maximum available amount that may be borrowed under the
Credit Facility at any given time. Since all indebtedness under the Credit
Facility was repaid with proceeds from the Offering, the Company elected to
reduce the current Borrowing Base under the Credit Facility to $15 million
on May 1, 1996. The reduction in the Borrowing Base will permit the
Company to pay a lower commitment fee, which is currently calculated at an
annual rate of 0.25 of 1% of the unused portion of the available
Borrowing Base. The Company may seek to adjust the terms and availability
of the Credit Facility in the future in accordance with its anticipated
capital requirements.
- 15 -
<PAGE>
The third party investors in the Moxa Programs have the contractual right on
an annual basis through 2004 to require the Company to purchase their
interests in such programs. No investor under the Moxa Programs exercised
such right through the third quarter of 1996. Based upon December 31,
1995 SEC basis reserve values, the maximum purchase price if all investors
exercised the put would be less than $40 million.
Certain of the Company's commodity price risk management arrangements
require the Company to deliver cash collateral or other assurances of
performance to the counterparties in the event that the Company's payment
obligations with respect to its commodity price risk management transactions
exceed certain levels. Certain of these transactions may be covered by
guarantees or letters of credit issued under the Credit Facility.
The Company intends to fund its planned capital expenditures, commitments
and working capital requirements through cash flows from operations, from the
proceeds of the Offering and to the extent necessary, borrowings under the
Credit Facility.
If there are changes in oil and gas prices, however, that correspondingly
affect cash flows and the Borrowing Base under the Credit Facility, the
Company has the discretion and ability to adjust its capital budget. The
Company believes it will have sufficient capital resources and liquidity
to fund its capital expenditures and meet its financial obligations as they
come due.
COMMODITY PRICE RISK MANAGEMENT TRANSACTIONS
With the primary objective of achieving more predictable revenues and cash
flows and reducing the exposure to fluctuations in natural gas and oil
prices, the Company has entered into price risk management transactions of
various kinds with respect to both gas and oil. While the use of certain of
these price risk management arrangements limits the downside risk of adverse
price movements, it may also limit future revenues from favorable price
movements. The Company engages in transactions such as selling covered
calls or straddles which are marked to market at the end of the relevant
accounting period. Since the futures market has been volatile of late, these
fluctuations may cause significant impact on the results of such
accounting period. The Company has entered into price risk management
transactions with respect to a substantial portion of its estimated
production for 1996 and with respect to lesser portions of its estimated
production for 1997 and 1998. The Company continues to evaluate
whether to enter into additional price risk management transactions for 1996
and future years. In addition, the Company may determine from time to time
to unwind its then existing price risk management positions.
- 16 -
<PAGE>
ENVIRONMENTAL MATTERS
The Company's operations are subject to various federal, state and local laws
and regulations relating to the protection of the environment, which have
become increasingly stringent. The Company believes its current
operations are in material compliance with current environmental laws and
regulations. There are no environmental claims pending or, to the Company's
knowledge, threatened against the Company. There can be no assurance,
however, that current regulatory requirements will not change, currently
unforeseen environmental incidents will not occur or past noncompliance with
environmental laws will not be discovered on the Company's properties.
- 17 -
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS NONE
ITEM 2 - CHANGES IN SECURITIES NONE
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES NONE
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS NONE
ITEM 5 - OTHER INFORMATION
On October 31, 1996 the Company purchased from third-party investors
interests (the "Acquired Interests") in the Belco Oil & Gas Corp. 1992, 1993 and
1992 Offset Moxa Arch Drilling Programs. The effective date of the purchase
was August 1, 1996. However, for financial reporting purposes, the effective
date is October 31, 1996. The Acquired Interests represent incremental working
interests in the Company's natural gas wells in the Moxa Arch trend located in
Lincoln, Sweetwater and Uinta Counties, Wyoming. The Company will pay
aggregate cash consideration of $7.9 million plus an 80% participation
in potential natural gas price increases associated with production from the
wells through July 31, 1999 (the "Price Participation Right"). The cash
purchase price, which differs from the contractual "put" price the
Company would be required to pay under the original terms of the Moxa Programs,
was based on estimated future net revenues of Proven Reserves attributable to
the Acquired Interests as of July 31, 1996 discounted to present value at 10%
per annum ("PV10 Value") plus (a) in the case of the 1992 Program, the net
revenues attributable to Section 29 Tight Sand Gas Credits associated with the
Acquired Interests as of July 31, 1996 discounted to present value at 10% per
annum, and (b) in the case of the 1993 Program and 1992 Offset Program, 10% of
the PV10 value. The acquisition will be funded out of the Company's existing
working capital.
- 18 -
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following exhibits are filed as part of this report:
Exhibit No.
11.1 Computation of Earnings per Share
27 Financial Data Schedules
(b) Reports on Form 8-K:
None.
- 19 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BELCO OIL & GAS CORP.,
a Nevada corporation
(REGISTRANT)
<TABLE>
<S> <C>
Date 11/12/96 /s/ LAURENCE D. BELFER
___________________ __________________________________
Laurence D. Belfer,
Executive Vice President and Chief
Operating Officer
Date 11/12/96 /s/ DOMINICK J. GOLIO
____________________ __________________________________
Dominick J. Golio,
Vice President - Finance and Chief
Financial Officer
</TABLE>
- 20 -
Belco Oil & Gas Corp.
Computation of Earnings Per Share
(In thousands, except per share data)
<TABLE>
<CAPTION>
<C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
<S>
Primary Calculation:
Shares issued in connection with the
combination and assumed outstanding
for all periods . . . . . . . . . . . 25,000 25,000 25,000 25,000
Weighted average shares and equivalent
shares outstanding:
Issued in connection with the public
offering. . . . . . . . . . . . . . . . 6,500 -- 4,476 --
Restricted stock, treasury stock method. 15 -- 8 --
Stock options, treasury stock method. 87 -- 48 --
------ ------ ------ ------
Weighted average common and common
equivalent shares outstanding. . . . .31,602 25,000 29,532 25,000
Net Income. . . . . . . . . . . $9,782 $ 11,713 $ 8,888 $29,823
Primary Earnings Per Share. . . $0.31 $0.31 $ 0.30 $1.19
Pro forma Net Income . . . . . . . . . $9,782 $ 7,848 $33,020 $19,981
Pro forma Net Income Per Share -
Primary. . . . . . . . . . . . . . . $0.31 $0.31 $1.12 $0.80
</TABLE>
The difference between primary and fully diluted earnings per share is not
significant.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 57,851
<SECURITIES> 0
<RECEIVABLES> 22,700
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 80,769
<PP&E> 275,759
<DEPRECIATION> (75,662)
<TOTAL-ASSETS> 281,098
<CURRENT-LIABILITIES> 17,990
<BONDS> 0
0
0
<COMMON> 315
<OTHER-SE> 223,168
<TOTAL-LIABILITY-AND-EQUITY> 281,098
<SALES> 83,930
<TOTAL-REVENUES> 88,192
<CGS> 35,717
<TOTAL-COSTS> 35,717
<OTHER-EXPENSES> 2,444
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 50,031
<INCOME-TAX> 41,143
<INCOME-CONTINUING> 8,888
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,888
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.12
</TABLE>
