--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
Commission file number 001-14256
--------------
BELCO OIL & GAS CORP.
(Exact name of registrant as specified in its charter)
Nevada 13-3869719
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
767 Fifth Avenue, 46th Floor 10153
New York, New York (Zip code)
(Address of principal executive offices)
(212) 644-2200
(Registrant's telephone number, including area code)
--------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _
As of September 30, 2000, there were 31,491,665 shares of the
Registrant's Common Stock, par value $.01 per share, outstanding.
--------------------------------------------------------------------------------
- 1 -
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BELCO OIL & GAS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
(Unaudited)
------------------ -----------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents (including
restricted cash of $800,000 at
December 31, 1999)................. $ 1,276 $ 2,105
Accounts receivable.................. 34,720 24,870
Income taxes receivable.............. -- 6,661
Assets from commodity price risk
management activities.............. 8,893 2,879
Commodity Price Risk Management related
funds on deposit................... 1,000 --
Other current assets................. 6,247 3,496
------- ------
Total current assets ....... 52,136 40,011
------ ------
PROPERTY AND EQUIPMENT:
Oil and gas properties at cost based on
full cost accounting--
Proved oil and gas properties... 1,136,430 1,008,261
Unproved oil and gas properties. 78,937 71,075
Less-- Accumulated depreciation,
depletion and amortization.... (660,031) (619,446)
--------- ---------
Net oil and gas properties.. 555,336 459,890
-------- ---------
Building and other equipment.... 9,054 9,107
Less-- Accumulated depreciation. (3,563) (2,634)
-------- ----------
Net building and other
equipment................. 5,491 6,473
-------- ---------
OTHER ASSETS........................... 5,651 4,599
-------- ---------
Total assets................ $618,614 $510,973
======== ========
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable.............. $ 23,235 $ 17,970
Liabilities from commodity price
risk management activities.. 72,831 17,822
Accrued interest.............. 7,481 7,098
Other accrued liabilities..... 11,246 5,510
------ -------
Total current liabilities... 114,793 48,400
------- ------
LONG-TERM DEBT......................... 374,819 306,744
DEFERRED INCOME TAXES.................. 17,870 33,638
LIABILITIES FROM COMMODITY PRICE RISK
MANAGEMENT ACTIVITIES................ 31,064 8,219
STOCKHOLDERS' EQUITY:
6-1/2% Convertible Preferred stock,
$.01 par value; 10,000,000 shares
authorized; 3,750,700 and 3,985,300
shares issued and outstanding at
September 30, 2000 and December 31,
1999, respectively................ 38 40
Common stock ($.01 par value,
120,000,000 shares authorized;
31,805,240 and 31,797,300 shares
issued at September 30, 2000 and
December 31, 1999, respectively).. 318 318
Additional paid-in capital............ 294,555 297,225
Retained earnings (deficit)........... (211,116) (177,111)
Treasury Stock, 313,575 and 704,900
shares at September 30, 2000 and
December 31, 1999, respectively..... (1,921) (4,317)
Unearned compensation................. (1,053) (1,430)
Notes receivable for equity interest.. (753) (753)
--------- -----------
Total stockholders' equity... 80,068 113,972
--------- ---------
Total liabilities and stock-
holders' equity............ $618,614 $510,973
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
- 2 -
<PAGE>
BELCO OIL & GAS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales, net of
cash hedging activities $50,999 $38,228 $148,841 $104,215
Non-Hedge Commodity Price
Risk Management Activities
- cash settlements (a) (9,743) (1,047) (22,738) (121)
Interest and other 214 275 714 675
------ -------- --------- ---------
Net revenues 41,470 37,456 126,817 104,769
------ ------ ------- -------
COSTS AND EXPENSES:
Oil and gas operating expenses 10,226 6,683 25,427 22,162
Production taxes 3,402 2,884 10,924 6,986
Depreciation, depletion and
amortization 13,500 13,247 41,666 40,259
General and administrative 1,506 1,178 4,651 3,651
Interest expenses 5,030 5,838 18,632 16,188
Non-cash change in fair value
of derivatives 21,023 22,210 70,614 45,225
------ ------ ------ ------
Total costs and expenses 54,687 52,040 171,914 134,471
------ ------ ------- -------
INCOME (LOSS) BEFORE INCOME TAXES (13,217) (14,584) (45,097) (29,702)
PROVISION (BENEFIT) FOR INCOME
TAXES (4,626) (5,104) (15,784) (10,396)
------- ------- -------- --------
NET INCOME (LOSS) (8,591) (9,480) (29,313) (19,306)
PREFERRED STOCK DIVIDENDS (1,540) (1,727) (4,692) (5,205)
------- --------- --------- ----------
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCK $(10,131) $(11,207) (34,005) $(24,511)
========= ========= ======== =========
NET INCOME (LOSS) PER SHARE OF
COMMON STOCK,
Basic and fully diluted $(0.32) $(0.35) $(1.09) $(0.78)
======= ======= ======= =======
AVERAGE NUMBER OF COMMON SHARES
USED IN COMPUTATION,
Basic and fully diluted 31,427 31,600 31,259 31,600
====== ====== ====== ======
</TABLE>
-----------------------------
(a) Includes cash premiums received.
The accompanying notes are an integral part of these condensed financial
statements.
- 3 -
<PAGE>
BELCO OIL & GAS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
---------------- ---------------- Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1999.... 3,985 $ 40 31,797 $ 318 $297,225
Exchanges of Preferred Stock to
Common Stock................ (215) (2) -- -- (2,394)
Exercise of Stock Options..... -- -- 1 -- 9
Repurchase of Preferred Stock. (21) -- -- -- (303)
Restricted Stock Issued....... -- -- 10 -- 49
Restricted Stock Forfeited.... -- -- (3) -- (31)
Restricted Stock Amortized.... -- -- -- -- --
Net Income (Loss)............. -- -- -- -- --
Preferred Dividend Paid....... -- -- -- -- --
Treasury Stock Acquisitions... -- -- -- -- --
Payment Received.............. -- -- -- -- --
------- ------- ------- ------ --------
BALANCE, September 30, 2000 3,751 $ 38 31,805 $ 318 $294,555
===== ======= ====== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Notes
Retained Receivable
Unearned Earnings for Equity
Compensation (Deficit) Interest
------------ --------- ----------
<S> <C> <C> <C>
BALANCE, December 31, 1999.... $(1,430) $(177,111) $ (753)
Exchanges of Preferred Stock t
Common Stock................) -- -- --
Exercise of Stock Options..... -- -- --
Repurchase of Preferred Stock.) -- -- --
Restricted Stock Issued....... (49) -- --
Restricted Stock Forfeited....) 31 -- --
Restricted Stock Amortized.... 395 -- --
Net Income (Loss)............. -- (29,313) --
Preferred Dividend Paid....... -- (4,692) --
Treasury Stock Acquisitions... -- -- --
Payment Received.............. -- -- --
-------- --------- --------
BALANCE, September 30, 2000 $(1,053) $(211,116) $ (753)
======== ========== ========
</TABLE>
<TABLE>
<CAPTION>
Treasury Common Stock
--------------------- Comprehensive
Shares Amount Total Income
------ ------ ----- ------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1999.... (705) $(4,317) $113,972 $ --
Exchanges of Preferred Stock to
Common Stock................ 391 2,396 -- --
Exercise of Stock Options..... -- -- 9
Repurchase of Preferred Stock. -- -- (303) --
Restricted Stock Issued....... -- -- --
Restricted Stock Forfeited.... -- -- -- --
Restricted Stock Amortized.... -- -- 395 --
Net Income (Loss)............. -- -- (29,313) (29,313)
Preferred Dividend Paid....... -- -- (4,692) --
Treasury Stock Acquisitions... -- -- -- --
Payment Received.............. -- -- -- --
------ ------- ------- --------
BALANCE, September 30, 2000 (314) $(1,921) $80,068
===== ======== =======
Comprehensive Income.......... $(29,313)
=========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
- 4 -
<PAGE>
BELCO OIL & GAS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ ($29,313) ($19,306)
Adjustments to reconcile net income (loss) to
net operating cash inflows--
Depreciation, depletion and amortization........... 41,666 40,259
Deferred tax benefit............................... (15,784) (10,396)
Commodity price risk management activities......... 21,619 10,904
Other.............................................. 275 150
Changes in operating assets and liabilities -
Commodity price risk management.................. 48,995 14,427
Accounts receivable, oil and gas................. (3,279) 6,300
Commodity price risk management funds on deposit. (1,000) 19,895
Other current assets............................. (2,558) (5,242)
Accounts payable and accrued liabilities......... 11,384 (2,727)
------ --------
Net operating cash inflows................ 72,005 54,264
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration and development expenditures........... (76,729) (34,688)
Purchases of oil and gas properties................ (69,959) (17,141)
Proceeds from sale of oil and gas properties....... 10,658 2
Other property additions........................... (417) (308)
Sale of gas plant.................................. 317 --
Changes in other assets............................ 143 (149)
---------- --------
Net investing cash outflows............... (135,987) (52,284)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of bonds................................ (2,850) -
Repurchases of common stock........................ -- (649)
Repurchases of preferred stock..................... (303) (1,090)
Long-term borrowings............................... 255,700 25,500
Long-term debt repayments.......................... (184,100) (18,000)
Preferred dividend paid............................ (4,692) (5,205)
Credit agreement fees.............................. (611) --
Other.............................................. 9 --
--------- ----------
Net financing cash inflows................ 63,153 556
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... (829) 2,536
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.... 2,105 2,435
------- -----
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......... $1,276 $4,971
====== ======
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
- 5 -
<PAGE>
BELCO OIL & GAS CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Accounting Policies:
-------------------
We have prepared the financial statements included herein, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. These financial statements 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 we believe that the
disclosures are adequate to make the information presented not misleading. These
financial statements should be read in conjunction with our Form 10-K for the
calendar year 1999, which includes financial statements and notes thereto.
Note 2 - Use of Estimates:
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates with regard to these financial statements include the estimated fair
value of oil and gas commodity price risk management contracts and the estimate
of proved oil and gas reserve volumes and the related discounted future net cash
flows therefrom.
Note 3 - Commodity Price Risk Management Activities (or CPRM):
----------------------------------------------------
We periodically enter into commodity price risk management transactions
such as swaps and options in order to manage our exposure to oil and gas price
volatility. Gains and losses related to hedges of our oil and gas production
that qualify for hedge accounting treatment are deferred and recognized as
revenues as the associated production occurs.
We use the mark-to-market method of accounting for instruments that do
not qualify for hedge accounting treatment. Under mark-to-market accounting,
those contracts that do not qualify for hedge accounting treatment 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.
The tables and related notes set forth in this footnote and summarized
below provide details about the volumes and prices of all open Belco CPRM
commitments, hedge and non-hedge, as of September 30, 2000. Since most of the
contracts covering a substantial portion of the committed volumes were entered
into in 1997 and early 1998 when commodity prices were substantially below
current commodity price levels, it is not possible to estimate future average
prices to be realized given the broad ranges covering both volumes and prices
committed at different points in time. A summary of committed volumes and prices
by year, assuming the NYMEX forward curve reference prices for oil and gas as of
September 30, 2000 is as follows:
<TABLE>
<CAPTION>
Average
Volume Realized
Year Per Day Price
<S> <C> <C> <C>
Oil - Barrels per day 2000 9,848 $19.00
2001 6,780 $19.60
2002 4,930 $21.00
2003 1,479 $19.10
</TABLE>
- 6 -
<PAGE>
<TABLE>
<CAPTION>
Average
Volume Realized
Year Per Day Price
<S> <C> <C> <C>
Gas - MMBtu per day 2000 70,815 $2.40
2001 85,000 $2.45
2002 35,000 $2.75
2003 10,000 $3.35
</TABLE>
Through June 30, 2000, we reported unrealized CPRM non-cash gains or
losses as a component of revenue which, in management's opinion, can materially
distort the amount of actual revenues received due to the volatile nature of
commodity prices. For the quarter ending September 30, 2000 and year to date, we
reported unrealized CPRM non- cash gains or losses as a component of costs and
expenses.
For the three months ended September 30, 2000, we recorded as required
by existing accounting rules non- hedge commodity price risk management losses
of $30.7 million, consisting of $9.7 million in cash settlements and $21.0
million in unrealized non-cash mark-to-market losses. This compares to a $23.3
million net loss consisting of $1.0 million in cash settlements paid and $22.2
million in unrealized non-cash mark-to-market losses reported for the 1999
comparable period. For the first nine months of 2000, we recorded non-hedge
commodity price risk management losses of $93.4 million, consisting of $22.7
million in cash settlements and $70.6 million in unrealized non-cash mark-to-
market losses due to substantial increases in commodity prices through September
30, 2000. For the first nine months of 1999, we recorded non-hedge commodity
price risk management losses of $45.3 million consisting of $0.1 million in cash
settlements paid and $45.2 million in unrealized non-cash mark-to-market losses.
Letters of credit and cash deposits in the amount of $27.5 million in favor of
counterparties were outstanding at September 30, 2000 and related to unrealized
non-cash mark-to-market and potential hedge losses at that date.
The following table and notes thereto cover our pricing and notional
volumes on open natural gas and oil commodity hedges as of September 30, 2000:
<TABLE>
<CAPTION>
Production Periods
----------------------------------------
2000 2001 2002 2003
---- ---- ---- ----
<S> <C> <C> <C> <C>
GAS (1) --
Price swaps sold -- receive
fixed price (thousand MMBtu)(2)..... 1,535 905 - 913
Average price, per MMBtu.......... $2.34 $2.30 - $3.35
Price swaps bought-- pay
fixed price (thousand MMBtu)(3)..... (388) (1,825) - --
Average price, per MMBtu.......... $3.75 $3.80 - -
Sub-total - net swap
volume (thousand MMBtu)....... 1,147 (920) -- --
----- ----- ------ ------
Collars (thousand MMBtu)(4).......... 3,528 9,125 5,475 2,738
----- ----- ----- -----
Average floor price, per MMBtu.... $1.39 $1.91 $2.50 $2.85
Average ceiling price,
per MMBtu....................... $2.68 $2.85 $3.49 $4.58
----- ----- ----- -----
Purchased options (thousand MMBtu)... (1,150) -- -- --
------ ----- ----- ------
Average ceiling (call) price.... $3.29 -- -- --
TOTAL NET HEDGE RELATED GAS VOLUMES
(thousand MMBtu)................... 3,525 8,205 5,475 3,651
===== ===== ===== =====
</TABLE>
- 7 -
<PAGE>
<TABLE>
<CAPTION>
Production Periods
-----------------------------------------
2000 2001 2002 2003
---- ---- ---- ----
(Continued)
<S> <C> <C> <C> <C>
OIL --
Price swaps sold-- receive fixed
price (MBbls)(2)(3) 420 1,170 660 240
Average price, per Bbl $19.02 $19.54 $19.51 $19.60
Price swaps bought - pay fixed
price (MBbls)(2)(3) (336) (75) -- --
Average price, per Bbl $25.25 $28.87 -- --
Sub-total - net swap volumes 64 1,095 660 240
----- ----- --- ---
Purchased collars - (Mbbls)(4) (45) -- -- --
Average floor price, per Bbl $18.45 -- -- --
Average ceiling price, per Bbl $21.80 -- -- --
------ ------- -------- -------
Collars sold (MBbls)(4) 360 300 120 --
------ ------- ------- -------
Average floor price, per Bbl $17.88 $18.30 $19.00 --
Average ceiling price, per Bbl $21.23 $22.12 $22.63 --
TOTAL NET HEDGE RELATED OIL VOLUMES
(MBbls) 379 1,395 780 240
=== ===== === ===
</TABLE>
----------
(1) Belco sells the majority of its Wyoming gas at prices based on the
Northwest Pipeline Rocky Mountain Index and has entered into basis swaps that
require the Counterparty to make a payment to Belco in the event that the NYMEX
Reference Price per MMBtu for a reference period exceeds the Northwest Pipeline
Rocky Mountain Index Price by more than a stated differential and requires Belco
to make a payment to the Counterparty in the event that the NYMEX Reference
Price exceeds the Northwest Pipeline Rocky Mountain Index Price by less than a
stated differential (or in the event that the Northwest Pipeline Rocky Mountain
Index Price is greater than the NYMEX Reference Price). Natural gas volumes
covered by basis transactions include 1,380 MMBtu at $0.50 and 3,650 MMBtu at
$0.27 for the balance of 2000 and year 2001, respectively.
(2) For any particular swap transaction, the Counterparty is required to
make a payment to Belco in the event that the NYMEX Reference Price for any
settlement period is less than the swap price for such hedge, and Belco is
required to make a payment to the Counterparty in the event that the NYMEX
Reference Price for any settlement period is greater than the swap price for
such hedge.
(3) In order to close certain commodity price hedge positions, Belco
entered into various swap positions where Belco is the fixed- price payer on the
swap. In these transactions, the Counterparty is required to make a payment to
Belco in the event that the NYMEX Reference Price for any settlement period is
greater than the swap price, and Belco is required to make a payment to the
Counterparty in the event that the NYMEX Reference Price for any settlement
period is less than the swap price.
(4) For any particular collar transaction, the Counterparty is required to
make a payment to Belco if the average NYMEX Reference Price for the reference
period is below the floor price for such transaction, and Belco is required to
make payment to the Counterparty if the average NYMEX Reference Price is above
the ceiling price for such transaction.
All of the above transactions were carried out in the over-the-counter
market, and not on the NYMEX. These financial counterparties all have at least
an investment grade credit rating. All of these transactions provide solely for
financial settlements related to closing prices on the NYMEX.
Non-Hedging Transactions
We use the mark-to-market method of accounting for instruments that do
not qualify for hedge accounting treatment. The first nine months of 2000
results of operations included an aggregate non-cash pre-tax loss of $70.6
million related to these activities resulting from net change in the value of
Belco's market-to-market portfolio of price risk management activities. At
September 30, 2000, Belco's consolidated balance sheet reflects $10.2 million
and $103.9 million of price risk management assets and liabilities,
respectively.
- 8 -
<PAGE>
The following table and notes thereto cover Belco's pricing and
notional volumes on open natural gas and oil financial instruments at September
30, 2000, that do not qualify for hedge accounting:
<TABLE>
<CAPTION>
Production Periods
-------------------------------------
2000 2001 2002 2003
-------- -------- -------- --------
<S> <C> <C> <C> <C>
GAS --
Calls bought (thousand MMBtu)(1)......... (1,380) - - -
Average price, per MMBtu.............. $2.97 - - -
Calls sold (thousand MMBtu)(1)........... 2,760 3,650 3,650 -
Average price, per MMBtu.............. $2.82 $3.23 $2.91 -
Sub-total net call volume
(thousand MMBtu)................. 1,380 3,650 3,650 -
----- ----- ----- ------
Price Swaps Sold-- receive fixed price
(thousand MMBtu)(2).................... 1,840 3,650 - -
Average price, per MMBtu.............. $2.30 $2.51 - -
Price Swaps Bought - pay fixed price
(thousand MMBtu)(2).................... - (1,365) - -
Average price, per MMBtu............... - $3.29 - -
Sub-total net swap volume........... 1,840 2,285 - -
----- ----- ------- ------
Puts Sold (thousand MMBtu)(1)............ (230) (1,369) - -
----- ------- ------- ------
Average price, per MMBtu.............. $3.79 $3.21 - -
Extension Swaps Sold - receive fixed
price (thousand MMBtu)................ - 18,250 3,650 -
----- ------ ----- ------
Average price, per MMBtu............... - $2.56 $2.65 -
TOTAL NON-HEDGE GAS VOLUMES
(thousand MMBtu)....................... 2,990 22,820 7,300 -
===== ====== ===== =====
OIL --
Price Swaps Bought-- pay fixed price
(MBbl)................................. (90) - - -
Average price, per Bbl................ $22.10 - - -
Price Swaps Sold-- receive fixed price
(MBbls) (2)............................ 105 120 - -
Average price, per Bbl................ $18.87 $17.25 - -
Sub-total net swap volume.......... 15 120 - -
-- --- ------ ------
Calls Bought (MBbls)(1).................. - - - -
Average price, per Bbl................ - - - -
Calls Sold (MBbls)(1).................... 630 840 720 -
Average price, per Bbl................ $20.12 $20.21 $22.00 -
Sub-total net call volume.......... 630 840 720 -
--- --- --- ------
Puts Sold (MBbls)(1)..................... (228) (255) - -
Average price, per Bbl................ $21.22 $19.78 - -
Puts Bought (MBbls)(1)................... 90 - - -
Average price, per Bbl................ $17.17 - - -
Sub-total net puts volume.......... (138) (255) - -
----- ----- ------ -----
Extension Swaps Sold, receive fixed
price (MBbls)......................... - - 300 300
----- ------ --- ---
Average price, per Bbl................. - - $18.86 $18.86
Extension Collars Sold.................... - 120 - -
------ --- ------ ------
Average ceiling price................... - $20.35 - -
Averge floor price...................... - $17.50 - -
TOTAL NON-HEDGE OIL VOLUMES (MBbls)....... 507 825 1,020 300
=== === ===== ===
</TABLE>
- 9 -
<PAGE>
----------
(1) Calls sold or puts sold under written option contracts, in return for a
premium received by Belco upon initiation of the contract. Belco is required to
make a payment to the Counterparty in the event that the NYMEX Reference Price
for any settlement period is greater than the price of the call sold, or less
than the price of the put sold. Conversely, calls or puts bought in return for
Belco's payment of a premium require the Counterparty to make a payment to Belco
in the event that the NYMEX Reference Price on any settlement period is greater
than the call price or less than the put price.
(2) For any particular swap transaction, the Counterparty is required to
make a payment to Belco in the event that the NYMEX Reference Price for any
settlement period is less than the swap price for such instrument and Belco is
required to make a payment to the Counterparty in the event that the NYMEX
Reference Price for any settlement period is greater than the swap price for
such instrument.
Note 4 - Capital Stock:
Through September 2000, we exchanged 213,900 shares of our 6-1/2%
convertible preferred stock for 391,325 shares of our common stock. The
preferred shares that were exchanged had a liquidation preference of $5.35
million.
Belco's credit facility and the indentures governing its subordinated
debt restrict the payment of dividends. As a result of recording substantial
unrealized non-cash mark-to-market losses required by existing accounting rules,
dividends on Belco's preferred stock may be limited or prohibited by the
restriction contained in Belco's 10-1/2% bond indenture. Payment of the December
2000 dividend and the March 2001 dividend on Belco's preferred stock will be
permitted. Subsequent dividends will be contingent upon the sale of equity
interests or sufficient net income to restore dividend payment capacity under
the indenture.
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 nine months ended September 30, 2000 and 1999
is presented in the table below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic net income (loss) per share:
Net loss ($8,591) ($9,480) ($29,313) ($19,306)
Less: Preferred Stock dividends (1,540) (1,727) (4,692) (5,205)
--------- ---------- --------- ---------
Loss attributable to common
shareholders ($10,131) ($11,207) ($34,005) ($24,511)
========= ========= ========= =========
Weighted average shares of common
stock outstanding 31,427 31,600 31,259 31,600
------ ------ ------ ------
Basic net income (loss) per share ($0.32) ($0.35) ($1.09) ($0.78)
======= ======= ======= =======
Diluted net income (loss) per share:
Weighted average shares of common
stock outstanding 31,427 31,600 31,259 31,600
Effect of dilutive securities:
Preferred stock, warrants and
stock options (1) -- - - --
------ --------- -------- --------
Average shares of common stock
outstanding including dilutive
securities 31,427 31,600 31,259 31,600
====== ====== ====== ======
Diluted net loss per share ($0.32) ($0.35) ($1.09) ($0.78)
======= ======= ======= =======
</TABLE>
-------------
(1) Amounts are not included in the computation of diluted net loss per
share because to do so would have been antidilutive.
- 10 -
<PAGE>
Note 5 - Long Term Debt:
--------------
Long term debt consists of the following at September 30, 2000 and 1999
(in thousands):
<TABLE>
<CAPTION>
September 30,
2000 1999
---- ----
<S> <C> <C>
Revolving credit facility due 2004.................... $113,600 $42,000
8-7/8% Senior Subordinated Notes due 2007 ............ 147,000 150,000
10-1/2% Senior Subordinated Notes due 2006,
including premium totaling approximately
$5.7 and $6.5 million for 2000 and 1999,
respectively.............................. 114,219 114,744
------- -------
Total Debt ................................. 374,819 306,744
Less: Current maturities.............................. - -
---------- ---------
Long term debt........................................ $374,819 $306,744
======== ========
</TABLE>
As of September 30, 2000, Belco's effective interest rate on the
outstanding balance of $113.6 million on its line of credit was approximately
8.25% per annum.
Belco's outstanding letters of credit totaled $26.5 million at
September 30, 2000.
Total interest cash expense paid for the nine months ended September
30, 2000 was approximately $23.3 million of which $5.2 million was capitalized.
- 11 -
<PAGE>
PART I - FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Belco Oil & Gas Corp. is an independent energy company engaged i the
exploration for and the acquisition, exploitation, development and production of
natural gas and oil in the United States within its four geographic core areas:
the Rocky Mountains, the Permian Basin, the Mid-Continent region and the Gulf
Coast. Since its inception in April 1992, Belco has grown its reserve base
largely through a balanced program of exploration and development drilling and
through acquisitions. We concentrate our activities primarily in the four
geographic core areas in which we have accumulated detailed geologic knowledge
and have developed significant management and technical expertise. Additionally,
Belco structures its participation in natural gas and oil exploration and
development activities to minimize initial costs and risks, while permitting
substantial follow-on investment.
Belco'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 Gulf Coast, primarily in Texas. These areas
accounted for approximately 99% of Belco's proved reserves at December 31, 1999.
Belco's reserve base was 641 Bcfe at December 31, 1999 with a reserve life index
of 10.6 years, based on 1999 production. During the first nine months of 2000,
Belco acquired approximately 86 Bcfe of proved reserves for approximately $70.0
million.
Our revenue, profitability and future rate of growth are substantially
dependent upon prevailing prices for natural gas, oil and condensate. Commodity
prices are subject to numerous factors beyond our control, such as economic,
political and regulatory developments and competition from other sources of
energy. Energy markets have historically been very volatile, and we can offer 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 our financial position,
results of operations and access to capital, as well as the quantities of
natural gas and oil reserves that we may economically produce. Natural gas
produced is sold under contracts that primarily reflect spot market conditions
for their particular area. We market our oil with other working interest owners
on spot price contracts and typically receive a small premium to the price
posted for such oil. Currently, approximately 63% of our production volumes
relate to the sale of natural gas (based on six Mcf of gas being considered
equivalent to one barrel of oil).
We utilize commodity swaps and options and other commodity price risk
management transactions related to a portion of our oil and natural gas
production to achieve a more predictable cash flow, and to reduce our exposure
to price fluctuations. We account for these transactions in compliance with
current generally accepted accounting principles as hedging activities or uses
mark-to-market accounting for those contracts that do not qualify for hedge
accounting. As of September 30, 2000, we had various natural gas and oil price
risk management contracts in place with respect to substantial portions of our
estimated remaining production for calendar year 2000 and with respect to lesser
portions of our estimated production for years 2001, 2002 and 2003. We expect to
reduce the current amount of price risk management contracts that we have in
place over the next 12 to 24 months in an effort to limit our future exposure to
the mark-to-market accounting rules requiring the immediate recognition of
non-cash unrealized gains and losses that cause large unpredictable swings in
reported results of operations and related earnings per share.
- 12 -
<PAGE>
The following table sets forth certain operations data for the periods
presented:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Oil and Gas Sales, Net of
Hedging Activities (in 000's) $50,999 $38,228 $148,841 $104,215
Weighted Average Sales Prices:
Oil (per Bbl)
- Unhedged $31.00 $20.16 $28.78 $15.75
- Hedge settlements (5.73) 0.25 (3.69) 3.42
-------- ------- -------- -------
Net realized $25.27 $20.41 $25.09 $19.17
Gas (per Mcf)
- Unhedged $3.87 $2.34 $3.04 $1.90
- Hedge settlements (1.25) (0.15) (0.67) (0.03)
------- ------- ------- ------
Net realized $2.62 $2.19 $2.37 $1.87
Net Production Data:
Oil (MBbl) 981 829 2,995 2,596
Gas (MMcf) 9,998 9,745 31,049 29,153
Gas equivalent (MMcfe) 15,883 14,719 49,019 44,732
Daily production (Mmcfe) 173 160 179 164
Operations Data per Mcfe:
Oil and gas sales revenues
(Unhedged) $4.35 $2.68 $3.68 $2.15
Hedged and non-hedge cash
settlements (1.75) (0.16) (1.11) 0.17
Oil and gas operating expenses (0.64) (0.45) (0.52) (0.50)
Production taxes (0.21) (0.20) (0.22) (0.15)
General and administrative (0.09) (0.08) (0.09) (0.08)
Depreciation, depletion and
amortization (0.85) (0.90) (0.85) (0.90)
------ ------ ------ ------
Pre-tax operating profit (1) $0.81 $0.89 $0.89 $0.69
===== ===== ===== =====
Operating cash flow (1) $1.66 $1.79 $1.74 $1.59
===== ===== ===== =====
</TABLE>
------------------------
(1) Excludes non-cash mark-to-market commodity price risk management
activities, interest income and interest expense.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2000 Compared to September 30, 1999
Revenues
During the third quarter of 2000, oil and gas sales revenues net of hedging
activities increased 34% from $38.2 million to $51.0 million when compared to
the prior year comparable period due principally to substantially higher
commodity prices realized in the third quarter of 2000 and increased production.
Average hedged price realizations, excluding non-hedge Commodity Price Risk
Management activities (or CPRM), for both oil and natural gas in the third
quarter of 2000 compared to last year's third quarter were higher by 24% and
20%, respectively. Oil production volume during the third quarter of 2000
increased by 18% and natural gas production increased by 3% compared to the
prior year comparable period. Natural gas production represented approximately
63% of total production on an Mcfe basis, compared to the 66% produced in the
third quarter of 1999.
As a result of escalating commodity prices during the third quarter of
2000, CPRM activities, including hedged and non-hedged transactions, reduced
reported revenues by $27.8 million representing cash settlements paid out ($18.1
million in hedge and $9.7 million in non-hedge). In addition, $21.0 million in
non-cash mark-to-market losses
- 13 -
<PAGE>
were recorded as required by current accounting rules. In the prior year third
quarter when commodity prices were substantially lower, we paid $2.3 million in
cash settlements ($1.3 million in hedge and $1.0 million in non-hedge) and
reported a non-cash mark-to-market loss of $22.2 million.
Costs and Expenses
Production and operating expenses (or lifting costs) increased t $10.2
million for the third quarter of 2000 as compared to the $6.7 million for the
comparable period in 1999. The increase is primarily due to newly acquired
producing properties and the addition of over 100 new wells. Lifting costs on an
equivalent unit basis were $0.64 per Mcfe in the third quarter of 2000, compared
to $0.45 per Mcfe in the third quarter of 1999. Production taxes increased to
$3.4 million from $2.9 million or to $0.21 from $0.20 per Mcfe due to higher
commodity prices.
Depreciation, depletion and amortization (or DD&A), for the quarter ended
September 30, 2000 was $13.5 million, a $0.3 million increase when compared to
the $13.2 million recorded in the prior year comparable period. This increase is
related to higher production. The DD&A rate per Mcfe was $0.85, a 6% decline as
compared to the prior year third quarter.
General and administrative expense (or G&A) increased 28% in the third
quarter of 2000 to $1.5 million primarily due to lesser amounts of personnel
costs capitalized to the full-cost pool when compared to the $1.2 million
incurred in the third quarter of 1999. The third quarter rate per Mcfe for G&A
costs increased from $0.08 in 1999 to $0.09 in 2000.
Interest expense for the third quarter of 2000 declined to $5.0 million
from $5.8 million reported in the prior year third quarter. The decline is due
to additional amounts capitalized in the current year and related to undeveloped
property acquisitions. The component of interest costs that is capitalized will
decline over time as properties are developed and transferred to the producing
category of assets.
Income (Loss) Before Income Taxes
Our reported loss before income tax benefits for the third quarter of 2000
was $13.2 million. This compares to a pre-tax loss of $14.6 million reported in
the third quarter of 1999. The reduced loss primarily reflects the impact of
higher commodity prices offset by the cash and non-cash CPRM activities.
Income Taxes
Income tax benefits were recorded for the 2000 third quarter in the amount
of $4.6 million as a result of the reported pre-tax loss. The third quarter 1999
income tax benefit recorded was $5.1 million.
Nine months Ended September 30, 2000 Compared to September 30, 1999
Revenues
For the first nine months of 2000, oil and gas sales revenues ne of hedging
activities increased $44.6 million, or 43% to $148.8 million when compared to
the prior year comparable period primarily the result of both higher production
and higher commodity prices. Natural gas production increased 7% over the prior
year first nine months. Average Mcfe price realizations net of hedging
activities increased by 29% in the first nine months of 2000 compared to last
year's first nine months. Natural gas production represented approximately 63%
of total production on an Mcfe basis compared to the 65% reported for the first
nine months of 1999. Oil production increased by 15% over the prior year
comparable period due to property acquisitions and newly drilled well additions
during the first nine months of the year.
CPRM activities, including hedged and non-hedged transactions, during the
first nine months of 2000 resulted in reported revenue reductions of $54.5
million compared to incremental revenues of $7.8 million reported in the prior
year comparable period. The first nine months of 2000 reductions consisted of
$54.5 million in actual cash settlements paid. In addition, $70.6 million in
non-cash mark-to-market unrealized future losses related to CPRM activities were
- 14 -
<PAGE>
recorded in compliance with current accounting rules. In the prior year
comparable period, $7.8 million in cash settlements were received while the
non-cash mark-to-market unrealized loss component recorded was $45.2 million.
Costs and Expenses Production and operating expenses during the first nine
months o 2000 increased by 15% to $25.4 million compared to $22.2 million
reported in the prior year comparable period. The increase was related to the
addition of wells, both acquired and drilled in the current year. On an
equivalent unit basis, lifting costs were $0.52 per Mcfe for the first nine
months of 2000 compared to $0.50 per Mcfe in the first nine months of 1999.
Production taxes were $0.22 and $0.16 per Mcfe for the first nine months of 2000
and 1999, respectively with the increase related to higher commodity prices.
DD&A for the nine months ended September 30, 2000 increased $1.4 million to
$41.7 million when compared to the $40.3 million recorded in the prior year
comparable period due to higher production volumes. The first nine months DD&A
rate per Mcfe was $0.85, a 6% decline as compared to the prior year comparable
period when $0.90 per Mcfe was recorded.
G&A costs increased by 28% in the first nine months of 2000 to $4.7 million
when compared to the $3.7 million incurred in the first nine months of 1999
principally due to reduced amounts of such costs charged to the full cost pool.
The rate per Mcfe for such costs increased from $0.08 to $0.09.
Interest expense is incurred on $147 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, and bank debt incurred to fund various activities.
Interest expense for the nine months ended September 30, 2000 increased by $2.4
million to $18.6 million, a 15% increase over the $16.2 million incurred in the
prior year comparable period due to higher interest rates charged and additional
borrowings outstanding under Belco's credit facility partially offset by
additional amounts capitalized during the current year.
Income (Loss) Before Income Taxes
Our reported loss before income tax benefits for the first nine months of
2000 was $45.1 million. This compares to a pre-tax loss of $29.7 million
reported for the first nine months of 1999. The 2000 and 1999 first nine months
reported losses are the result of recognizing the required non-cash
mark-to-market unrealized CPRM losses as required by current accounting rules.
Excluding the effect of the non-cash mark-to-market unrealized CPRM losses
income before income taxes was $25.6 million and $15.5 million for the first
nine months of 2000 and 1999, respectively.
Income Taxes
Income tax benefits were recorded for the first nine months of 2000 in the
amount of $15.8 million as a result of the reported pre-tax loss. The benefit
for income taxes for the comparable nine month period of 1999 was $10.4 million.
LIQUIDITY AND CAPITAL RESOURCES
General
In September 1997, we entered into a five-year $150 million Credit
Agreement dated September 23, 1997 with The Chase Manhattan Bank, N.A., as
administrative agent and other lending institutions. In June 2000, the credit
facility was amended and restated and now provides for an aggregate principal
amount of revolving loans of up to the lesser of $250 million or a defined
borrowing base in effect from time to time, includes a sub-facility for letters
of credit and expires in January 2004. The borrowing base at September 30, 2000
was $200 million with $113.6 million advanced at that date. Additionally, there
were letters of credit outstanding in the amount of $26.5 million in connection
with CPRM activities. 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, we may request two
additional
- 15 -
<PAGE>
redeterminations and the banks may request one additional redetermination per
year. Our indebtedness under the credit facility is secured by a pledge of the
capital stock of each of our material subsidiaries.
Indebtedness under the credit facility bears interest at a floating rate
based (at our option) upon (i) the ABR with respect to ABR Loans or (ii) the
Eurodollar Rate (as defined) for one, two, three or nine 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 1.125% to 1.625% 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.
We are required to pay to the banks a commitment fee based on th 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
0.25% to 0.50% depending on the borrowing base usage.
We entered into interest rate swap agreements converting two lon 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
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$100 million 12/97 8.875% 8.875% March 15, 2001 (a)
$85 million 12/97 10.500% 11.25% October 1, 2000 (a)
$50 million 1/98 8.875% 8.875% March 15, 2001 (a)
</TABLE>
-----------------------
(a) Floating rate is redetermined at each six month period following the
expiration through September 15, 2007 currently capped at rates indicated.
The agreements obligate Belco 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.
Belco's board of directors has authorized the purchase from time to time,
in the open market or in privately negotiated transactions, shares of its common
stock and 6-1/2% convertible preferred stock, in an aggregate amount not to
exceed $10 million. The current $10 million authorization is in addition to the
$10 million that was exhausted in December 1999. During the nine months ending
September 30, 2000, Belco purchased 20,700 shares of its preferred stock for a
total cost of $0.3 million pursuant to the existing authorization.
Additionally, during the nine months ending September 30, 2000, Belco
exchanged 213,900 shares of its 6-1/2% convertible preferred stock for 391,325
shares of its common stock. The liquidation preference of the preferred stock
that was exchanged was $5.35 million.
In August 2000, Belco sold its interest in certain North Texas oil
properties, including 436 producing wells for $10.1 million in cash and retained
a volumetric production payment which Belco values at approximately $5.0
million.
In April 2000, Belco closed a $24.4 million acquisition of oil and gas
properties adding approximately 51 Bcfe of proved reserves to Belco's reserve
base. The transaction was financed through additional borrowings under the
credit facility.
In February 2000, Belco closed a $40.5 million acquisition of oi and gas
properties expected to add approximately 2,400 BOE per day to the existing
production base. The transaction was financed through additional borrowings
under the credit facility.
- 16 -
<PAGE>
In January 2000, Belco purchased $3 million face value of its 8- 7/8%
Senior Subordinated Notes due 2007 at a discount in the open market resulting in
a modest gain.
Cash Flow
Our principal sources of cash are operating cas flow and bank borrowings.
Cash flow from operating activities for the nine months ending September 30,
2000 was $72.0 million, a 33% increase over the prior comparable period when
$54.3 million was realized. The increase is the result of higher production
volumes and higher commodity prices.
Net cash used in investing activities for the nine months ended September
30, 2000 and 1999 was $136.0 and $52.3 million, respectively. Investing
activities for these periods include oil and gas property acquisitions in the
amount of $70.0 million and $17.0 million for 2000 and 1999, respectively. In
addition, investing activities generally include exploration and development
activities and proceeds from the sale of properties or other assets.
Net cash provided by financing activities for the nine months ending
September 30, 2000 and 1999 was $63.1 million and $0.6 million, respectively.
Net debt increased by $68.1 million related to property acquisitions. Cash flow
from operations and the disposition of assets funded drilling and other
operating activities during the current year, including preferred dividends
paid. Belco's credit facility and the indentures governing its subordinated debt
restrict the payment of dividends. As a result of reporting substantial
unrealized non-cash mark-to-market losses required by existing accounting rules,
dividends on Belco's preferred stock may be limited or prohibited by the
restrictions contained in Belco's 10-1/2% bond indenture. Payment of the
December 2000 dividend and the March 2001 dividend on Belco's preferred stock
will be permitted. Subsequent dividends will be contingent upon the sale of
equity interests or sufficient net income to restore dividend payment capacity
under the indenture.
Capital Expenditures
Through September 30, 2000, net capital expende by Belco totaled $136.0
million, including $70.0 million identified with the acquisition of properties
and property dispositions of $10.7 million. Capital expenditures for the full
year 2000 are expected to total approximately $160.0 million net.
We intend to fund our future capital expenditures, commitments and working
capital requirements through cash flows from operations, borrowings under the
credit facility or other potential financings, including the sale of equity or
debt securities. If there are changes in oil and natural gas prices, however,
that correspondingly affect cash flows and the borrowing base under the credit
facility, we have the discretion and ability to adjust our capital budget. We
believe that we will have sufficient capital resources and liquidity to fund our
capital expenditures and meet all of our financial obligations through the end
of 2001.
Commodity Price Risk Management Transactions
Certain of Belco's commodity price risk management arrangements require
Belco to deliver cash collateral or other assurances of performance to the
counterparties in the event that Belco's payment obligations with respect to its
CPRM transactions exceed certain levels. Two of the inherent risks of a price
risk management program are margin requirements and collateralization. Certain
transactions may be subject to margin calls under certain conditions including
change of ownership control, rating agency activity or default. Belco's current
collateral requirement is $27.5 million consisting of $26.5 million in letters
of credit and $1.0 million in cash deposits. Belco's borrowing capacity under
its credit facility will allow Belco to be responsive to any additional
collateral calls.
With the primary objective of achieving more predictable revenues and cash
flows, Belco has entered into CPRM 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. Belco engages in
transactions such as selling options 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 reported
financial results of any given accounting period. Belco has entered into
- 17 -
<PAGE>
price risk management transactions with respect to a substantial portion of its
estimated production for years 2000 and 2001 and lesser portions of its
estimated production thereafter. Belco continues to evaluate whether to enter
into additional price risk management transactions for future years. We expect
to reduce the current amount of price risk management contracts that we have in
place over the next 12 to 24 months in an effort to limit our future exposure to
the mark-to-market accounting rules requiring the immediate recognition of
non-cash unrealized gains and losses that cause large unpredictable swings in
reported results of operations, related earnings per share and shareholder
equity. In addition, Belco may determine from time to time to unwind its then
existing price risk management positions as part of its price risk management
strategy.
We expect to incur additional hedge and non-hedge related cash settlement
costs through the remainder of calendar year 2000 assuming commodity prices
remain at current levels. This cash settlement amount is currently estimated at
approximately $26 million utilizing the September 30, 2000 forward price curve
applied to volumes of oil and gas expected to be produced during the three month
period ending December 31, 2000. This estimated amount can increase or decrease
if commodity prices rise or decline from the current levels used in developing
this estimate. As cash settlements are made on volumes produced, no additional
losses are expected to be recorded, unless actual prices increase above
estimated future prices used in the September 30, 2000 mark-to-market
calculation. Subsequent to September 30, 2000, both oil and natural gas futures
prices have declined slightly and if such conditions persist, Belco may be
required to record mark-to-market unrealized gains representing a reversal of
previously reported mark- to-market unrealized losses. For the year 2001, Belco
has approximately 6,780 BOPD and 85,000 MMBtu committed at average prices of
$19.60 per bbl of oil and $2.45 per MMBtu of gas. The committed volumes assume
the NYMEX forward curve reference prices as of September 30, 2000. No estimate
of settlements or mark-to- market gains or losses are determinable as such
amounts are contingent upon commodity prices at the time of production.
In June 1998, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities" which was amended by Financial Accounting
Standard No. 138 ("SFAS 138") in June 1999. SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. It
also requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows derivatives gains and losses to offset
related results on the hedged item in the income statement, and requires that a
company must formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting. We will fully adopt SFAS 133 on
January 1, 2001, the effective date as amended by SFAS 138. We have not
completely quantified the impact of adopting SFAS 133 on our financial
statements and have not determined the final method of adoption of SFAS 133.
However, SFAS 133 is expected to increase volatility of stockholder's equity,
reported earnings (losses) and other comprehensive income. The current
preliminary impact of full compliance with SFAS 133 on financial statements as
if the implementation were to have occurred September 30, 2000, Belco would
record an additional $11.5 million in current assets, $1.6 million in non-
current assets, $51.7 million in current liabilities and $19.8 million in
non-current liabilities related to Belco's existing oil and gas hedges based on
the forward price curve in effect at September 30, 2000. These contracts should
also qualify for hedge accounting treatment under SFAS 133. The total potential
net liability of $58.4 million related to qualifying hedge instruments would be
charged to Other Comprehensive Income and appear in the equity section of the
balance sheet. This amount combined with amounts previously recorded on the
balance sheet representing non-cash mark-to- market unrealized losses in the net
amount of $93.7 million represent the full potential exposure of Belco's CPRM
related activities that may or may not be realized as they are dependent on
future commodity prices. After adoption, Belco will be required to recognize any
hedge ineffectiveness in the income statement each period. In addition, Belco
has three interest rate swaps that will be effected by SFAS 133. We currently
believe these swaps will qualify for hedge accounting and as a result, Belco
will be required to record an additional $2.4 million in current liabilities and
$8.3 million in non-current liabilities with the offsetting charge to long-term
debt. We would also record $160,000 to the income statement for the ineffective
portion related to these swaps.
- 18 -
<PAGE>
Other
Environmental Matters
Our operations are subject to various federal, state and local laws and
regulations relating to the protection of the environment, which have become
increasingly stringent. We believe that our current operations are compliant all
material respects with current environmental laws and regulations. There are no
material environmental claims pending or, to our knowledge, threatened against
Belco. We can give 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 our
properties.
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", "will", "may" and similar expressions are intended to
identify forward-looking statements. Although we believe that our expectations
are based on reasonable assumptions, it is important to note that actual results
could differ materially from those projected by such forward-looking statements.
Important factors that could cause actual results to differ materially from
those in the forward-looking statements include, but are not limited to, the
timing and extent of changes in commodity prices for oil and gas, the need to
develop and replace reserves, environmental risk, the substantial capital
expenditures required to fund its operations, drilling and operating risks,
risks related to exploration and development, uncertainties about the estimates
of reserves, competition, government regulation and our ability to implement our
business strategy. You should refer to the description of these risks and other
risks contained in our Annual Report on Form 10-K as filed with the SEC.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Belco's market risk exposures relate primarily to commodity prices,
interest rates and marketable equity securities. Belco enters into various
transactions involving commodity price risk management activities involving a
variety of derivatives instruments. In addition, Belco 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 Belco'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 September 30, 2000, Belco had substantial derivative financial
instruments outstanding and related to its market risk management program. See
Item 1, Notes 2 and 3 and Item 2, "Management's Discussion And Analysis of
Financial Condition And Results of Operations" for additional information
related to Belco's market risk management activities during the first nine
months of 2000. There has not been a material change in Belco's exposure to
commodity price and interest rate risk since the date of the 1999 Form 10-K
filing.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS - NONE
ITEM 2 - CHANGES IN SECURITIES - NONE
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - NONE
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS - NONE
ITEM 5 - OTHER INFORMATION - 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: None.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<CAPTION>
BELCO OIL & GAS CORP.,
a Nevada corporation
(REGISTRANT)
<S> <C> <C>
Date 11/14/00 /s/ LAURENCE D. BELFER
------------------------ -----------------------
Laurence D. Belfer,
Vice-Chairman
Date 11/14/00 /s/ DOMINICK J. GOLIO
------------------------ ---------------------
Dominick J. Golio,
Senior Vice President
- Finance
and Chief Financial Officer
</TABLE>
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<PAGE>
