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, 1997
Commission file number 001-14256
______________
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, 1997, there were 31,582,000 shares of the
Registrant's Common Stock, par value $.01 per share, outstanding.
<PAGE>
<TABLE>
TABLE OF CONTENTS
<CAPTION> Page
PART I
FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at
September 30, 1997 and December 31, 1996 . . . . 1
Condensed Consolidated Statements of Operations
for the three and nine months ended September 30,
1997 and 1996 . . . . . . . . . . . . . . . . . . 2
Condensed Consolidated Changes in Stockholders'
Equity for the nine months ended September 30,
1997. . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1997
and 1996 . . . . . . . . . . . . . . . . . . . . .4
Notes to Condensed Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . .5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . .7
PART II
OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . .13
Item 2. Changes in Securities. . . . . . . . . . . . . . .13
Item 3. Defaults Upon Senior Securities. . . . . . . . . .13
Item 4. Submission of Matters to a Vote of Security-
Holders. . . . . . . . . . . . . . . . . . . . . 13
Item 5. Other Information. . . . . . . . . . . . . . . . .13
Item 6. Exhibits and Reports on 8-K. . . . . . . . . . . .14
Signature . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
BELCO OIL & GAS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
<CAPTION>
<S> <C> <C>
September 30, December 31,
1997 1996
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $138,488 $ 43,473
Accounts receivable, oil and gas 24,717 28,934
Assets from commodity price risk management
activities - 2,249
Advances to oil and gas operators 986 69
Other current assets 26 456
--------- ---------
Total current assets 164,217 75,181
--------- ---------
PROPERTY AND EQUIPMENT:
Oil and gas properties at cost based on full
cost accounting Proved oil and gas properties 319,552 237,150
Unproved oil and gas properties 83,277 77,570
Less--Accumulated depreciation, depletion
and amortization (118,865) (86,490)
--------- ---------
Net property and equipment 283,964 228,230
--------- ---------
OTHER ASSETS 39,235 507
--------- ---------
Total assets $ 487,416 $303,918
========= =========
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities 8,812 16,886
Liabilities from commodity price risk
management activities 12,534 7,220
Income taxes payable 14 2,408
--------- ---------
Total current liabilities 21,360 26,514
--------- ---------
LONG-TERM DEBT 150,000 -
DEFERRED INCOME TAXES 52,105 39,967
LIABILITIES FROM COMMODITY PRICE RISK MANAGEMENT
ACTIVITIES 2,244 4,234
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; 31,582,000 shares issued
and outstanding at September 30, 1997) 316 316
Additional paid-in capital 186,807 186,703
Retained earnings 76,563 48,244
Unearned compensation (1,204) (1,285)
Notes receivable for equity interest (775) (775)
--------- ---------
Total stockholders' equity 261,707 233,203
--------- ---------
Total liabilities and stockholders'
equity $487,416 $303,918
========= =========
The accompanying notes are an integral part of these condensed financial
statements.
</TABLE>
<PAGE>
<TABLE>
BELCO OIL & GAS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
---- ---- ---- ----
REVENUES:
Oil and gas sales $ 27,163 $ 27,284 $ 89,742 $ 83,930
Commodity price risk management (4,576) (220) (7,674) 2,413
Interest and other 1,058 963 2,326 1,849
--------- -------- -------- --------
Total revenues 23,645 28,027 84,394 88,192
--------- -------- -------- --------
COSTS AND EXPENSES:
Oil and gas operating expenses 2,152 1,947 6,657 5,826
Depreciation, depletion and
amortization 10,491 10,571 32,190 29,891
General and administrative 807 688 2,476 2,444
--------- -------- -------- --------
Total costs and expenses 13,450 13,206 41,323 38,161
--------- -------- -------- --------
INCOME BEFORE INCOME TAXES 10,195 14,821 43,071 50,031
PROVISION FOR INCOME TAXES 3,492 5,039 14,752 (a)41,143
--------- -------- -------- --------
NET INCOME $ 6,703 $ 9,782 $28,319 (a)$8,888
========= ======== ======== =========
PRO FORMA NET INCOME
Income before income taxes $10,195 $14,821 $43,071 $50,031
Pro forma provision for income taxes 3,492 5,039 14,752 17,011
--------- -------- -------- --------
Pro forma net income $ 6,703 $ 9,782 $28,319 $33,020
========= ======== ======== ========
PRO FORMA NET INCOME PER COMMON SHARE $ 0.21 $ 0.31 $ 0.90 $ 1.12
========= ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 31,582 31,500 31,582 29,476
========= ======== ======== ========
(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. 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 had occurred on January 1, 1996.
The accompanying notes are an integral part of these condensed financial
statements.
</TABLE>
<PAGE>
<TABLE>
BELCO OIL & GAS CORP.
CONDENSED CONSOLIDATED CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
(Unaudited)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Notes
Common Stock Additional Receivable
Paid-In Unearned Retained for Equity
Shares Amount Capital Compensation Earnings Interest Total
================================================================
BALANCE,
December 31,
1996 31,577 $316 $186,703 ($1,285) $48,244 ($775) $233,203
-------------------------------------------------------------------
Restricted
stock issued 5 - 104 81 - - 185
Net Income - - - - 28,319 - 28,319
-------------------------------------------------------------------
BALANCE,
September 30,
1997 31,582 $ 316 $186,807 ($1,204) $76,563 ($775) $261,707
-------------------------------------------------------------------
The accompanying notes are an integral part of these condensed financial
statements.
</TABLE>
<PAGE>
<TABLE>
BELCO OIL & GAS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
-----------------
<S> <C> <C>
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 28,319 $ 8,888
Adjustments to reconcile net income (loss) to net
operating cash inflows
Depreciation, depletion and amortization 32,190 29,891
Deferred tax provision (a) 12,138 39,625
Amortization of restricted stock compensation 185 70
Commodity price risk management activities 5,572 --
Changes in operating assets and liabilities --
Accounts receivable, oil and gas 4,217 (5,721)
Revenues and royalties payable -- 3,437
Income taxes payable (2,394) 340
Other current assets 430 183
Accounts payable and accrued liabilities (1,616) --
-------- -------
Net operating cash inflows 79,041 76,713
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration and development expenditures (101,994) (103,751)
Investment in Hugoton Energy Corp (30,870) --
Changes in accounts payable and accrued liabilities
for oil and gas expenditures (6,272) 5,773
Proceeds from sale of oil and gas properties 13,885 --
Change in advances to oil and gas operators (917) 45
Changes in other assets (7,858) 100
Other - 76
-------- -------
Net investing cash outflows (134,026) (97,757)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering - 113,115
Long-term borrowings 150,000 13,300
Long-term debt repayments - (35,300)
Equity distributions - (13,865)
Other - 89
-------- -------
Net financing cash inflows 150,000 77,339
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 95,015 56,295
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 43,473 1,556
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $138,488 $57,851
======== =======
________________________________
(a) 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 group
of non-taxpaying entities. See Note 4.
The accompanying notes are an integral part of these condensed financial
statements.
</TABLE>
<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 10K for the calendar
year 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.
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 for the three and nine
month periods ended on September 30, 1997 and 1996, respectively.
<PAGE>
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. 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, 1997 and 1996 have been presented
to reflect the Company's income taxes under the assumption that the Company
was a taxpaying entity since its inception.
The differences between the statutory federal income taxes and the Company's
pro forma effective taxes is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
---- ---- ---- ----
Statutory federal income taxes $ 3,568 $ 5,187 $15,075 $17,511
State income tax, net of federal
benefit 62 20 121 60
Section 29 tax credits (211) (175) (656) (575)
Other 73 7 212 15
-------- -------- -------- --------
Pro forma provision for income taxes $ 3,492 $ 5,039 $14,752 $17,011
======== ======== ======== ========
</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 revenues as the associated production occurs.
Reference is made to the December 31, 1996 financial statements of Belco Oil &
Gas Corp. included in the Form 10K for the calendar year 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 unrealized gain or loss in the period of change.
<PAGE>
For the nine months ended September 30, 1997, the Company had net losses of
$7.7 million ($7.9 million in cash settlements and $0.2 million in
marked-to-market net gains consisting of $5.1 million in cash premiums
received and $4.9 million in recognized non-cash losses) compared to a $2.4
million net gain all cash reported in the first nine months of 1996 related to
its price risk management activities.
Note 6 - Investment in Hugoton Energy Corporation: In June 1997 the Company
purchased 2,940,000 shares of common stock of Hugoton Energy Corporation
(Hugoton) at $10.50 per share or a total investment of $30.9 million. This
investment is presently carried at cost on the Company's Balance Sheet.
Note 7 - Subsequent Event: On November 3, 1997, the Company announced that it
had entered a definitive merger agreement to acquire all of the outstanding
stock of Coda Energy, Inc. (Coda) from an affiliate of Enron Capital & Trade
Resources Corp. holding 95% of the common stock of Coda, and certain members
of Coda's senior management. Belco anticipates closing this transaction in
late November, 1997. See the Company's Report on Form 8-K filed on November
3, 1997, which includes as exhibits thereto the Company's press release
announcing the transaction and a copy of the Agreement and Plan of Merger
(excluding exhibits).
<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, with
substantially all of its growth to date coming "through the drill bit".
The Company's participation in exploration and development activities in
the Moxa Arch Area of Wyoming and in the Austin Chalk Trend in Texas (Giddings
Field) and Louisiana 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 25,000,000 shares of Common Stock to such owners in exchange for
the Combined Assets on March 29, 1996, the date the Company closed its initial
public offering (the "Offering"). 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, 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.
From inception through the date of the Exchange, March 29, 1996, 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 was required to include in its taxable
income, for all periods ending on the date of or prior to the completion of
the Combination, such owner's allocable portion of the taxable income
attributable to the Combined Assets and was 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
natural gas prices will not be subject to wide fluctuations in the future. A
substantial or extended decline in oil and natural 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 natural gas and
oil reserves that the Company may economically produce. Natural gas produced
is sold under contracts that primarily reflect spot market conditions for
their particular area. 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 oil. Approximately 88% of the Company's
production volumes relate to the sale of natural gas.
The Company utilizes commodity swaps and options and other commodity
price risk management transactions for a portion of its oil and natural 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 uses mark-to-market accounting for those contracts that do not
qualify for hedge accounting. As of September 30, 1997, the Company has
various natural gas and oil price risk management contracts in place with
respect to estimated production for the remainder of 1997 and with respect to
lesser portions of its estimated production for 1998 and 1999. The Company
expects from time to time to either add or reduce the amount of price risk
management contracts that it has in place in keeping with its hedging
strategy.
<PAGE>
The following table sets forth certain operations data of the Company for
the periods presented:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, Variances September 30, Variances
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1996 AMOUNT % 1997 1996 AMOUNT %
Oil and Gas Sales
(Unhedged)(in
thousands) $27,163 $27,284 $(121) -0.4% $89,742 $83,930 $ 5,812 7%
Commodity Price
Risk Management (4,576) (220) (4,356)-1980% (7,674) 2,413 (10,087)-418%
Weighted Average
Sales Prices
(Unhedged):
Oil (per Bbl) $ 18.94 22.17 $ (3.23) -15% $ 19.92 $ 20.36 $ (0.44) -2%
Gas (per Mcf) 1.87 1.90 (0.03) -1.6% 2.04 1.84 0.20 11%
Net Production Data:
Oil (MBbl) 263 161 102 63% 716 575 141 25%
Gas (MMcf) 11,873 12,465 (592) -5% 36,973 39,252 (2,279) -6%
Gas equivalent
(Mmcfe) 13,450 13,430 20 -- 41,269 42,701 (1,432) -3%
Data per Mcfe:
Oil and gas
sales revenues
(Unhedged) $ 2.02 $ 2.03 $(0.01) -0.5% $ 2.17 $ 1.97 $ 0.20 10%
Commodity Price
Risk Management
Activities-- (0.34) (0.02) (0.32) 1600% (0.18) 0.06 (0.24)-400%
Oil and gas
operating
expenses (0.16) (0.14) (0.02) 14.3% (0.16) (0.14) (0.02)14.3%
General and
administrative (0.06) (0.05) (0.01) 20% (0.06) (0.06) 0.00 0%
Depreciation,
depletion and
amortization (0.78) (0.79) 0.01 -1% (0.78) (0.70) (0.08) 11%
Interest and
other income 0.08 0.07 0.01 14.3% 0.06 0.04 0.02 50%
------ ----- ----- ----- ----- ----- ----- ---
Pre-tax operating
profit $ 0.76 $ 1.10 $(0.34) -31% $1.05 $ 1.17 $(0.12) 10%
====== ====== ======= ===== ===== ====== ====== ====
</TABLE>
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended September 30, 1997 Compared to September 30, 1996
Revenues
During the third quarter of 1997, oil and gas sales revenues (unhedged)
declined modestly from $27.3 million to $27.2 million over the prior year
comparable period. The revenue decrease is the result of lower average price
realizations for both oil and natural gas, offset by a moderate increase in
daily MCFE production. Oil production volume during the third quarter of 1997
increased by 63% while natural gas production declined by 5% compared to the
prior year comparable period. Natural gas production represented
approximately 88% of total Company production on an Mcfe basis.
As a result of a significant upward price movement in natural gas prices
at the end of the third quarter of 1997, commodity price risk management
activities resulted in a non-cash unrealized $4.6 million marked-to-market
loss. The third quarter of 1996 included $0.2 million in realized hedge
related losses.
Costs and Expenses
Production and operating expenses increased 11% from $1.9 million for the
third quarter of 1996 to $2.2 million for the comparable period in 1997 due
mainly to the increased number of wells on line and higher costs associated
with a growing population of older wells. Operating costs were $0.16 per Mcfe
for the third quarter of 1997 when compared to $0.14 per Mcfe in the third
quarter of 1996.
Depreciation, depletion and amortization ("DD&A"), for the quarter ended
September 30, 1997 was virtually unchanged at $10.5 million when compared to
the $10.6 million recorded in the prior year comparable period.
General and administrative expense ("G&A") increased 17% in the third
quarter of 1997 to $807,000 when compared to the $688,000 incurred in the
third quarter of 1996. The rate per Mcfe for G&A costs increased from $0.05
to $0.06.
Income Before Income Taxes
The Company's income before income taxes for the third quarter of 1997
declined by approximately $4.6 million, or 31%, to $10.2 million from $14.8
million in the prior year period. The decrease over the prior year comparable
period is principally due to lower weighted average prices realized for both
oil and natural gas and $4.6 million of this was non-cash marked-to-market
losses related to commodity price risk management activities.
Income Taxes
Income tax expense for the third quarter of 1997 declined to $3.5 million
from $5.0 million in the 1996 comparable quarter due to reduced income. The
estimated effective income tax rates were 34.25% and 34.0% for 1997 and 1996,
respectively.
<PAGE>
Nine Months Ended September 30, 1997 Compared to September 30, 1996
Revenues
For the first nine months of 1997, oil and gas sales revenues (unhedged)
increased $5.8 million, or 7%, to $89.7 million over the prior year comparable
period. The revenue increase is the result of higher year to date average
price realizations for natural gas (11%) while the price of oil declined by
2%. Oil production volume during the first nine months of 1997 increased
141,000 barrels or 25% year over year primarily due to new production from
Louisiana Austin Chalk properties coming on stream. Natural gas production
declined by 6% when compared to the first nine months of 1996.
As a result of the substantial oil and gas price increases which occurred
in the first quarter of 1997 (which had a positive overall impact on oil and
gas sales revenues), commodity price risk management activities during the
first nine months of 1997 resulted in a net pre-tax loss of $7.7 million,
consisting of $7.9 million in realized losses offset by a $0.2 million in
unrealized mark-to-market gains. The impact of such activities on an Mcfe
basis amounted to a net loss of $0.18 ($0.07 cash loss and non-cash loss of
$0.11) and a gain of $0.06 (all cash) per Mcfe for the first nine months of
1997 and 1996, respectively.
Costs and Expenses
Production and operating expenses increased 16% from $5.8 million in the
first nine months of 1996 to $6.7 million for the comparable period in 1997
due mainly to the increased number of wells on line and higher costs
associated with new oil wells and a growing population of older wells.
Operating costs were $0.16 per Mcfe for the first nine months of 1997 when
compared to $0.14 per Mcfe in the first nine months of 1996.
Depreciation, depletion and amortization ("DD&A"), for the first nine
months of 1997 were up 8% over the prior year comparable period, from $29.9
million to $32.1 million, primarily due to increased exploration costs and the
drilling of deeper higher cost wells.
General and administrative expense ("G&A") increased a modest 1% in the
first nine months of 1997 to $2.5 million when compared to the $2.4 million
incurred in the first nine months of 1996. The rate per Mcfe for G&A costs
year-to-date is unchanged at $0.06.
Income Before Income Taxes
The Company's income before income taxes for the first nine months of
1997 decreased by approximately $7.0 million, or 14%, to $43.07 million from
$50.03 million in the prior year period. The decrease over the prior year
comparable period is principally identified with commodity price risk
management activities and to a much lesser extent, moderately lower MCFE
production.
Income Taxes
Income tax expenses for the first nine months of 1997 were $14.75 million
utilizing an estimated effective income tax rate of 34.25%. In connection
with the Combination and the Exchange Agreement, the Company became a taxable
<PAGE>
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 nine months 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. At year end 1996, this
estimated amount was increased to $30.1 million following the completion of
related income tax returns.
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, were used to fund planned capital
expenditures, commitments, other working capital requirements and for general
corporate purposes.
In September, 1997 the Company issued $150 million of 8-7/8% Senior
Subordinated Notes due 2007 (the "Notes"). Interest on the Notes will accrue
at the rate of 8-7/8% per annum and will be payable semi-annually in arrears
on March 15 and September 15 of each year, commencing on March 15, 1998. The
Notes mature on September 15, 2007 unless previously redeemed. Except under
limited circumstances, the Notes will not be redeemable to the Company's
option prior to September 15, 1997. Therefore, the Notes will be subject to
redemption at the option of the Company, in whole or in part, at the
redemption prices set forth in the indenture agreement, plus accrued and
unpaid interest, if any, thereon to the applicable redemption date. In
addition, upon a Change of Control (as defined) the Company is required to
offer and redeem the Notes for cash at 101% of the principal amount, plus
accrued and unpaid interest, if any, thereon to the applicable date of
repurchase.
The Notes are general unsecured obligations of the Company and will be
subordinated in right of payment to all existing and future Senior Debt (as
defined) of the Company, which includes borrowings under the New Credit
Facility described below. The Notes will rank pari passu in right of payment
with a any existing or future senior subordinated debt of the Company and will
rank senior in right of payment to all other subordinated indebtedness of the
Company.
In September, 1997 the Company entered into a new five-year $150 million
Credit Agreement dated September 23, 1997 (the "Credit Facility") with The
Chase Manhattan Bank, N.A., as administrative agent (the "Agent") and other
lending institutions (the "Banks"). The Credit Facility provides for an
aggregate principal amount of revolving loans of up to the lesser of $150
million or the Borrowing Base (as defined) as in effect from time to time,
which includes a subfacility from the Agent for letters of credit of up to $25
million. Initially, the Borrowing Base is set at $50 million. The borrowing
base will be redetermined by the Agent and the Banks semi-annually based upon
their usual and customary oil and gas lending criteria as such exist from time
to time. In addition, the Company may request two additional redeterminations
and the Banks may request one additional redetermination per year.
<PAGE>
Indebtedness of the Company under the Credit Facility is secured by a
pledge of the capital stock of each of the Company's material subsidiaries.
Indebtedness under the Credit Facility will bear interest at a floating
rate based (at the Company's option) upon (I) the ABR with respect to ABR
Loans or (ii) the Eurodollar Rate for one, two, three or six months (or nine
or twelve months if available to the Banks), plus the Applicable Margin. The
ABR will be the greater of (I) the Prime Rate, (ii) the Base CD Rate plus 1%
or (iii) the Federal Funds Effective Rate plus 2 of 1%. The Applicable Margin
for Eurodollar Loans will vary from 0.50% to 0.875% depending on the Borrowing
Base usage. Borrowing Base usage will be a ratio of (I) outstanding Loans and
letters of credit to (ii) the then effective Borrowing Base. Interest on ABR
Loans will be payable quarterly in arrears and interest on Eurodollar Loans
will be payable on the last day of the interest period therefor and, if longer
than three months, at three month intervals.
The Company is required to pay to the Banks a commitment fee based on the
committed undrawn amount of the lesser of the aggregate commitments or the
then effective Borrowing Base during a quarterly period equal to a percent
which varies from 0.20% to 0.30% depending on the Borrowing Base usage.
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, provision for deferred income taxes and the non-cash
effects of commodity price risk management activities. Net operating cash
flow (pre-tax) before changes in working capital was approximately $78.4 and
$78.5 million for the first nine months of 1997 and 1996, respectively. The
Company had working capital amounting to $142.9 million as of September 30,
1997, a substantial increase from the $48.7 million available as of December
31, 1996. This increase is the result of consummation of the Company's recent
offering of the Notes (the "Note Offering").
For 1997, the Company has budgeted approximately $150 million for capital
expenditures which amount was subject to increase or decrease depending on oil
and gas prices, drilling results and other investment opportunities.
Currently, the Company anticipates actual capital expenditures for the year to
total approximately $120 million.
The Company intends to fund its planned capital expenditures, commitments
and working capital requirements through cash flows from operations, from the
proceeds of the recent Note Offering and to the extent necessary, borrowings
under the New Credit Facility or other potential financings. If there are
changes in oil and natural 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.
<PAGE>
In June, 1997 the Company purchased 2,940,000 shares of common stock of
Hugoton Energy Corporation at $10.50 per share or a total investment of $30.9
million.
Commodity Price Risk Management Transactions
With the primary objective of achieving more predictable revenues and
cash flows and reducing the exposure to fluctuations in oil and natural gas
prices, the Company has entered into price risk management transactions of
various kinds with respect to both oil and natural gas. 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 historically has been highly
volatile, these fluctuations may cause significant impact on the results of
any given accounting period. The Company has entered into price risk
management transactions with respect to a substantial portion of its estimated
production for the remainder of 1997 and with respect to lesser portions of
its estimated production for 1998 and 1999. The Company continues to evaluate
whether to enter into additional price risk management transactions for 1997
and future years. In addition, the Company may determine from time to time to
unwind its then existing price risk management positions as part of its price
risk management strategy.
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.
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.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128 -
"Earnings per Share" effective for interim and annual periods after December
15, 1997. This statement replaces primary earnings per share ("EPS") with a
newly defined basic EPS and modifies the computation of diluted EPS. The
Company's basic and diluted EPS computed using the requirements of SFAS 128
are the same as the Company's currently disclosed pro forma net income per
common share.
<PAGE>
Information Regarding Forward Looking Statements
The information contained in this Form 10-Q includes certain
forward-looking statements. When used in this document, such words as
"expect", "believes", "potential", and similar expressions are intended to
identify forward-looking statements. Although the Company believes that its
expectations are based on reasonable assumptions, it is important to note that
actual results could differ materially from those projected by such
forward-looking statements. Important factors that could cause actual results
to differ materially from those in the forward-looking statements include, but
are not limited to, the timing and extent of changes in commodity prices for
oil and gas, the need to develop and replace reserves, environmental risk, the
substantial capital expenditures required to fund its operations, drilling and
operating risks, risks related to exploration and development, uncertainties
about the estimates of reserves, competition, government regulation and the
ability of the Company to implement its business strategy.
<PAGE>
<TABLE>
<CAPTION>
PART II - OTHER INFORMATION
<S> <C>
ITEM 1 - LEGAL PROCEEDINGS NONE
ITEM 2 - CHANGES IN SECURITIES NONE
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES NONE
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS NONE
ITEM 5 - OTHER INFORMATION NONE
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Item 6. Exhibits and Reports on Form 8-K
<S> <C>
(a) Exhibits.
Exhibit No.
3.1 Articles of Incorporation of the Company (Incorporated by
reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (File No. 333-1034))
3.2 By-Laws of the Company (Incorporated by reference to Exhibit
3.2 to the Company's Registration Statement on Form S-1 (File
No. 333-1034))
4.1 Indenture dated as of September 23, 1997 among the Company,
as issuer, and The Bank of New York, as trustee (Incorporated
by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-4 (File No. 333-37125))
4.2 Exchange and Registration Rights Agreement dated September
23, 1997 by and among the Company and Chase Securities Inc.,
Goldman, Sachs & Co. and Smith Barney Inc. (Incorporated by
reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-4 (File No. 333-37125))
10.1 Credit Agreement dated as of September 23, 1997 by and among
Belco Oil & Gas Corp., and The Chase Manhattan Bank, as
administrative agent, and certain financial institutions
named therein as Lenders (Incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on Form
S-4 (File No. 333-37125))
11.1* Computation of Earnings per Share
27* Financial Data Schedule
___________________
* Filed herewith
(b) Reports on Form 8-K:
None.
</TABLE>
<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)
Date 11/12/97 /s/ LAURENCE D. BELFER
Laurence D. Belfer,
President and Chief Operating Officer
Date 11/12/97 /s/ DOMINICK J. GOLIO
Dominick J. Golio,
Vice President - Finance and Chief Financial Officer
<PAGE>
<TABLE>
EX-11.1
<CAPTION>
Belco Oil & Gas Corp.
Computation of Earnings Per Share
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
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 6,500 6,500 4,476
Restricted stock, treasury stock
method 16 15 16 8
Stock options, treasury stock
method 207 87 212 48
------ ------ ------ ------
Weighted average common and
common equivalent shares
outstanding 31,582 31,602 31,582 29,532
====== ====== ====== ======
Net Income (Loss) $ 6,703 $ 9,782 $28,319 $ 8,888
====== ====== ====== ======
Primary Earnings (Loss)
Per Share $ 0.21 $ 0.31 $ 0.90 $ 0.30
====== ====== ====== ======
Pro forma Net Income $ 6,703 $ 9,782 $28,319 $33,020
====== ====== ====== ======
Pro forma Net Income
Per Share - Primary $ 0.21 $ 0.31 $ 0.90 $ 1.12
====== ====== ====== ======
The difference between primary and fully diluted earnings per share is not
significant.
</TABLE>
