<PAGE> 1
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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 MARCH 31, 1999
------------
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, 46th Floor
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 March 31, 1999, there were 31,769,000 shares of the Registrant's
Common Stock, par value $.01 per share, outstanding.
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<PAGE> 2
FINANCIAL STATEMENTS
BELCO OIL & GAS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31,
1999 December 31,
(Unaudited) 1998
----------- ------------
<C> <C>
<S>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . .$ 4,615 $ 2,435
Accounts receivable, oil and gas . . . . . 22,148 28,464
Assets from commodity price risk
management activities. . . . . . . . . . 10,681 18,643
Other current assets . . . . . . . . . . . 2,519 1,005
------- -------
Total current assets . . . . . . . . 39,963 50,547
PROPERTY AND EQUIPMENT:
Oil and gas properties at cost based on full
cost accounting --
Proved oil and gas properties. . . . . . . 937,429 931,218
Unproved oil and gas properties. . . . . . 79,049 74,935
Less--Accumulated depreciation, depletion
and amortization . . . . . . . . . . . .(579,614) (566,613)
Net oil and gas property. . . . . . . 436,864 439,540
Building and other equipment . . . . . . . 8,792 8,633
Less--Accumulated depreciation . . . . . . (1,612) (1,281)
Net building and other equipment. . . 7,180 7,352
OTHER ASSETS . . . . . . . . . . . . . . . . . . 7,519 8,097
------- -------
Total assets. . . . . . . . . . . . .$491,526 $505,536
======= =======
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable. . . . . . . . . . . . . . 10,228 18,372
Liabilities from commodity price risk
management activities . . . . . . . . . . 3,900 5,393
Accrued interest. . . . . . . . . . . . . . 6,606 6,897
Other accrued liabilities . . . . . . . . . 4,831 5,064
------- -------
Total current liabilities. . . . . . . 25,565 35,726
LONG-TERM DEBT . . . . . . . . . . . . . . . . . 298,337 294,990
DEFERRED INCOME TAXES. . . . . . . . . . . . . . 29,963 31,833
LIABILITIES FROM COMMODITY PRICE RISK MANAGEMENT
ACTIVITIES . . . . . . . . . . . . . . . . . . 5,237 4,696
STOCKHOLDERS' EQUITY:
6-1/2% Convertible Preferred stock, $.01 par
value; 10,000,000 shares authorized;
4,249,100 and 4,312,000 issued and out-
standing at March 31, 1999 and December
31, 1998, respectively. . . . . . . . . . . 42 43
Common stock ($.01 par value, 120,000,000
shares authorized; 31,769,000 and
31,609,900 shares issued and outstanding
at March 31, 1999 and December 31, 1998,
respectively) . . . . . . . . . . . . . . . 318 316
Additional paid-in capital. . . . . . . . . .301,197 301,416
Retained earnings (deficit). . . . . . . . .(166,592) (161,627)
Unearned compensation. . . . . . . . . . . (1,766) (1,082)
Notes receivable for equity interest . . . (775) (775)
------- -------
Total stockholders' equity. . . . . . 132,424 138,291
------- -------
Total liabilities and stockholders'
equity. . . . . . . . . . . . . . .$491,526 $505,536
======= =======
</TABLE>
<PAGE> 3
BELCO OIL & GAS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
--------- --------
<C> <C>
<S>
REVENUES:
Oil and gas sales. . . . . . . . . . . . . . . $24,985 $34,833
Commodity price risk management activities
- cash settlements (a). . . . . . . . . . 7,034 (3,098)
- non-cash mark-to-market . . . . . . . . (7,494) 1,331
Interest and other . . . . . . . . . . . . . . 200 285
------- -------
Total revenues. . . . . . . . . . . . . . $24,725 $33,351
------- -------
COSTS AND EXPENSES:
Oil and gas operating expenses . . . . . . . . 9,701 9,480
Depreciation, depletion and amortization . . . 13,332 14.461
General and administrative . . . . . . . . . . 1,258 1,125
Interest expenses. . . . . . . . . . . . . . . 5,375 4,120
Impairment of oil and gas properties . . . . . -- 80,000
Impairment of equity securities. . . . . . . . -- 10,100
------- -------
Total costs and expenses. . . . . . . . . 29,666 119,286
------- -------
LOSS BEFORE INCOME TAXES . . . . . . . . . . . . . . (4,941) (85,935)
------- -------
INCOME TAX BENEFIT . . . . . . . . . . . . . . . . . (1,729) (26,542)
------- -------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . (3,212) (59,393)
======= =======
PREFERRED STOCK DIVIDENDS. . . . . . . . . . . . . . (1,753) (592)
======= =======
EARNINGS (LOSS) ON COMMON STOCK. . . . . . . . . . . ($4,965) ($59,985)
======= =======
EARNINGS (LOSS) PER SHARE OF COMMON STOCK,
BASIC AND FULLY DILUTED . . . . . . . . . . . . . ($0.16) ($1.90)
======= =======
AVERAGE NUMBER OF COMMON SHARES USED IN COMPUTATION
BASIC AND FULLY DILUTED . . . . . . . . . . . . . 31,529 31,583
======= =======
</TABLE>
_____________________________
(a) Includes cash premiums received.
<PAGE> 4
BELCO OIL & GAS CORP.
CONDENSED CONSOLIDATED CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
Preferred Outstanding Paid-In Unearned
Shares Amount Shares Amount Capital Compensation
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1998 4,312 $43 31,609 $316 $301,416 ($1,082)
Repurchase Preferred Stock (63) (1) -- -- (997) --
Restricted stock issued/earned -- -- 160 2 778 (684)
Net Loss -- -- -- -- -- --
Preferred dividend paid -- -- -- -- -- --
BALANCE, March 31, 1999 4,249 $42 31,769 $318 $301,197 ($1,766)
</TABLE>
<TABLE>
<CAPTION>
Notes
Retained Receivable
Earnings For Equity
(Deficit) Interest Total
<S> <C> <C> <C>
BALANCE, December 31, 1998 ($161,627) ($775) $138,291
Repurchase Preferred Stock - - (998)
Restricted stock issued/earned -- - 96
Net Loss (3,212) -- (3,212)
Preferred dividend paid (1,753) -- (1,753)
BALANCE, March 31, 1999 ($166,592) ($775) $132,424
</TABLE>
<PAGE> 5
BELCO OIL & GAS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
-------- -------
<C> <C>
<S>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . ($3,212) ($59,393)
Adjustments to reconcile net income (loss)
to net operating cash inflows --
Depreciation, depletion and amortization. 13,332 14,461
Impairment of oil and gas properties. . . -- 80,000
Deferred tax benefit. . . . . . . . . . . (1,729) (26,642)
Impairment of marketable equity
securities . . . . . . . . . . . . . . -- 10,100
Other . . . . . . . . . . . . . . . . . . (39) 78
Commodity price risk management
activities . . . . . . . . . . . . . . 1,025 (2,812)
Changes in operating assets and
liabilities --
Accounts receivable, oil and gas. . . . . 6,281 8,680
Assets from commodity price risk
management activities . . . . . . . . . 7,961 --
Other current assets. . . . . . . . . . . (258) (63)
Accounts payable and accrued liabilities. (10,159) (3,850)
-------- --------
Net operating cash inflows . . . . . 13,202 20,559
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration and development expenditures . . . (11,128) (25,083)
Purchases of oil and gas properties. . . . . . (420) (38,298)
Proceeds from sale of oil and gas properties . 2 1,881
Changes in accounts payable and accrued
liabilities for oil and gas expenditures . . -- (12,321)
Change in advances to oil and gas operators. . -- (54)
Proceeds from sale of marketable equity
securities . . . . . . . . . . . . . . . . . -- 3,410
Purchase of marketable equity securities . . . -- (1,845)
Other property additions . . . . . . . . . . . (159) --
Changes in other assets. . . . . . . . . . . . (66) 129
-------- --------
Net investing cash outflows. . . . . (11,771) (72,181)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from preferred stock offering, net. . -- 105,495
Repurchases of preferred stock . . . . . . . . (998) --
Long-term borrowings . . . . . . . . . . . . . 3,500 --
Long-term debt repayments. . . . . . . . . . . -- (59,090)
Preferred dividend paid. . . . . . . . . . . . (1,758) --
-------- --------
Net financing cash inflows . . . . . 744 46,405
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . 2,180 (5,217)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . 2,435 12,260
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . $4,615 $7,043
======== ========
</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 1998 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, 1998 financial statements of Belco Oil & Gas Corp., included in the
Form 10-K for the calendar year 1998, 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 three months ended March 31, 1999, the Company had net commodity
price risk management losses of $460,000 consisting of $7.0 million in
cash settlements and $7.5 million in mark-to-market net losses. This
compares to a $1.8 million net loss consisting of $3.1 million in cash
settlements and $1.3 million in mark-to-market net gains, reported in
the first three months of 1998 related to its price risk management
activities.
Note 3 - Impairment of Oil and Gas Properties: The capitalization 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 depreciation, depletion and amortization. Application of
these rules during periods of relatively low oil and gas prices, even if
of short-term duration, may result in write-downs.
<PAGE> 7
Note 4 - 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 months ended March 31, 1999 and
1998 is presented in the table below (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
--------- --------
<C> <C>
<S>
Basic net loss per share:
Net loss ($3,212) ($59,393)
Less: Preferred Stock dividends (1,753) (592)
Loss attributable to common shareholders ($4,965) ($59,985)
Weighted average shares of common stock
outstanding (1) 31,529 31,583
Basic net loss per share ($0.16) ($1.90)
Diluted net income (loss) per share:
Weighted average shares of common stock
outstanding (1) 31,529 31,583
Effect of dilutive securities:
Restricted stock (2) -- --
Preferred stock, warrants and stock options (2) -- --
Average shares of common stock outstanding
including dilutive securities 31,529 31,583
Diluted net loss per share ($0.16) ($1.90)
</TABLE>
_____________
(1) Includes shares issued and outstanding minus non-vested restricted
stock.
(2) Amounts are not included in the computation of diluted net loss per
share because to do so would have been antidilutive.
Note 5 - 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 quarter ended March 31,
1999 and 1998 are as follows (in thousands):
<PAGE> 8
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
--------- --------
<C> <C>
<S>
Net income (loss) ($3,212) ($59,393)
Less: Reclassification adjustment for losses
included in net income -- 1,320
Total Comprehensive Income (Loss) ($3,212) ($58,073)
</TABLE>
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
========
Belco Oil & Gas Corp. and its subsidiaries (the "Company") is an
independent energy company engaged in the exploration for and the
acquisition, exploitation, development and production of natural gas and
oil in the United States 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.
On November 26, 1997, the Company acquired all of the outstanding
capital stock of Coda Energy, Inc. ("Coda"), an independent energy
company that was principally engaged in the acquisition and exploitation
of producing oil and natural gas properties. Coda's properties were
principally located in the Permian Basin of west Texas and the
Mid-Continent region of Oklahoma and north Texas. The acquisition
approximately doubled the Company's reserve base to 604 Bcfe at December
31, 1997, extended the Company's reserve life index at that time and
established a more balanced reserve mix of approximately 51% oil and 49%
natural gas. Based on 1998 production, the Company's reserve life index
is 9.7 years.
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, primarily in Texas. These areas accounted for
approximately 99% of the Company's proved reserves at December 31, 1998.
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. 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 64%
of the Company's production volumes relate to the sale of natural gas
(based on six Mcf of gas being considered equivalent to one barrel of
oil).
<PAGE> 10
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 March 31, 1999, the Company has various natural gas and oil price
risk management contracts in place with respect to substantial portions
of its estimated remaining production for calendar year 1999 and with
respect to lesser portions of its estimated production for 2000 and
2001. 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 price risk management strategy.
The following table sets forth certain operations data of the Company
for the periods presented:
<TABLE>
<CAPTION>
Three Months
Ended March 31, Variances
(Unaudited)
--------------- ------------------
1999 1998 AMOUNT %
------ ------ ---------- ------
<C> <C> <C> <C>
<S>
Oil and Gas Sales (Unhedged)
(in thousands) $24,985 $34,833 ($9,848) (28%)
Commodity Price Risk Management
(in thousands)
- cash settlements (1) 7,034 (3,098) 10,132 327%
- non-cash mark-to-market (7,494) 1,331 (8,825) (663%)
Weighted Average Sales Prices
(Unhedged):
Oil (per Bbl) $ 11.37 $ 14.44 ($3.07) (21%)
Gas (per Mcf) 1.57 2.01 (0.44) (22%)
Net Production Data:
Oil (MBbl) 886 1,074 (188) (18%)
Gas (MMcf) 9,494 9,622 (128) (1%)
Gas equivalent (MMcfe) 14,810 16,066 (1,255) (8%)
Data per Mcfe:
Oil and gas sales revenues
(Unhedged) $ 1.69 $ 2.17 ($0.48) (22%)
Commodity Price Risk
Management Activities (2) (0.03) (0.10) 0.07 70%
Oil and gas operating expenses (0.65) (0.59) (0.06) (10%)
General and administrative (0.08) (0.07) (0.01) (14%)
Depreciation, depletion and
amortization (0.90) (0.90) -- --
Pre-tax operating profit (3) $0.03 $0.51 ($0.48) (94%)
</TABLE>
___________________________
(1) Includes cash premiums received.
(2) Includes net results of commodity price risk management activities
(cash and non-cash).
(3) Exclude ceiling test and other impairment provisions, interest
income and interest expense.
<PAGE> 11
RESULTS OF OPERATIONS
=====================
Three Months Ended March 31, 1999 Compared to March 31, 1998
- ------------------------------------------------------------
Revenues
- --------
During the first quarter of 1999, oil and gas sales revenues (unhedged)
declined from $34.8 million to $25.0 million when compared to the prior
year comparable period due principally to a substantial decline in
commodity prices in the first quarter of 1999. Average price
realizations, excluding price risk management activities, for both oil
and natural gas in the first quarter of 1999 compared to last year's
first quarter were lower by 21% and 22%, respectively. Oil production
volume during the first quarter of 1999 declined by 18% and natural gas
production declined by 1% compared to the prior year comparable period.
Natural gas production represented approximately 64% of total Company
production on an Mcfe basis up from the 60% reported in the first
quarter of 1998.
As a result of upward price movement in oil prices during the first
quarter of 1999, commodity price risk management activities resulted in
non-cash net losses of $0.5 million, including $7.0 million in cash
settlements received and a $7.5 million non-cash reversal of
mark-to-market gains reported in the fourth quarter of 1998 based on
year-end 1998 prices.
Costs and Expenses
- ------------------
Production and operating expenses increased to $9.7 million for the
first quarter of 1999 when compared to the $9.5 million for the
comparable period in 1998. The increase is primarily due to reduced
cost efficiencies related to lower unit production. Operating costs
were $0.65 per Mcfe for the first quarter of 1999 when compared to $0.59
per Mcfe in the first quarter of 1998.
Depreciation, depletion and amortization ("DD&A"), for the quarter ended
March 31, 1999 was $13.3 million, a $1.2 million decline when compared
to the $14.5 million recorded in the prior year comparable period. The
current DD&A rate per Mcfe is $0.90, unchanged from the comparable prior
year quarter.
General and administrative expense ("G&A") increased 14% in the first
quarter of 1999 to $1.3 million primarily due to personnel and related
cost increases when compared to the $1.1 million incurred in the first
quarter of 1998. The rate per Mcfe for G&A costs increased from $0.07
to $0.08.
Income (Loss) Before Income Taxes
- ---------------------------------
The Company's reported loss before income tax benefits for the first
quarter of 1999 was $4.9 million. This compares to a pre-tax loss of
$85.9 million reported in the first quarter of 1998. The reduced loss
primarily reflects the absence of an $80 million non-cash ceiling test
provision reported in the prior year first quarter.
<PAGE> 12
Income Taxes
- ------------
Income tax benefits were recorded for the 1999 first quarter in the
amount of $1.7 million as a result of the reported pre-tax loss. The
first quarter 1998 income tax benefit recorded was $26.5 million.
LIQUIDITY AND CAPITAL RESOURCES
===============================
General
- -------
In September 1997, the Company entered into a 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) in effect
from time to time, and includes a sub-facility from the Agent for
letters of credit. The Borrowing Base at March 31, 1999 was $150
million with $33.0 million advanced to the Company at that date. The
borrowing base is 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 therefore and, if longer than three months, at three month
intervals.
<PAGE> 13
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.
In September 1997, the Company issued $150 million of the 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.
On February 25, 1998, the Company merged Coda into Belco and immediately
thereafter transferred all of Coda's assets and liabilities, except for
Coda's obligations under its 10-1/2% Senior Subordinated Notes due 2006
("the 10-1/2% Notes") to Belco Energy Corp., a Nevada corporation and a
wholly owned subsidiary of the Company. As of December 31, 1998, the
Company also had $109 million principal amount outstanding under the
10-1/2% Notes. Interest on the 10-1/2% 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 10-1/2%
<PAGE> 14
Notes are not redeemable at the Company's option prior to April 1, 2001.
Thereafter the 10-1/2% Notes will be subject to redemption at specified
prices, plus accrued and unpaid interest, if any, thereon to the
applicable redemption date.
The 10-1/2% Notes are general unsecured obligations of the Company and
are subordinated in right of payment to all existing and future Senior
Debt (as defined) of the Company, including any bank debt.
The Company entered into interest rate swap agreements converting two
long-term debt fixed rate obligations to floating rate obligations as
follows:
<TABLE>
<CAPTION>
Agreement Transaction Fixed Floating Floating Rate
Amount Date Rate Rate Expiration Date
- --------- ----------- ----- --------- ---------------
<C> <C> <C> <C> <C>
<S>
$100 million 12/97 8.875% 8.280% March 15, 2000 (a)
$110 million 12/97 10.500% 10.120% April 1, 2000 (a)
$50 million 1/98 8.875% 7.919% September 15, 1999 (a)
</TABLE>
_______________________
(a) Floating rate is redetermined at each six month period following
the expiration through September 15, 2007.
The agreements obligate the Company to actually pay the indicated
floating rate rather than the original fixed rate. The floating rates
are capped at 8-7/8% through September 15, 2001 and at 10% from March
15, 2002 through September 15, 2007 on the 8-7/8% Notes and capped at
10-1/2% through October 1, 1999 and 11.625% from April 1, 2000 through
April 1, 2003 on the 10-1/2% Notes. The agreements reduced the
Company's 1998 interest expense by approximately $1 million.
On March 10, 1998 the Company completed the sale of 4.37 million shares
of its 6-1/2% Convertible Preferred Stock (the "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 $105.1 million, which
was used to pay down bank indebtedness.
On June 12, 1998, the Company, through its wholly-owned Canadian
subsidiary, purchased approximately $10.5 million of 5% Convertible
Preferred Stock of Big Bear, a Canadian oil and gas company, at
approximately $0.85 per share with each 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. 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
<PAGE> 15
account. On November 10, 1998, the Company executed a restructuring
agreement whereby (i) the Company agreed to convert the Big Bear 5%
Convertible Preferred Stock into 21,428,571 shares of Big Bear Common
Stock at a conversion price of approximately $0.50 per share (reduced
from $0.85 per share), (ii) the Special Acquisition Warrants were
canceled, (iii) the Belco representatives resigned from Big Bear's Board
of Directors, (iv) the $60 million letter of credit was canceled, and
(v) the 3,436,000 shares of Company common stock held in the escrow
account were returned to the Company and designated as unissued. The
restructuring agreement closed on January 22, 1999. Immediately
following the closing of the restructuring agreement, an 11 to 1 reverse
split of Big Bear Common Shares was effected and Belco, through its
wholly-owned Canadian subsidiary, now owns 1,948,052 common shares or
approximately 4.6% ownership in Big Bear.
In February 1998, the Company acquired properties consisting of
approximately 65 Bcfe of long-lived reserves in the Permian Basin of
west Texas from EnerVest Texoma Acquisition L.P. for $37.3 million in
cash.
In November 1998, the Company acquired approximately 20 Bcfe of
long-lived reserves on producing properties in Oklahoma and Kansas, as
well as certain undeveloped acreage and 3-D seismic data, for
approximately $14.8 million.
Cash Flow
- ---------
Operating cash flow, a measure of performance for exploration and
production companies, is generally derived by adjusting net income to
eliminate the effects of the non-cash components included in the net
income calculation such as depreciation, depletion and amortization
expense, provision for deferred income taxes, ceiling test provisions,
and the non-cash effects of investing and commodity price risk
management activities. First quarter operating cash flow was
approximately $13.2 and $20.6 million for the years 1999 and 1998,
respectively. The Company had working capital of $14.4 million as of
March 31, 1999, a decrease of $0.4 million from the $14.8 million
available as of December 31, 1998.
Capital Expenditures
- --------------------
During the three months ending March 31, 1999 the Company incurred
approximately $11.5 million on capital expenditures. For 1998, the
Company incurred capital expenditures in the amount of $133.1 million,
including property acquisitions totalling $52.2 million.
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. The
Company has a 1999 capital expenditure budget of approximately $75
million, with $25 million allocated to potential acquisitions. 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 that it will have sufficient capital resources and
liquidity to fund its capital expenditures and meet all of its financial
obligations as they come due.
<PAGE> 16
On December 15, 1998, the Company's Board of Directors authorized the
purchase from time to time, in the open market or in privately
negotiated transactions, shares of its Common and 6-1/2% Convertible
Preferred Stock, in an aggregate amount not to exceed $10 million. As
of March 31, 1999 the Company expended approximately $1.8 million
acquiring 120,900 shares of its 6-1/2% Convertible Preferred Stock.
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 1999 and lesser portions of its estimated production
thereafter. The Company continues to evaluate whether to enter into
additional price risk management transactions for 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.
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 year 2000 issue concerns deal with the potential inability of
information technology and non-information technology systems and
processes to properly recognize and process date-sensitive information
before, during, and after December 31, 1999.
<PAGE> 17
The Company has a variety of operating systems, computer software
program applications, computer hardware equipment and other equipment
with embedded electronic circuits, including applications used in the
Company's financial business systems, field operations, and
administrative functions (collectively, the "systems").
Members of the Company's management group and financial department
personnel have oversight of the information systems and personnel
charged with implementing the Company's year 2000 compliance program.
The Company has upgraded hardware and software over the past year and
believes that its internal financial and most of the operational systems
are currently year 2000 compliant. The Company does not separately
track the costs associated with the year 2000 compliance effort, as they
have not been material and, further, no projects with any significant
impact to the Company's operations have been deferred due to the year
2000 compliance effort. To date, the Company estimates that it has
incurred less than $100,000 in upgrading a limited amount of hardware
and does not expect to incur any significant additional cost in becoming
year 2000 compliant. The Company does not know whether its significant
vendors' and customers' systems are yet fully year 2000 compliant. If
they are not, such failure could partially affect the Company's ability
to sell its oil and gas and receive related payments. In addition,
there could be disruptions in getting certain vendors to provide
supplies and/or services in support of the Company's operations. While
this is the most likely worst case scenario, the Company believes that
its significant vendors and customers will be year 2000 compliant before
that critical date.
Additionally, the Company fully understands that there are risks
associated with year 2000 issues that it cannot directly control,
primarily the readiness of its key suppliers and customers. The Company
has had contact with a significant number of its customers and vendors
and furnished information about how it is addressing the year 2000
issue. The Company is presently investigating contingency strategies
primarily with existing internal resources in the event of any third
party or internal system failure. Contingency plans contemplated
include the use of alternative hardware and software vendors and
customers as appropriate in the event that a presently unforeseen
failure of a key vendor or customer is burdened with some
non-controllable year 2000 compliance related failure.
The Company presently expects that its financial and related information
systems, operations systems and other essential functions will be ready
for the year 2000 transition, and that year 2000 issues would not have a
material effect on the Company's business or financial condition.
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
<PAGE> 18
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.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk exposures relate primarily to commodity
prices, interest rates and marketable equity securities. The Company
enters into various transactions involving commodity price risk
management activities involving a variety of derivatives instruments to,
in effect, hedge the impact of crude oil and natural gas price
fluctuations. In addition, the Company entered into interest rate swap
agreements to reduce current interest burdens related to its fixed
long-term debt. The derivatives instruments are generally put in place
to limit the risk of adverse oil and natural gas price movements,
however, such instruments can limit future gains resulting from upward
favorable oil and natural gas price movements. Recognition of both
realized and unrealized gains or losses are reported currently in the
Company's financial statements as required by existing generally
accepted accounting principles. The cash flow impact of all derivative
related transactions is reflected as cash flows from operating
activities.
As of March 31, 1999, the Company had substantial derivative financial
instruments outstanding and related to its market risk management
program. See Item 1, Note 2 and Item 2, "Management's Discussion And
Analysis of Financial Condition And Results of Operations" for
additional information related to the Company's market risk management
activities during the first quarter of 1999. There has not been a
material change in the Company's exposure to commodity price and
interest rate risk since the date of the 1998 Form 10-K filing.
PART II
<TABLE>
<C>
<S>
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>
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: None.
<PAGE> 19
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: May 13, 1999 /s/ LAURENCE D. BELFER
------------------------------------------
LAURENCE D. BELFER
(VICE-CHAIRMAN AND CHIEF OPERATING OFFICER)
Date: May 13, 1999 /s/ DOMINICK J. GOLIO
------------------------------------------
DOMINICK J. GOLIO
(SENIOR VICE PRESIDENT-FINANCE AND
CHIEF FINANCIAL OFFICER)
</TABLE>
<PAGE> 20
EXHIBIT 27
FINANCIAL DATA SCHEDULE
[TYPE] Ex 27
[DESCRIPTION] ART. 5 FDS FOR 1ST QUARTER 10-Q
[ARTICLE] 5
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
<PERIOD TYPE> 3-MOS
<FISCAL YEAR END> DEC-31-1999
<PERIOD END> MAR-31-1999
[CASH] 4,615
[SECURITIES] 0
[RECEIVABLES] 22,148
[ALLOWANCES] 0
[INVENTORY] 0
<CURRENT ASSETS> 39,963
[PP&E] 1,016,478
[DEPRECIATION] (579,614)
<TOTAL ASSETS> 491,526
<CURRENT LIABILITIES> 25,565
[BONDS] 298,337
0
[PREFERRED] 42
[COMMON] 318
[OTHER-SE] 132,064
<TOTAL LIABILITY AND EQUITY> 491,526
[SALES] 24,985
<TOTAL REVENUES> <F1> 24,725
[CGS] 23,033
<TOTAL COSTS> 252,033
<OTHER EXPENSES> 1,258
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 5,375
[INCOME-PRETAX] (4,941)
<INCOME TAX> (1,729)
[INCOME-CONTINUING] (3,212)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
<NET INCOME> 3,212
[EPS-PRIMARY] (0.16)
[EPS-DILUTED] (0.16)
</TABLE>
<F1> Includes cash premiums received.
