<PAGE> 1
==============================================================================
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 JUNE 30, 1998
---------------
Commission file number 001-14256
---------------
BELCO OIL & GAS CORP.
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction
of incorporation or organization)
767 Fifth Avenue
New York, New York
(Address of principal executive offices)
13-3869719
(I.R.S. employer identification no.)
10153
(Zip code)
(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 June 30, 1998, there were 31,609,600 shares of the Registrant's
Common Stock, par value $.01 per share, outstanding.
==============================================================================
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BELCO OIL & GAS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
<C> <C>
<S>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . $ 9,660 $ 12,260
Accounts receivable, oil and gas. . . . . . . . . 24,619 43,867
Assets from commodity price risk management
activities. . . . . . . . . . . . . . . . . . . 9,116 936
Advances to oil and gas operators . . . . . . . . 426 346
Marketable equity securities. . . . . . . . . . . 7,796 28,884
Other current assets. . . . . . . . . . . . . . 745 710
--------- ---------
Total current assets . . . . . . . . . . . . 52,362 87,003
--------- ---------
PROPERTY AND EQUIPMENT:
Oil and gas properties at cost based on full
cost accounting
Proved oil and gas properties . . . . . . . . . . 877,728 793,475
Unproved oil and gas properties . . . . . . . . . 81,118 86,172
Less Accumulated depreciation, depletion
and amortization . . . . . . . . . . . . . . . (465,544) (282,750)
--------- ---------
Net oil and gas property. . . . . . . . . . . . . 493,302 596,897
--------- ---------
Building and other equipment, net . . . . . . . . 6,485 6,877
--------- ---------
OTHER ASSETS
Assets from commodity price risk management
activities. . . . . . . . . . . . . . . . . . . 6,363 797
Other . . . . . . . . . . . . . . . . . . . . . . 17,594 5,535
--------- ---------
Total assets . . . . . . . . . . . . . . . . $576,106 $697,109
========= =========
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities. . . . . $12,721 $33,651
Liabilities from commodity price risk management
activities. . . . . . . . . . . . . . . . . . . 7,174 9,555
Accrued interest. . . . . . . . . . . . . . . . . 6,400 7,040
--------- ---------
Total current liabilities. . . . . . . . . . 26,295 50,246
--------- ---------
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . . . 293,694 352,090
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . 55,975 110,047
LIABILITIES FROM COMMODITY PRICE RISK MANAGEMENT
ACTIVITIES. . . . . . . . . . . . . . . . . . . . . . 12,510 78
STOCKHOLDERS' EQUITY
6-1/2% Convertible Preferred Stock, $.01 par
value; 10,000,000 shares authorized;
4,370,000 issued and outstanding . . . . . . . . 44 0
Common stock ($.01 par value, 120,000,000
shares authorized; 35,045,000 and 31,584,400
shares issued and 31,609,600 and 31,584,400
outstanding at June 30, 1998 and December 31,
1997, respectively. . . . . . . . . . . . . . . 316 316
Additional paid-in capital. . . . . . . . . . . . 302,717 196,864
Retained earnings (deficit) . . . . . . . . . . . (113,758) (8,664)
Unearned compensation . . . . . . . . . . . . . . (912) (1,093)
Notes receivable for equity interest. . . . . . . (775) (775)
Unrealized loss on marketable equity securities . - (2,000)
--------- ---------
Total stockholders' equity. . . . . . . . . . . 187,632 184,648
--------- ---------
Total liabilities and stockholders' equity . $576,106 $697,109
========= =========
</TABLE>
<PAGE> 3
BELCO OIL & GAS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
--------- ------- ------- ------
<C> <C> <C> <C>
<S>
REVENUES:
Oil and gas sales . . . . . . . . $ 33,426 $ 28,173 $ 68,259 $ 62,578
Commodity price risk management . 3,937 23 2,170 (3,098)
Interest and other. . . . . . . . 140 893 425 1,268
-------- -------- -------- ---------
Total revenues. . . . . . . . . 37,503 29,089 70,854 60,748
-------- -------- -------- ---------
COSTS AND EXPENSES:
Oil and gas operating expenses. . 9,715 2,310 19,195 4,504
Depreciation, depletion and
amortization . . . . . . . . . . 14,333 11,262 28,794 21,698
General and administrative. . . . 1,274 867 2,399 1,670
Interest expenses . . . . . . . . 5,557 0 9,677 0
Impairment of oil and gas
properties . . . . . . . . . . . 74,000 0 154,000 0
Impairment of equity securities . 4,000 0 14,100 0
-------- -------- -------- --------
Total costs and expenses. . . . 108,879 14,439 228,165 27,872
-------- -------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES . . (71,376) 14,650 (157,311) 32,876
PROVISION (BENEFIT) FOR INCOME TAXES. (27,530) 5,018 (54,072) 11,260
-------- -------- -------- --------
NET INCOME (LOSS) . . . . . . . . . . ($43,846) $ 9,632 ($103,239) $ 21,616
======== ======== ========= ========
PREFERRED STOCK DIVIDENDS . . . . . . ($1,263) $ 0 ($1,855) $ 0
EARNINGS (LOSS) ON COMMON STOCK . . . ($45,109) $ 9,632 ($105,094) $ 21,616
EARNINGS (LOSS) PER SHARE OF COMMON
STOCK, BASIC AND FULLY DILUTED. . . ($1.43) $0.31 ($3.33) $0.69
AVERAGE NUMBER OF COMMON SHARES USED
IN COMPUTATION, BASIC AND FULLY
DILUTED . . . . . . . . . . . . . 31,609 31,526 31,609 31,550
</TABLE>
<PAGE> 4
BELCO OIL & GAS CORP.
CONDENSED CONSOLIDATED CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Unrealized
Preferred Common Stock Notes Loss on
Stock Outstanding Additional Unearned Retained Receivable Marketable
------------- ------------- Paid-In Compen- Earnings for Equity Equity
Shares Amount Shares Amount Capital sation (Deficit) Interest Securities Total
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
<S>
BALANCE, December 31, 1997 -- -- 31,584 $ 316 $196,864 ($1,093) ($8,664) ($775) ($2,000) $184,648
- ----------------------------------------------------------------------------------------------------------------
Issuance of Preferred Stock 4,370 $ 44 -- -- 105,451 -- -- -- -- 105,495
Restricted stock issued/
earned -- -- 25 -- 402 181 -- -- -- 583
Loss recognized on market-
able equity securities -- -- -- -- -- -- -- -- 2,000 2,000
Net Loss -- -- -- -- -- -- (103,239) -- -- (103,239)
Preferred dividend paid -- -- -- -- -- -- (1,855) -- -- (1,855)
- ----------------------------------------------------------------------------------------------------------------
BALANCE, June 30, 1998 4,370 $ 44 31,609 $ 316 $302,717 ($912)($113,758) ($775) -- $187,632
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 5
BELCO OIL & GAS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1998 1997
------------ -----------
<C> <C>
<S>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . . . . . . .($103,239) $ 21,616
Adjustments to reconcile net income (loss)
to net operating cash inflows
Depreciation, depletion and amortization . . . 28,794 21,698
Impairment of oil and gas properties . . . . . 154,000 --
Deferred tax provision . . . . . . . . . . . . (54,072) 8,904
Impairment of marketable equity securities . . 14,100 --
Amortization of restricted stock compensation. 583 152
Commodity price risk management activities . . (3,696) (2,786)
Changes in operating assets and liabilities --
Accounts receivable, oil and gas . . . . . . . 19,248 6,363
Other current assets . . . . . . . . . . . . . (35) 53
Accounts payable and accrued liabilities . . . (4,826) (2,785)
--------- ----------
Net operating cash inflows . . . . . . . . . 50,857 53,215
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration and development expenditures . . . . (44,728) (71,693)
Purchases of oil and gas properties. . . . . . . (38,343) --
Proceeds from sale of oil and gas properties . . 3,872 11,800
Changes in accounts payable and accrued
liabilities for oil and gas expenditures . . . (16,744) (1,564)
Change in advances to oil and gas operators. . . (80) (605)
Equity investment in Big Bear Exploration Ltd. . (10,268) --
Proceeds from sale of marketable equity
securities . . . . . . . . . . . . . . . . . . 10,819 --
Purchase of marketable equity securities . . . . (1,851) (30,870)
Changes in other assets. . . . . . . . . . . . . (1,378) (1,878)
--------- -----------
Net investing cash outflows. . . . . . . . . . (98,701) (94,810)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from preferred stock offering, net. . . 105,495 --
Long-term debt repayments. . . . . . . . . . . . (58,396) --
Preferred dividend paid. . . . . . . . . . . . . (1,855) --
--------- -----------
Net financing cash inflows . . . . . . . . . . 45,244 --
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . (2,600) (41,595)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD. . . 12,260 43,473
--------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD. . . . . . $ 9,660 $ 1,878
========= ============
</TABLE>
<PAGE> 6
BELCO OIL & GAS CORP.
NOTES TO CONDENSED 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 1997 which includes financial statements and notes thereto.
NOTE 2 - COMMODITY PRICE RISK MANAGEMENT ACTIVITIES: The Company periodically
enters into commodity price risk management 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, 1997 financial
statements of Belco Oil & Gas Corp., included in the Form 10-K for the
calendar year 1997, for a more thorough discussion of the Company's commodity
price risk management 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.
For the six months ended June 30, 1998, the Company had net gains of $2.2
million ($1.4 million loss in cash settlements and $3.6 million in marked-to-
market gains). This compares to a $3.1 million net loss consisting of $7.9
million in cash settlements and $4.8 million in marked-to-market net gains,
reported in the first six months of 1997 related to the Company's price risk
management activities.
NOTE 3 - IMPAIRMENT OF OIL AND GAS PROPERTIES: The capitalized costs of
proved oil and gas properties are subject to a "ceiling test", which limits
such costs to the estimated present value net of related tax effects,
discounted at a 10 percent interest rate, of future net cash flows from proved
reserves, based on current economic and operating conditions (PV10). If
capitalized costs exceed this limit, the excess is charged to expense.
Application of these rules during periods of relatively low oil and gas
prices, even if of short-term duration, may result in write-downs which in
management's opinion may not reflect the longer term value of the relevant oil
and gas reserves.
<PAGE> 7
The Company recorded a non-cash impairment of oil and gas properties of
approximately $154 million ($100 million after-tax) primarily due to the
significant decline in oil prices in the first six months of 1998 as required
by ceiling test rules described above.
NOTE 4 - 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 for a total investment of $30.9 million. In
March, 1998 Hugoton was merged into Chesapeake Energy Corp. (CHK) and the
Company received 3,822,000 common shares of CHK. The remaining investment is
presently carried at market value on the Company's Balance Sheet. The
investment in the Hugoton stock (now Chesapeake) is classified as an
"available for sale" security under SFAS No. 115. Accordingly, at December
31, 1997, the excess of the cost of the investment over its fair market value,
was shown as a reduction of equity. During the first six months of 1998, the
Company sold shares of the Chesapeake stock realizing a loss of $5.5 million.
Because of the continuing significant decline in the value of the Chesapeake
stock following the end of both the first and second quarters of 1998 and
management's intent to liquidate this investment, the remaining Chesapeake
shares held at June 30, 1998 have been further written-down to current market
value through a charge to earnings. The 1998 loss recorded as of June 30,
1998 was $14.1 million consisting of $5.5 million in realized losses and $8.6
million in unrealized losses. Subsequent to June 30, 1998 the Company sold
substantially all the remaining shares of CHK at a nominal additional loss.
NOTE 5 - ISSUANCE OF PREFERRED STOCK: On March 10, 1998 the Company completed
the closing and sale of 4,370,000 shares at $25 per share ($109.3 million) of
6-1/2% Convertible Preferred Stock in an underwritten public offering. Each
share of Convertible Preferred Stock can be converted into Belco Common Stock
at an initial conversion rate of 1.1292 shares of Common Stock for each share
of Convertible Preferred Stock, equivalent to a conversion price of $22.14 per
share of Common Stock. The net proceeds of the offering in the amount of
$105.5 million were used to reduce bank indebtedness and fund capital
expenditures.
<PAGE> 8
NOTE 6 - CAPITAL STOCK: Net Income (Loss) Per Common Share. A reconciliation
of the components of basic and diluted net income (loss) per common share for
the three and six months ended June 30, 1998 and 1997 is presented in the
table below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic net income (loss) per share:
Net income (loss) . . . . . . . . ($43,846) $ 9,632 ($103,239) $ 21,616
Less: Preferred Stock
dividends. . . . . . . . . . . (1,263) -- (1,855) --
--------- -------- ---------- --------
Earnings (loss) available to
common shareholders. . . . . . . . ($45,109) $ 9,632 ($105,094) $ 21,616
Weighted average shares of common
stock outstanding (1). . . . . . . 31,609 31,526 31,609 31,550
--------- -------- ---------- --------
Basic net income (loss) per share. . ($1.43) $ 0.31 ($3.33) $0.69
========= ======== ========== ========
Diluted net income (loss) per
share:
Weighted average shares of
common stock outstanding (1) . . 31,583 31,526 31,583 31,550
Effect of dilutive securities:
Restricted stock (2) (3) . . . . . 26 -- 26 --
Preferred stock, warrants and
stock options (2) (3). . . . . . -- -- -- --
Average shares of common stock
outstanding including dilutive
securities . . . . . . . . . . . . 31,609 31,526 31,609 31,550
--------- --------- --------- --------
Diluted net income (loss) per share. ($1.43) $ 0.31 ($3.33) 0.69
========= ========= ========= ========
</TABLE>
_____________
(1) Includes shares issued and outstanding plus vested restricted stock.
(2) Calculated using the treasury stock method, including unearned
compensation of restricted stock as proceeds.
(3) Amounts are not included in the computation of diluted net income (loss)
per share in 1998 because to do so would have been antidilutive.
<PAGE> 9
NOTE 7 - COMPREHENSIVE INCOME: In the first quarter of 1998 the Company
adopted SFAS No. 130, "Reporting Comprehensive Income" which requires
disclosure of comprehensive income and its components in the financial
statements. For the Company, comprehensive income includes net income and
reserve for unrealized losses on marketable equity securities held. The
components of comprehensive income for the three and six months ended June 30,
1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
<C> <C> <C> <C>
<S>
Net income (loss) . . . . . . . . ($43,846) $ 9,632 ($103,239) $ 21,616
Less: Reclassification
adjustment for losses included
in net income. . . . . . . . . . -- -- 2,000 --
--------- -------- ---------- --------
Total Comprehensive Income. . . . ($43,846) $ 9,632 ($101,239) $ 21,616
========= ======== ========== ========
</TABLE>
<PAGE> 10
PART I - FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Belco Oil & Gas Corp. is an independent energy company engaged in the
exploration for and the acquisition, exploitation, development and production
of natural gas and oil primarily in the Rocky Mountains, the Permian Basin,
the Mid-Continent region and the Austin Chalk Trend. Since its inception in
April 1992, the Company has grown its reserve base largely through a balanced
program of exploration and development drilling and through acquisitions. The
Company concentrates its activities primarily in four core areas in which it
has accumulated detailed geologic knowledge and has developed significant
management and technical expertise. Additionally, the Company structures its
participation in natural gas and oil exploration and development activities to
minimize initial costs and risks, while permitting substantial follow-on
investment.
The Company's operations are currently focused in the Rocky Mountains,
primarily in the Green River (which includes the Moxa Arch Trend), Wind River
and Big Horn Basins of Wyoming, the Permian Basin in west Texas, the Mid-
Continent region in Oklahoma and north Texas, and the Austin Chalk Trend in
both Texas and Louisiana. These areas accounted for approximately 98% of the
Company's reserves at December 31, 1997.
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 small premium
to the price posted for such oil. Currently, approximately 59% 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 related to 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 June 30, 1998, the Company
has various natural gas and oil price risk management contracts in place with
respect to portions of its estimated production for the remainder of 1998 and
with respect to lesser portions of its estimated production for 1999 and 2000.
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> 11
The following table sets forth certain operations data of the Company for
the periods presented:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Variances Ended June 30, Variances
------------------ --------------- ------------------ --------------
1998 1997 AMOUNT % 1998 1997 AMOUNT %
-------- -------- -------- ------ -------- -------- -------- -----
<C> <C> <C> <C> <C> <C> <C> <C>
<S>
Oil and Gas Sales
(Unhedged)(in thousands) . $ 33,426 $ 28,173 $ 5,253 19% $ 68,259 $ 62,578 $ 5,681 9%
Commodity Price Risk
Management (in thousands) 3,937 23 3,914 -- 2,170 (3,098) 5,268 --
Weighted Average Sales
Prices (Unhedged):
Oil (per Bbl). . . . . . $ 13.74 $ 19.25 ($5.51) (29%) $ 14.09 $ 20.49 ($6.40) (31%)
Gas (per Mcf). . . . . . 1.96 1.79 0.17 10% 1.99 2.12 (0.13) (6%)
Net Production Data:
Oil (MBbl) . . . . . . . 1,105 271 834 308% 2,179 453 1,726 381%
Gas (MMcf) . . . . . . . 9,296 12,814 (3,518) (27%) 18,918 25,100 (6,182) (25%)
Gas equivalent (MMcfe) . 15,926 14,438 1,488 10% 31,994 27,818 4,176 15%
Data per Mcfe:
Oil and gas sales
revenues (Unhedged). . $ 2.10 $ 1.95 $ 0.15 8% $ 2.13 $ 2.25 ($0.12) (5%)
Commodity Price Risk
Management Activities-- 0.25 -- 0.25 -- 0.07 (0.11) 0.18 --
Oil and gas operating
expenses. . . . . . . . (0.61) (0.16) (0.45) 281% (0.60) (0.16) (0.44) 275%
General and administra-
tive. . . . . . . . . . (0.08) (0.06) (0.02) 33% (0.07) (0.06) (0.01) 17%
Depreciation, depletion
and amortization. . . . (0.90) (0.78) (0.12) 15% (0.90) (0.78) (0.12) 15%
--------- --------- ------- ---- --------- --------- ------- ----
Pre-tax operating
profit (1). . . . . . $ 0.76 $ 0.95 ($0.19) (20%) $ 0.63 $ 1.14 ($0.51) (45%)
========= ========= ======= ==== ========= ========= ======= =====
</TABLE>
__________________
(1) Excluding ceiling test provision, impairment of equity securities and
interest income and expenses.
<PAGE> 12
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO JUNE 30, 1997
REVENUES
During the second quarter of 1998, oil and gas sales revenues increased
$5.3 million, or 19%, to $33.4 million over the prior year comparable period.
The revenue increase is largely the result of a 10.3% increase in Mcfe
production to 175 MMcfe per day over the prior year second quarter despite a
29% decline in average realized oil prices. Natural gas production
represented approximately 58% of total Company production on an Mcfe basis
compared to the prior year second quarter when natural gas production
represented 89% of the total Company production. Oil production increased by
308% over the prior year quarter due to the acquisition of Coda Energy, Inc.
("Coda") in November, 1997.
Commodity price risk management activities resulted in a net pre-tax cash
gain of $3.9 million in the second quarter of 1998. The second quarter of
1997 included a net pre-tax gain of $23,000 consisting of $1.45 million in
realized losses offset by a $1.47 million unrealized mark-to-market gain. The
net impact of such activities on an Mcfe basis was an additional $0.25 (all
cash) per Mcfe for the second quarter of 1998 compared to a $0.10 cash loss
and $0.10 offsetting non-cash gain per Mcfe in the 1997 second quarter.
COSTS AND EXPENSES
Production and operating expenses increased 321% from $2.3 million for
the second quarter of 1997 to $9.7 million for the comparable period in 1998.
The increase is identified with the growth in oil production through secondary
recovery techniques following the Coda acquisition and reflects the higher
costs normally associated with such production when compared to natural gas.
Operating costs were $0.61 per Mcfe for the second quarter of 1998 when
compared to $0.16 per Mcfe in the second quarter of 1997 reflecting the more
balanced oil/gas production profile for the Company.
Depreciation, depletion and amortization ("DD&A"), for the quarter ended
June 30, 1998 increased 27% over the prior year comparable period, from $11.3
million to $14.3 million. The current DD&A rate per Mcfe is $0.90, up $0.12
over the comparable prior year quarter. Oil prices throughout the second
quarter of 1998 continued their downward trend necessitating a further ceiling
test writedown in the amount of $74 million ($48 million after-tax) for the
quarter ending June 30, 1998.
General and administrative expense ("G&A") increased 47% in the second
quarter of 1998 to $1.3 million when compared to the $0.9 million incurred in
the second quarter of 1997, reflecting the addition of personnel related to
the acquisition of Coda in November, 1997. The rate per Mcfe for G&A costs
increased from $0.06 to $0.08 quarter to quarter.
<PAGE> 13
Interest expense is incurred on $150 million of 8-7/8% Senior
Subordinated Notes due 2007 issued in September 1997, $109 million 10-1/2%
Senior Subordinated Notes due 2006 (the "Coda Notes") assumed in the Coda
acquisition in November 1997 and bank debt incurred to fund the Coda
acquisition and capital expenditures.
The Company's investment in Hugoton Energy Corporation ("Hugoton") in the
form of 2,940,000 shares of common stock was converted into 3,822,000 shares
of Chesapeake Energy Corporation ("CHK") common stock following a merger of
the two companies on March 10, 1998. As a result of the substantial decline
in the market value of these securities, the Company was required by current
accounting rules to record impairment charges of $4.0 million ($2.9 million
net of tax) in order to reflect the current market value of such securities.
Subsequent to June 30, 1998, the Company sold substantially all the remaining
shares of CHK at a nominal additional loss.
INCOME BEFORE INCOME TAXES
The Company's reported loss before income tax benefits for the second
quarter of 1998 was $71.4 million. This compares to a pre-tax profit of $14.7
million reported in the second quarter of 1997. The loss is the result of the
$74 million ceiling test provision mandated by current accounting rules.
INCOME TAXES
Income tax benefits were recorded for the second quarter of 1998 in the
amount of $27.5 million compared with a provision of $5.0 million recorded in
the prior year comparable quarter.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO JUNE 30, 1997
REVENUES
For the first six months of 1998, oil and gas sales revenues (unhedged)
increased $5.7 million, or 9%, to $68.3 million over the prior year comparable
period despite a substantial decline in commodity prices. The revenue
increase is the result of a 15% increase Mcfe production over the prior year
comparable period. Average Mcfe price realizations excluding price risk
management activities declined by 5% in the first half of 1998 compared to
last year's first six months. Natural gas production represented
approximately 59% of total Company production on an Mcfe basis, compared to
the 90% reported for the first six months of 1997. Oil production increased
by 381% over the prior year comparable period due to the Coda acquisition.
Commodity price risk management activities during the first half of 1998
resulted in a net pre-tax gain of $2.2 million, consisting of $1.3 million in
realized losses which were offset by a $3.5 million ($2.1 million in cash
realized and $1.4 million non-cash unrealized) mark-to-market gain. The
impact of such activities on an Mcfe basis amounted to a net gain of $0.07
($0.02 cash and $0.05 non-cash) and a net loss of $0.11 (all cash) per Mcfe
for the first half of 1998 and 1997, respectively.
<PAGE> 14
COSTS AND EXPENSES
Production and operating expenses increased to $19.2 million for the
first six months of 1998 when compared to the $4.5 million for the comparable
period in 1997. The increase is identified with the growth in oil production
through secondary recovery techniques following the Coda acquisition and
reflects the higher costs normally associated with such production when
compared to natural gas. Operating costs were $0.60 per Mcfe for the first
six months of 1998 when compared to $0.16 per Mcfe in the first six months of
1997.
DD&A for the six months ended June 30, 1998 was $28.8 million when
compared to the $21.7 million recorded in the prior year comparable period.
The first half DD&A rate per Mcfe is $0.90, up $0.12 over the comparable prior
year period. For the six months ending June 30, 1998, the Company recorded a
$154 million ($100 million after-tax) non-cash ceiling test provision as
required by full-cost accounting rules. This provision was the result of
applying substantially lower commodity prices to estimated recoverable
reserves as of June 30, 1998.
G&A costs increased by 44% in the first six months of 1998 to $2.4
million when compared to the $1.7 million incurred in the first six months of
1997, primarily due to the addition of personnel acquired from the Coda
transaction. The rate per Mcfe for such costs increased from $0.06 to $0.07.
Interest expense is incurred on $150 million of 8-7/8% Senior
Subordinated Notes due 2007 issued in September 1997, $109 million of 10-1/2%
Senior Subordinated Notes due 2006 assumed in the Coda acquisition in November
1997 and bank debt incurred to fund the Coda acquisition and capital
expenditures.
As a result of the substantial decline in the market value of CHK
securities, the Company was required by current accounting rules to record
impairment charges of $14.1 million ($10.1 million net of tax) in order to
reflect the current market value of such securities. Subsequent to June 30,
1998, the Company sold substantially all the remaining shares of CHK at a
nominal additional loss.
INCOME (LOSS) BEFORE INCOME TAXES
The Company's reported loss before income tax benefits for the first six
months of 1998 was $157.3 million. This compares to a pre-tax profit of $32.9
million reported in the first six months of 1997. The loss is the result of
the non-cash ceiling test impairment of $154 million ($100 million after-tax)
and the $14.1 million related to equity securities mandated by current
accounting rules. Income before income taxes, excluding the effect of the
impairment provisions, was $10.8 million.
INCOME TAXES
Income tax benefits were recorded for the first six months of 1998 in the
amount of $54 million as a result of the reported pre-tax loss. The provision
for income taxes for the comparable six month period of 1997 was $11.3
million.
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
On March 29, 1996, the Company successfully completed an initial public
offering of 6.5 million shares of common stock (the "Offering"). The Offering
provided the Company with approximately $113 million net of Offering expenses.
Proceeds from the Offering were used to repay approximately $35 million of
indebtedness under the Company's previous credit facility, fund capital
expenditures and for other general corporate purposes. The remaining proceeds
from the Offering, together with cash flows from operations, were used to fund
planned capital expenditures, including lease acquisitions, commitments, other
working capital requirements and general corporate purposes.
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. The Borrowing Base at June 30, 1998 was set at $150 million with $28
million advanced to the Company at that date. 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.
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 bears 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 (as defined) for one, two, three or six months (or
nine or twelve months if available to the Banks) Eurodollar Loans (as
defined), plus the Applicable Margin. The ABR is the greater of (i) the Prime
Rate (as defined), (ii) the Base CD Rate (as defined) plus 1% or (iii) the
Federal Funds Effective Rate (as defined) plus 0.50%. The Applicable Margin
for Eurodollar Loans varies from 0.50% to 0.875% depending on the Borrowing
Base usage. Borrowing Base usage is determined by a ratio of (i) outstanding
Loans (as defined) and letters of credit to (ii) the then effective Borrowing
Base. Interest on ABR Loans is payable quarterly in arrears and interest on
Eurodollar Loans is 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
that varies from 0.20% to 0.30% depending on the Borrowing Base usage.
<PAGE> 16
In September 1997, the Company issued $150 million of 8-7/8% Senior
Subordinated Notes due 2007 (the "8-7/8% Notes"). Interest on the 8-7/8%
Notes accrues at the rate of 8-7/8% per annum and is payable semi-annually in
arrears on March 15 and September 15 of each year, commencing on March 15,
1998. The 8-7/8% Notes mature on September 15, 2007 unless previously
redeemed. Except under limited circumstances, the 8-7/8% Notes are not
redeemable at the Company's option prior to September 15, 2002. Thereafter,
the 8-7/8% Notes will be subject to redemption at the option of the Company,
in whole or in part, at specified redemption prices, plus accrued and unpaid
interest, if any, thereon to the applicable redemption date. In addition,
upon a change of control (as defined in the indenture pursuant to which the
8-7/8% Notes were issued) the Company is required to offer to redeem the 8-7/8%
Notes for cash at 101% of the principal amount, plus accrued and unpaid
interest, if any, thereon to the applicable date of repurchase.
The 8-7/8% Notes are general unsecured obligations of the Company and are
subordinated in right of payment to all existing and future Senior Debt (as
defined in the 8-7/8% Indenture) of the Company, which includes borrowings
under the Credit Facility described above. The 8-7/8% Notes rank pari passu
in right of payment with any existing or future senior subordinated debt of
the Company and rank senior in right of payment to all other subordinated
indebtedness of the Company.
In November 1997, the Company completed the acquisition of Coda. The
Company paid an aggregate of $324 million including approximately $192 million
in cash ($150 million plus a $42 million adjustment for proceeds from the
disposition of Taurus Energy Corp. ("Taurus"), a subsidiary of Coda (which
occurred on the day prior to closing of the Coda acquisition)), assumption of
$110 million of Coda long-term debt outstanding and three year warrants to
purchase 1,666,667 shares of Common Stock of the Company at $27.50 per share
issued to the holders of the outstanding common stock, preferred stock and
options to purchase common stock of Coda. Concurrently with the closing of
the acquisition of Coda, the Company contributed $23 million to Coda that Coda
utilized, together with the funds from the disposition of Taurus, to repay all
of the debt outstanding under Coda's revolving credit facility (approximately
$65 million in principal amount), plus accrued interest thereon, and such
credit facility was thereafter terminated. At closing, the Company funded the
cash portion of the consideration and the cash contribution to Coda through
cash on hand and borrowings of $84 million under its Credit Facility.
As of June 30, 1998, the Company also had $109,000,000 principal amount
outstanding under the Coda Notes. Interest on the Coda Notes accrue at the
rate of 10-1/2% per annum and is payable semi-annually in arrears on April 1
and October 1 of each year. Except under limited circumstances, the Coda
Notes are not redeemable at the Company's option prior to April 1, 2001.
Thereafter the Coda Notes will be subject to redemption at specified prices,
plus accrued and unpaid interest, if any, thereon to the applicable redemption
date. On February 25, 1998, the Company merged Coda into Belco and Belco
assumed the obligations under the Coda Notes.
The Coda Notes are general unsecured obligations of the Company and are
subordinated in right of payment to all existing and future Senior Debt (as
defined) including any bank debt.
<PAGE> 17
In December 1997, the Company entered into two interest rate swap
agreements converting two fixed rate obligations to floating rate obligations.
The first agreement covers $100 million of 8.875% long-term debt (comparable
to the interest rate on the 8-7/8% Notes) and obligates the Company to pay an
initial rate of 8.175% through September 15, 1998. Thereafter, the rate is
redetermined at each six month period through September 15, 2007. The
floating rates are capped at 8.875% through September 15, 2001 and at 10% from
March 15, 2002 through September 15, 2007. The second agreement covers $110
million of 10-1/2% long-term debt (comparable to the interest rate on the Coda
Notes) and obligates the Company to pay an initial rate of 9.8881% through
April 1, 1998. Thereafter, the rate is redetermined at each six month period
through 2003. Floating rates on this agreement are capped at 10-1/2% through
October 1, 1999 and 11.625% from April 1, 2000 through April 1, 2003. The two
agreements will reduce the Company's interest expense by approximately $1
million through October 1, 1998.
On March 10, 1998 the Company completed the sale of 4.37 million shares
of its 6-1/2% Preferred Stock. The Preferred Stock has a liquidation
preference of $25 per share and is convertible at the option of the holder
into shares of the Company's Common Stock at an initial conversion rate of
1.1292 shares of Common Stock for each share of Preferred Stock, equivalent to
a conversion price of $22.14 per share of Common Stock. The Company received
net proceeds from the sale of the Preferred Stock of $105.5 million, which was
used to pay down bank indebtedness.
On April 30, 1998 the Company announced that it had entered into an
agreement under which it may invest up to $141 million in Big Bear Exploration
Ltd., a Canadian oil and gas company ("Big Bear"). On June 12, 1998, the
Company announced the closing of this agreement. The Company's initial
investment included the purchase, through its wholly owned Canadian
subsidiary, of approximately $10.5 million of 5% Convertible Preferred shares
of Big Bear at approximately $0.85 per share with each such share convertible
into one common share of Big Bear. The Company was also issued approximately
$120 million of Special Acquisition Warrants at a price of approximately $0.72
per warrant. Payments for the Special Acquisition Warrants may be made from
time to time to fund oil and gas property acquisitions by Big Bear which have
been approved by the Company. Each warrant is exchangeable for one share of
the common stock of Big Bear at no further cost.
In connection with the issuance of the Special Acquisition Warrants, the
Company deposited a $60 million letter of credit and 3,436,000 shares of the
Company's common stock into an escrow account. The Company may substitute,
from time to time and in its sole discretion, cash, letters of credit or other
securities or investments for the 3,436,000 shares of the Company's common
stock. The $60 million letter of credit was issued by the Agent pursuant to
the Credit Facility and has the effect of reducing available borrowing under
the Credit Facility by $60 million. [The 3,436,000 shares of the Company's
common stock are deemed issued but not outstanding under Nevada corporate law
and therefore do not affect the number of shares of the Company's common stock
outstanding nor any calculations relating thereto.] The letter of credit and
shares of the Company's common stock, or any cash or other assets substituted
therefore, may be utilized by the Company from time to time, prior to June 12,
1999, in the Company's sole discretion, to purchase some or all of the Special
Acquisition Warrants. On June 12, 1999, assets remaining in the escrow
account will be returned to the Company.
<PAGE> 18
CASH FLOW
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 $36.5 and
$49.6 million for the first six months of 1998 and 1997, respectively. The
Company had working capital of $26.1 million as of June 30, 1998, a decrease
of $10.7 million from the $36.8 million available as of December 31, 1997.
CAPITAL EXPENDITURES
Capital expenditures in the first six months of 1998 including the $37.5
million acquisition of EnerVest properties on February 27, 1998 and before
sale of assets of $3.9 million were approximately $83 million. The Company's
current 1998 capital budget is approximately $120 million. However, this
budget may be changed depending on energy prices and whether any additional
significant acquisitions are consummated.
The Company intends to fund its future capital expenditures, commitments
and working capital requirements through cash flows from operations,
borrowings under the 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.
COMMODITY PRICE RISK MANAGEMENT TRANSACTIONS
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.
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 commodity 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 1998 through 1999 and lesser
portions of its estimated production thereafter. The Company continues to
evaluate whether to enter into additional price risk management transactions
for 1998 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.
<PAGE> 19
OTHER
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.
YEAR 2000 COMPLIANCE
The Company believes that its internal financial and other systems are
currently Year 2000 compliant. The Company does not know whether its
significant vendors' and customers' systems are yet Year 2000 compliant. If
they are not, such failure could effect the ability of the Company to sell its
oil and gas and receive payment therefore and the ability to get vendors to
provide supplies and services in support of the Company's operations. The
Company believes that its significant vendors and suppliers will be Year 2000
compliant before that critical date.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities ("FAS
133"). FAS 133 is effective for fiscal years beginning after June 15, 1999.
FAS 133 requires all derivatives to be recorded on the balance sheet at fair
value and established "special accounting" for the following three different
types of hedges: hedges of changes in the fair value of assets, liabilities,
or firm commitments (referred to as fair value hedges); hedges of the variable
cash flows of forecasted transactions (cash flow hedges); and hedges of
foreign currency exposures of net investments in foreign operations. Though
the accounting treatment and criteria for each of the three types of hedges is
unique, they all result in offsetting changes in fair values or cash flows of
both the hedge and the hedged item being recognized in earnings in the same
period. Changes in fair value of derivatives that do not meet the criteria of
one of these three categories of hedges are included in income. Transitions
adjustments resulting from adoption must be recognized in income and
comprehensive income, as appropriate, as a cumulative effect of an accounting
change. Belco has not yet determined the effect of total compliance, but it
is not expected to materially impact the financial statements of the Company.
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
<PAGE> 20
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> 21
PART I - FINANCIAL INFORMATION
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
See footnotes to the financial statements of the Company for the year
ending December 31, 1997 for further discussion of this item.
<PAGE> 22
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS: NONE
ITEM 2 - CHANGES IN SECURITIES AND USE OR PROCEEDS: NONE
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES: NONE
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS: NONE
ITEM 5 - OTHER INFORMATION: NONE
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits: Exhibit No. 27* Financial Data Schedule
___________________
* Filed herewith
(b) Reports on Form 8-K: Current Report on Form 8-K dated June 12, 1998.
Item 5. Other Events
Item 7. Financial Statements and Exhibits
<PAGE> 23
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.
<TABLE>
<S> <C>
Date: August 14, 1998 LAURENCE D. BELFER
-------------------------------------
Laurence D. Belfer,
President and Chief Operating Officer
Date: August 14, 1998 DOMINICK J. GOLIO
-------------------------------------
Dominick J. Golio,
Senior Vice President - Finance and
Chief Financial Officer
</TABLE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 9,660
<SECURITIES> 7,796
<RECEIVABLES> 24,619
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 52,362
<PP&E> 958,846
<DEPRECIATION> (465,544)
<TOTAL-ASSETS> 576,106
<CURRENT-LIABILITIES> 31,989
<BONDS> 293,694
0
44
<COMMON> 316
<OTHER-SE> 187,272
<TOTAL-LIABILITY-AND-EQUITY> 576,106
<SALES> 68,259
<TOTAL-REVENUES> 70,854
<CGS> 216,089
<TOTAL-COSTS> 216,089
<OTHER-EXPENSES> 2,399
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<INCOME-PRETAX> (157,311)
<INCOME-TAX> (54,072)
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